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?”

Aiden Avtgis · Answer

For me, it's property taxes. It's important to do your due diligence on all of these expenses, but taxes seem to be one of the easiest to get wrong if you're relying on the seller's current bill. I always recommend reviewing the most recent two years of tax bills and calculating it yourself through the county assessor's website. If the assessed value changes dramatically after the sale, your tax bill can change just as dramatically. It's an expense that can have a big impact on cash flow if you don't account for it correctly.

Kasing Ng · Answer

I am a financial analyst and tax modeler rather than an active property owner, but from an underwriting perspective, property taxes and insurance cause the most structural damage to a deal.

Unlike maintenance or repairs, which can be managed or staged through reserves, taxes and insurance are external expenses that reset immediately upon acquisition. When a property sells, county assessors often trigger a reassessment to market value, eliminating the seller's historical tax basis. Paired with spiking insurance premiums across commercial assets, these two costs inflate instantly.

Repairs are expensive, but they can be forecasted. Taxes and insurance are fixed mandates that cannot be operated away. If a pro forma fails to stress test tax reassessments and insurance rate hikes after acquisition, thin cash flow margins disappear on day one.

David Krulac · Answer

@Alex S.   On the other hand, taxes can be appealed.  Sometimes there are errors on the assesment record, and we have often used our resent purchase as justification for lowereing the taxes.  One year I appealed 64 of my properties and got 60 of them lowered, well worth the effort and did not hire either an attorney nor an appraiser.

Alex S. · Answer

Taxes, by a wide margin, because the seller's current bill is often based on a stale assessment and many counties reassess at the sale price the year after closing. The fix is cheap: pull the county millage rate and apply it to your purchase price rather than the assessed value in the listing, then check whether the seller had a homestead or senior exemption you will lose. Insurance and repairs hurt too, but they show up in year one where you can still react, while a tax reset quietly eats the spread on a deal you already own.

Ryan Thomson · Answer

Taxes are the one that catches investors most off guard, and I've seen it kill deals that looked clean on paper.

Insurance is rising fast in Colorado, but at least you usually get a quote before closing. Taxes are sneakier. Sellers often have owned for years, sometimes through a homestead exemption, and the mill levy hasn't caught up to market value. You buy at $480k, the county reassesses at $465k, and suddenly your tax line is 30-40% higher than what was in the pro forma.

The fix is simple but people skip it: call the county assessor's office before you close, not after. Ask what the assessed value is, when the next reassessment cycle runs, and what the current mill levy is. Run the number yourself. Don't copy the seller's tax bill.

Repairs are the one people handwave the most. "I'll use 10%" and move on. The problem is 10% of what? On a $120k property that's $12k/year and you might not spend it. On a $450k property with a 1970 slab, original electrical, and a 15-year-old HVAC, 10% is probably too low.

The stress case you described is the right frame. If your deal can't absorb taxes coming in 35% higher than pro forma, you don't have margin, you have hope.

Assumable mortgages are one way I've seen investors buy breathing room on the expense side. A payment that's $800/month lower than a new loan gives you a lot more cushion to absorb the surprises. But that only works if the rest of the numbers were run honestly in the first place.

Igor Ganapolsky · Answer

Michael, your line about "a capital schedule sitting inside the property whether you write it down or not" is exactly right. Now multiply that by the tax deed auction scenario — you can't inspect inside before you bid. That capital schedule is completely hidden. The roof could be 2 years old or 25 years old, and you won't know until you own it.

David's tax appeal checklist is the traditional approach, and it works well for MLS purchases. But at tax deed auctions, the entire calculus shifts. Your winning bid becomes the new assessed value. There's no reassessment surprise because you SET the value at auction. If a property is assessed at $400K and you win the bid at $250K, your tax basis is $250K — not some post-transfer reassessment that catches you off guard.

This is why the acquisition discount is the ultimate assumption buffer. Dan's three-case framework (current, realistic, stress) becomes almost irrelevant when you buy at 50-70% of assessed value. Even if insurance doubles, even if repairs hit $50K, even if taxes reassess upward to your bid price — you still have margin because you started with 30-50% instant equity.

I've been working Broward County (Florida) tax deed auctions. Auction #113 in October has 16 properties ranging from $200K-$500K assessed value, with opening bids at $100K-$350K. The discount IS the stress test. Michael's question — "which single number am I most likely to be wrong about?" — becomes less dangerous when every number has a 30%+ cushion built in.

The tradeoff is you sacrifice certainty for margin. You can't inspect inside, you can't verify the capital schedule, and you're bidding blind on condition. But if your underwriting assumes worst-case rehab and you STILL clear your return hurdles at 70% of assessed value, the unknowns become manageable.

David Krulac · Answer

@Dan Handford

1. I start with is purchase price less than market assessed value.

2. Then check for building sq ft, and lot sq ft.

3.  Then aux buildings

4. Then beds and baths

5. then nearby comps less than 6 months old

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.

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

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

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