Which Assumption Has Killed More Deals: Taxes, Insurance, or Repairs?

Question

A lot of deals look acceptable until one ordinary expense assumption changes.

For example, a property may appear to cash flow using the seller's current tax bill, last year's insurance premium, and a light maintenance estimate. Then the reassessment arrives, the insurance quote comes in higher, or an aging roof and HVAC system turn a thin margin into a monthly loss.

When I review a deal, I find it useful to separate three cases:

1. The current case, based on verified in-place numbers.

2. The realistic forward case, based on what a new owner is likely to experience.

3. The stress case, where one or two major assumptions move against the deal.

The goal is not to make every property look bad. It is to identify which assumption the deal cannot afford to get wrong. If a small change destroys the return or eliminates reserves, the purchase price or structure may need to change.

For investors who have owned property through a full cycle, which expense has surprised you most often: property taxes, insurance, repairs, utilities, vacancy, or something else?

Michael Eskenasy · Answer

For me, the assumption that causes the most damage is usually not the biggest expense. It’s the one people treat as fixed when it actually moves.

Repairs are obvious enough that most investors at least know they’re guessing. Taxes and insurance are more dangerous because they often get copied directly from the seller’s operating history and dropped into the pro forma as though the buyer will inherit them unchanged.

That’s especially risky with taxes. The seller’s current bill may reflect an old assessment, exemptions you won’t receive, or a value that resets after transfer. A property can look great using the historical tax number and become a completely different deal once the new owner’s bill shows up.

Insurance has become similar. The seller may have a policy written years ago under completely different pricing. Your actual quote might be 30%, 50%, or more above what the trailing financials show. In some markets, the bigger problem is not even the premium. It’s whether the property is insurable on reasonable terms at all.

Repairs are where I think the mistake is slightly different. People often use a flat percentage of rent and call that conservative, but the building itself may already be telling you what is coming. If the roof, HVAC, water heaters, plumbing, and exterior systems are all old, the next five years are not some abstract 5% maintenance assumption.

There is a capital schedule sitting inside the property whether you write it down or not.

The most useful thing I’ve found is asking which assumption the deal is least capable of surviving. If taxes can rise 20% and the property is still fine, that assumption is not really dangerous. If a $4,000 insurance increase wipes out half the cash flow, that is the number I want to understand before closing.

I also like separating uncertainty from severity. A roof replacement might be expensive, but if I know it will cost roughly $20,000 and probably happens within three years, I can price it. An insurance market where I don’t know whether next year’s premium is $6,000 or $14,000 is harder because the range itself is the risk.

That’s probably the mistake I see most often in underwriting. People spend enormous effort refining the assumptions they can already estimate pretty well and not enough time identifying the one assumption that can move far enough to break the deal.

The best stress test is not “what happens if every expense gets 10% worse?”

It’s “which single number am I most likely to be wrong about, and how wrong can I afford to be?”

Dan Handford · Answer

That timing point is valuable. An arm's-length purchase can be a strong self-comparable immediately after closing, while delays can weaken the argument. Checking the assessment record for square footage, removed structures, and subdivision errors also seems like a practical step investors can take before paying for outside help. Do you keep a standard assessment-review checklist for every acquisition?

David Krulac · Answer

@Dan Handford  Before I buy a property I always look at the assessed value and the county market value computation. There may be errors of record or what I feel are over assesments. One of the best rationales to use to appeal assessment is recent sale.  If I buy a property that is listed in the MLS, viewed by thousands of agents and potential buyers, and my purchase is an arms lenghth transaction, it becomes the most valid comp of it self. Therefore the best time to appeal that situation is right after you settle on the property.  If you wait, you make your rationale less and less relavent as time goes on.  Wait until next year to appeal and your self comp becomes stale.

The second item to look at right away are errors. Maybe the square footage is wrong, or the number of beds and baths, or some auxilary building were removed from the property but not from the assessment record.  Sometimes the lot was subdivided and is now smaller than of record.

Next step is to find other comps, as close as possible to the subject property and sold within the last 6 months.  When I did the 65 appeals, I didn't use either an attorney or an appraiser and did all the prep work myself and made 65 presentations at 65 hearing by myself.  Therefore my only cost was my time and my research.

Dan Handford · Answer

Those are useful examples because they show that taxes and insurance are not simply fixed inputs. Shopping carriers can matter, but the property condition, vacancy period, and scope of work can also change which coverage is available. The tax appeal results are especially notable. Prevailing on 61 of 65 appeals suggests that verifying assessments and understanding the local appeal process can be a meaningful part of due diligence. Do you typically begin that review before closing, or after receiving the first post-purchase assessment?

David Krulac · Answer

@Dan Handford You bring up taxes and insurance.  We've shopped insurance rates and have moved insurance companies where necessary.  Spmetimes by our choice, sometimes by the carrier choice.  The second property I bought, I approached the same insurance company from the first purchase, by they did not want any parts of the second proeprty insurance, because it was over 100 years old, had a slate roof and metal roof that were original to the building and had older plumbing,electric and HVAC.  So I had to find another carrier.  Just recently were working on a major rebab and the property has been vacant for more than a year due to permit delays.  The regular insurance carrier, who I have used many years would not isure for more than a year of vacancy due to increaseed risks on an unoccupied house.  Therefore we had to find another carrier.  If you don't like your insurance premiums shop the rates with other carriers.

As far as taxes, those are not etched in stone either.  One year we appealed the tax assessments on 65 of the properties that we owned and prevailed in lower taxes on 61 of those properties. Of they four not lowered, none were raised and two of which were lowered on subsequent yearly appeals. They know me well at the Assessment Office and I paid a courtesy call there just this week to keep them informed on my major rehab progress.  They already got notice of my Bulding Permit application from the muncipality, and I was giving them an update on the scope of work and estimated completion dates.

Dan Handford · Answer

Jules, Michael, and David, I appreciate the examples. The common thread I see is that the most dangerous assumption is often the one inherited without enough investigation. Historical taxes and insurance may not transfer to the buyer, a flat repair percentage can hide a real capital schedule, and repeated ownership changes can signal that prior buyers discovered something the listing does not explain. I also like the distinction between a known expensive item and a wide range of uncertainty. A roof with a reasonably supported cost can be budgeted. An insurance market or operating issue with no dependable range deserves a larger margin of safety. What source has proven most reliable for validating the assumption you are least comfortable with before closing?

David Krulac · Answer

I think the biggest msitake is confusing cheap with value.  Not every cheap property is a good deal or has value there.  Sometimes a cheap property is cheap for a real reason.  One thing I look at is how long the seller owned the property and the seller before then, and the seller before them.  3 owners in the last 6 years bad sign, 3 owners expeting a good deal then dumping it after 2 years, 3 different owners dumping it.  The second property I bought the seller owned for 37 years and was only selling because they passed away.  I also owned that property for 37 more years before selling.  It was a cash cow.  The former owner had to have appriased for inheritance tax purposes; I bought it for 43% of appraised value. There were 5 or 6 heirs, none wanted the property.  They wanted the cash even slip 6 ways. This was a multi-unit that generated cash and I improved the cash flow by sererating the gas heat and the electric to tenant pay, a big value add, reducing expenses from the get go.

Jules Aton · Answer

Great points. I haven’t had a property I completely regretted or took a loss on over the years but I have encountered a few significant repair surprises and one case where property tax and insurance were considerably more than anticipated.

Which Assumption Has Killed More Deals: Taxes, Insurance, or Repairs?

Most Popular Reply