Supplemental tax property tax increase for off market purchase

[Dan H.]

Property is in Escondido, CA.

I have purchased directly from the owner twice prior without getting a supplemental increase to the accessed value for property tax purposes. My off market purchase that closed New Years Eve (Dec 31, 2020) I received an accessed value for property tax purposes of ~$100K over what I paid for the property. I was told this is because it was not on the MLS and therefore susceptible to a state appraisal. I had never heard of such a thing and as indicated I have purchased twice before direct from the owner (once in 1992 and once in 2017).

 I can see getting a different accessed value if I was purchasing from a friend or in some other way was not an arms length purchase.  I did not know this seller and never interacted with this seller except as related to the purchase of his property.  The seller was represented by an attorney that looked after his interests.  My offer had various contingencies removed or reduced including over $100K appraisal gap.  The offer let the seller dictate the closing time (instead of it being short, it ended up being long like 4 months all at the sellers control which long closing presents various issues that needed to be worked).  Prices rose a lot in the time between when the offer was accepted and when the seller wanted to close.

After closure, I had 2 workers work on the place for much of 2 months to get it into its current shape. In general, properties that are off market either are in worse shape or have higher risk that the properties on the MLS. Comparing them to MLS properties is not an accurate comp.

I agree today the property is worth at least as much as the state's appraised value (actually quite a bit more).  This does not reflect the value at the time the offer was accepted.  I believe the value should be based on what the buyer and seller agree to (except for cases where the seller is gifting some value to the buyer or other such relationship based offers).

Has anyone heard of such an increase to accessed value for property tax purposes for offers that are not purchased on the MLS? Is this a new thing? If I had known, I would have placed in on the MLS with it already under contract. They indicated I could appeal the appraised value, but the place has had hundreds of hours of work done to it since purchase and in its current shape was worth at least as much as their value at the time of the purchase (it was not in its current shape at the time of purchase). I also believe the value should not be based on the value at the close of escrow, but the time the property went under contract (Sept).

A value of ~$100K above the paid value is just over $1K extra property tax per year and is not going to hurt this purchase significantly. It just seems wrong that a property needs to be on the MLS otherwise it is susceptible to state appraisal to determine the value for the property tax (in cahoots with RE agents???). It also seems wrong to comp off market properties with MLS properties (It is rare to see an off market property that either does not need a lot or work or has risk items). There is the use of the close date to set the value instead of the date the property went under contract. Final item is concessions in the contract: contingencies removed, seller dictate closing, appraisal gap coverage, etc.

We have been told we have limited time to appeal the state's appraisal.

Thanks for any information anyone has related to this.

[Dan H.]

Originally posted by @Rob Moran:

@Dan H. I had the same thing happen to me a few years back and the County can challenge the assessed valuation of the property. If they believe it is lower than market they can send the supplemental. If you don’t have a formal appraisal to support your new valuation based on the purchase price, you are susceptible to this happening. I’m sure someone knows the official rule and can explain better than I. 

 My appraisal came after repairs and was $40k higher than the state appraisal (some of this was market appreciation and some was the value add).  So I have no appraisal that will help with the state appraisal setting the prop tax value.  

I just do not understand how 2 independent parties agree on a market price with both parties knowing the property condition, terms of the offer, and the risks yet the state determines the selling price was not at market value because it was not on the MLS. In my case the seller used a lawyer to represent him. The property was like many off market properties and was not comparable to properties that are on the MLS. I have yet to see an off market property that was without risk that was in the same condition as typical of MLS properties (I am sure there are some, but they would be atypical). Comping them as if they were on the MLS is a flawed approach.

As indicated, if there was a gifting of some value that would definitely be different situation and should get a different valuation.  My only relationship with the seller is as the buyer of his property.