All Forum Posts by: Richard Sanderson

Bill:

I think Joel makes some good points about the pros of hiring an attorney. I have nothing against attorney's. Just be very sure they are experienced in your state with tax assessment appeals, preferably with your type of property (e.g., multifamily, retail, shopping center, hotel, warehouse, etc.). Each state has a different assessment review and appeal process. In all of the states I've worked in (as an assessor) there have been three steps: (1) an informal request for review of the assessment to the local assessor; (2) an formal appeal to a local appeal board; and (3) a formal appeal to circuit court, tax tribunal, or state revenue commission. It's during the first and second steps of a three step process that I recommend learning the process. At the third step you really do need an attorney and outside independent appraiser.

Bill:

I'm relatively new to BiggerPockets (BP) but have a lot of experience in tax assessment appeals. I've posted a few things recently to my BP blog and have made comments to a few forum postings that may help you. I urge you to talk to the folks at the assessors office in Wilkes-Barre or the county assessment office who assesses properties in that area. Despite what you may think, most assessors will explain the appeal process and prove helpful. Many Pennsylvania counties haven't been reassessed in 10 to 20 years. I usually don't recommend that you hire an attorney to start. Learn the process yourself and hire an attorney if you can't get satisfaction. Attorney fees and appraisal fees usually outpace tax savings unless several years of taxes on a major assessment are at stake.

One way to approach the real estate tax cost (as apposed to personal property tax on furniture & equipment) is to use the approach that assessors often use when they value income producing properties. Don't have a expense item for property taxes (that's what the assessor is estimating so he doesn't take property taxes as an operating expense. BUT add it to the capitalization (CAP) rate. For example, if investors are looking for a return of 10% and recent sales to the net operating income (NOI) for those same sales indicate them same cap rate (of course make sure the NOI does not include real estate taxes as an expense) and real estate taxes in the subject property's location represent 2% of market value the resulting capitalization rate for comparison purposes would be 12%. This also help when comparing competing properties for sale or as comps from various taxing districts, even region wide.

Keith: I think Steve Babiak has the answer. In my area in order for a living area to be used as a bedroom it needs to have 5 feet of headroom (finished floor surface to ceiling) and a window and a closet. The headroom requirement eliminates a lot of attic spaces being used as bedrooms even when there are access stairs. MOST assessors concentrate on gross living area to estimate value for assessment purposes rather than bedroom count.

During the 30-plus years I spent as a local real estate assessor (most recently for a five year period to June 2012) I got frequent requests from investors for an Excel spreadsheet that listed all residential properties in the city or county with a separate column for: (1) location address for each property) and (2) mailing address for each property owner. The investor would use the spreadsheet to identify the absentee owners who may want to sell.

Not all local assessors will provide this. Some may not provide it at all (commercial use is prohibited) or they may charge you a fee. My advise is to be honest with why you want the data. The local assessor is too valuable a resource to spoil the relationship over the misuse of data.

Steve:

In my own experience as a real estate assessor (one was as the City Assessor for Midland, MI) I know that the IRS generally accepts the percentage contribution that land makes of the total assessed value as a basis for land as a non-depreciating asset. For example, if the assessed value for the subject property in the year you purchased it was $100,000 and the assessment for land was $20,000, or 20%, if you allocated 20% of the purchase price of your real estate purchase to land the IRS would probably accept that as reasonable.

I know I'm responding late, but I hope this is good background on assessments for property investors in general.

State tax laws govern property tax assessments in the U.S. and only a handful of states adjust an assessment based on sale price alone. But you should always keep the following in mind when it comes to real estate assessments:

1. They always have an "effective date for valuation." Similar to a stock price or appraisal, the assessor's value is as of a specific date. You may be surprised to find that the 2012 assessment is as of December 31, 2011, or January 1, 2012.

2. The assessed values are based on sales during a specific time frame BEFORE the effective date for valuation. For example, 2012 assessments may have a January 1, 2012, effective date for estimating value based on sales during a 12 month period from July 1, 2010, through June 30, 2011.

3. When selecting comps be sure that you chose them for the same time frame used by the assessor. Most assessors and review boards will reject sales outside of the time frame studied for the assessments.

4. As long as the assessor has prepared all of the assessments using the same methodology, this system is considered fair and equitable. It works best when prices are rising. Remember years ago when you wondered why assessments were so far behind the rising market? Well, this time delay is why they are taking so long to reflect the downturn in the current market. Assessors need this lead time between studying sales and sending out assessment notices because they are valuing EVERY property in their community, not just the ones that sold.

5. Assessors are typically required to have the assessments reflect market value or some percentage of market value (true value, fair value, etc.). Most definitions of market value assume a willing buyer and willing seller, neither under duress. As such most assessors ignore foreclosure sales, bank-owned property sales, and other sales under duress. Most assessors will only consider sales under duress if these kinds of sales are the prevailing market conditions (that is a high percentage of sales during a given year are sales under duress).

6. Show the assessor or review board a list of needed repairs or actual property features that are substandard. Assessors records typically assume normal wear and tear unless a building permit is issued for repairs or it's placed on a "unfit for habitation" list. The property owner, or potential buyer who is serious, always knows more about the subject property than the assessor or review board.

Denny:

As Steven Hamilton said, different counties have different procedures. State tax laws govern property tax assessments in the U.S. and only a handful of states adjust an assessment based on sale price alone. But you should always keep the following in mind when it comes to real estate assessments:

1. They always have an "effective date for valuation." Similar to a stock price or appraisal, the assessor's value is as of a specific date. You may be surprised to find that the 2012 assessment is as of December 31, 2011, or January 1, 2012.

2. The assessed values are based on sales during a specific time frame BEFORE the effective date for valuation. For example, 2012 assessments may have a January 1, 2012, effective date for estimating value based on sales during a 12 month period from July 1, 2010, through June 30, 2011.

3. When selecting comps (as Harry M. mentioned) be sure that you chose them for the same time frame used by the assessor. Most assessors and review boards will reject sales outside of the time frame studied for the assessments.

4. As long as the assessor has prepared all of the assessments using the same methodology, this system is considered fair and equitable. It works best when prices are rising. Remember years ago when you wondered why assessments were so far behind the rising market? Well, this time delay is why they are taking so long to reflect the downturn in the current market. Assessors need this lead time between studying sales and sending out assessment notices because they are valuing EVERY property in their community, not just the ones that sold.

5. Assessors are typically required to have the assessments reflect market value or some percentage of market value (true value, fair value, etc.). Most definitions of market value assume a willing buyer and willing seller, neither under duress. As such most assessors ignore foreclosure sales, bank-owned property sales, and other sales under duress. Most assessors will only consider sales under duress if these kinds of sales are the prevailing market conditions (that is a high percentage of sales during a given year are sales under duress).

6. As Harry M. said, show the assessor or review board a list of needed repairs or actual property features that are substandard. Assessors records typically assume normal wear and tear unless a building permit is issued for repairs or it's placed on a "unfit for habitation" list.

Asim:

I agree with Bill Gulley when he recommends finding comparable sales (comps) with local real estate agents or brokers. With free Internet sources for real estate valuation like Zillow (just for example) you don't know how recent their sales database is. As a former local assessor I know that many real estate information services like Zillow and CoreLogic get data from local assessors, but sometimes only on a quarterly basis. And because of other duties and responsibilities, assessors are not always up to date on property transfers when these updates are sent to subscribers.

I have to strongly agree with Theresa K. and Pat L. about contacting your local assessor. It's better to know the full story now (or better yet, before you sign a purchase agreement) about your holding costs. I always advise property investors to make friends with the local assessor. They have a huge amount of real estate information available. Most even survey income-producing properties for income and expense information. They can't tell you specifics (it's confidential) but they may tell you what their survey indicates for multi-family apartments of less than 12 units, for example. Every assessor get a copy of any building permit issued. They just don't act on some of them. For example a permit to re-roof a home won't trigger a visit by the assessor but a complete remodel will. Because some assessors have been burned when the applicant for a permit hasn't been honest (yes, it does happen) and finds a complete remodel when the permit says replace electrical panel, some inspect all properties where a permit has been issued. When you talk to the local assessor be sure to ask him or her why price paid isn't always the market value and why cost expenditures don't always contribute to market value (expect maybe California).