Tax adjustments after sale (Chicago area)

12 Replies

Hi, Chicago-area investors,

As I move closer to buying my first multifamily, one thing I haven't been able to learn much about is property taxes. Specifically, how are they adjusted after a sale on the open market? My experience with SFR in other places has been that the county appraisal immediately jumps up to roughly the transaction price. Which seems fair enough, unless every nearby property that didn't transact is appraised for much less.

Looking at some of these properties, the Cook Co. books have them at half (or even less) what they would sell for today. I've chatted with a few brokers about this, but not gotten satisfying answers. That's reasonable since they a) are not tax experts, and b) have a vested interest in the sale.

I've reached out to the atty who handles our residential appeals but hoping to hear from investors who've been through this, especially with multifamily.

Thanks,
Allen


In suburbs you will often see a drastic tax change after higher sale during next assessment. In city limits I have never seen a jump related to a sale price, its just not how these are calculated here. This is in regards to residential/2-4 units. Taxes can still go up as areas gentrify depending where you buy which is the bigger risk and something you should factor in analysis. 

Originally posted by @Allen B. :

Hi, Chicago-area investors,

As I move closer to buying my first multifamily, one thing I haven't been able to learn much about is property taxes. Specifically, how are they adjusted after a sale on the open market? My experience with SFR in other places has been that the county appraisal immediately jumps up to roughly the transaction price. Which seems fair enough, unless every nearby property that didn't transact is appraised for much less.

Looking at some of these properties, the Cook Co. books have them at half (or even less) what they would sell for today. I've chatted with a few brokers about this, but not gotten satisfying answers. That's reasonable since they a) are not tax experts, and b) have a vested interest in the sale.

I've reached out to the atty who handles our residential appeals but hoping to hear from investors who've been through this, especially with multifamily.

Thanks,
Allen

Taxes aren't generally adjusted right after a sale unless your unable to claim the same exemptions as the previous owner. For example if you purchase a property with a senior exemption and you're not a senior expect your taxes to go up. Other than that all property taxes, including multifamily, are supposed to be adjusted once per year based on assessed value, not fair market value. The public tax assessor determines what the assessed value is. Much of that assessment is determined by what a city or village needs to operate.  This is why you'll find some poor communities with low fair market values but high assessed values because they do not have an industrial or commerical tax base.

 

@Allen B. Cook County operates 100% the same way. It doesn't matter if you are in the city or in the suburbs. We are re assessed on a triannual cycle, so a lot of this depends on where your property falls in the cycle. This year all of the suburban areas where I invest were re assessed so a lot of the assessed values just jumped tremendously. 

When you underwrite a property, it is important to note that the property taxes will definitely jump if you assessed value is significantly below market value. The issues is, they probably won't jump for 6 months to maybe 18 months. We pay taxes in arrears, so it takes some time for the assessor to catch up. 

The other thing you should look at are the exemptions. On the cookcountypropertyinfo.com website they list the exemptions. If you are a pure investor, then you will get zero exemptions. This can also throw people off quite a bit. 

You are correct that taxes are an important issues, and it is always mind boggling to me how many investors spend so much time thinking about CapEx or vacancy and they spend zero time on their highest expense which will definitely be their property taxes.


City properties are reassessed every 3 years, the next one being 2021. I have seen big adjustments close to the purchase price, and I underwrite all properties for my clients assuming it gets adjusted to the purchase price.   This is a property my client bought in 2017 for $640k and it got adjusted during the 2018 reassessment.  He called me freaking out because he had a 60% increase in taxes.  But I reminded him we underwrote it with taxes at $13,750 a year and we went back to the offer calculator from when he was buying.  He is still profiting more than my projections, and was a happy client.  Not a pissed off one because his agent didn't prepare him and he was losing $300 / mo in cash flow.

Year             Property Tax          Land+      Additions=Assessed Value
2018$9,753 (+60.6%)$7,332$45,478$52,810
2017$6,074 (+7.5%)$6,396$21,819$28,215

Thanks, @John Warren and @Brie Schmidt ; this backs up the conclusion I'd reluctantly reached. I'm underwriting assuming the worst case -- assessment bumped to transaction price and no change in tax rate. Worst reasonable case, anyway.

Brie, wish I'd had you as my agent 20 years ago when buying a first home in Austin, TX. At the time, prices had changed pretty rapidly and the jump in taxes was a surprise to my totally ignorant young self. Nice work taking care of your client!

@Allen B. you might consider doing a best case and a worst case analysis for taxes. On my larger multi unit deals I often times have to do this as the swings can be dramatic. One 22 unit I just purchased in the Cicero neighborhood could see a jump from 27k per year to as much as 55-60k per year in one year's time. The thing is, I might be able to contest it and keep the taxes down in which case I could see an additional 20-30k of cash flow. I have to be able to operate either way for myself and my partner. 

This logic works the same way on a smaller building. I think knowing your worst case scenario is so important, but you may not always see the worst case. 

Originally posted by @Allen B. :

Thanks, @John Warren and @Brie Schmidt; this backs up the conclusion I'd reluctantly reached. I'm underwriting assuming the worst case -- assessment bumped to transaction price and no change in tax rate. Worst reasonable case, anyway.

Brie, wish I'd had you as my agent 20 years ago when buying a first home in Austin, TX. At the time, prices had changed pretty rapidly and the jump in taxes was a surprise to my totally ignorant young self. Nice work taking care of your client!

That is exactly how we underwrite.  Chances are it won't go that high, but if you are ok with the cash flow that way then you will be pleasantly surprised, not stuck with something that doesn't offer the returns you wanted

 

Thanks again, @John Warren and @Brie Schmidt . What a confused situation! I guess the only remaining question is, can even the best tax appeal be reasonably expected to drop the county appraisal back below a recent fair-market transaction? That seems unlikely, but then, government rarely works the way I think it ought to :-)