Archives for May 2011

The Purpose of Title Insurance on Investment Property

The Big Protector: Simply put, title insurance helps protect the lender and the property investor in any property transfer.

It ensures that the investor will own the property with no past claims (encumbrances) already on it, or at least none that the buyer doesn’t know about and has agreed to allow upon the purchase of the house.

Title insurance is obtained through title companies. First-time investors, not used to the closing process, are usually baffled by the “stranger” at the closing table: the title company representative.

To explain title insurance better, let’s take a step-by-step look at how a title company operates – and what their involvement is in the closing process.

The process begins

The whole process starts when the attorney for the purchasing investor places an order for title insurance for his client. This order generally takes place after the investor receives a written mortgage commitment from a lender, or in the case of an all cash deal, upon execution by the parties of a contract of sale.

More costs?

The investor’s attorney wants to protect his client from incurring any costs or fees for title work until there is a reasonable certainty that the deal will take place.

At the time of ordering, the title company is provided with a great deal of information: the names of the buyer and seller, the identity and requirements of the lender, and the names of the attorneys representing the various parties to the transaction, along with the legal description of the subject property. The title company then prepares a confirmation of the order, and sends it to the parties involved in the sale for verification purposes.

In the event there are no changes needed, the title company orders the search of the records in the county clerk’s office where the property is located.

This search is essentially a review of the deeds, mortgages, liens, legal proceedings, easements, restrictions and other encumbrances on record that may affect the title to the subject property. Basically, if there’s been an ownership problem in the past, this search will pick it up.

What a search covers

These searches often cover all activity involving the property for about 50 to 60 years or more. Title searches also include records filed with the municipality where the property is located. This is done to check any outstanding tax bills, water and/or sewer charges, special assessments, tax liens and other items which may affect the title. Records filed with the building, fire, highway and other municipal departments may be searched for records of violations, building permits and the like.

Results

The results of these searches are then reviewed by the title company. A report is prepared and sent to all attorneys involved in the sale. This report will show the identity of the owners of record of the property, the source of the title, and a listing of mortgages, liens, easements, restrictions and encumbrances that may affect the title to the property.

The report will also contain any additional information and/or requirements that will need to be obtained and addressed prior to the closing. So, for example, if the title report comes back showing there is an outstanding (open) building permit on the property, the seller will need to complete the work required to obtain that permit and receive their Certificate of Occupancy, prior to the closing.

Obtaining clear title

Attorneys will also want to ascertain that the seller can provide “clear” title, to the extent agreed to in the contract of sale. The attorney for the seller will want to know what steps have to be taken to provide such title by the closing date. The attorney for the lender will want to be certain that the lender receives the title that is required by the mortgage commitment, as well as by the requirements of the secondary lender’s market. This stage can be marked by a great deal of discussion and negotiation by all concerned.

After the attorneys agree on which documents are to be obtained and delivered to whom, a closing date is usually set. At the closing, the required documents are delivered, the buyer becomes the new owner, the lender becomes the mortgage holder, and everyone goes home – safe and secure in their investments.

Transferring ownership

The title policy provides that the buyer is given an insurance policy that insures that title ownership has been successfully transferred, subject only to the conditions set forth in the policy. These can include items such as easements, driveway maintenance agreements and the like.

The lender is given insurance that the mortgage it holds on the property is a valid, enforceable lien against the premises, again, subject to the various items found by the title company (and not disposed of prior to the closing).

Taking the deed

The title company representative leaves the closing table with the deed and mortgage (for filing with the appropriate county clerk’s office). This representative will also leave with checks to pay any “open” items, such as back taxes for example. In addition, they will bring to the clerk’s office whatever evidence had been required earlier (to clear some of the title defects uncovered in the search and review phase of the deal).

One time premium

For the title company work and insurance policy, there is usually a one-time premium paid to the title company at the closing by the borrower, as well as certain search fees for various municipal searches which were requested or required by the various attorneys.

Finally, the closing documents, after filing and recording, are then sent to the respective attorneys for all the parties to the sale.

Complex, yet essential

Though title insurance is yet another closing cost for the property investor, it’s a cost that is absolutely essential in protecting your investment.

photos courtesy of toonpool.com, massrealestatelawblog.com, salelahome.com, rmbescrow.com, ocasturkiye.com

When To Obtain A Building Permit

The Importance of the Building Permit

Almost any renovation, whether interior or exterior, will usually require a building permit in your municipality. Two major exceptions to this would include re-shingling a roof, as well as any house painting project. Both of these types of improvements would not usually require a permit.

To paraphrase from “Oklahoma!,” the building inspector and the investor should be friends. A common misconception seems to be that building inspectors (from any locale) love to deny permits or will give the property investor a hard time.

It makes for a nice myth though.

When you consider that the building department of any town is there for the overall protection of the community, and it is ultimately responsible for the overall safety of dwellings and therefore individuals who live in that community, the building inspector can be looked on in quite a different light.

Safety and savings

Besides safety, they can actually end up saving the investor money in the long run as well. If, for example, your contractor is cutting corners on a particular project without you knowing, be it in time or expense, the building inspector can usually spot it – and will make sure the job is done correctly according to local building code standards.

Some points in a town’s building code can be open to interpretation, so it’s best to check with the building department prior to starting any work on any investment project you may be considering.

Many building departments made their building codes more stringent about twenty years ago, to reflect increasing pressure for town safety. The departments are charges with two main duties: to make the community safer for all, and to make sure that house renovations are performed correctly, whether done by a contractor or the house owner themselves.

As an example of their combined commitment to code enforcement and also being there for the property investor, building inspectors may, for example, point out when a house owner is trying to install a sheet rock ceiling themselves incorrectly. Upon close inspection, they will offer the “tip” that the sheet rock requires more screws lined up closer together to make sure there will be no future sags or warping in the ceiling.

Problem solved

Of course that advice was taken, and more screws were added, and the job was made much safer prior to the investor obtaining his Certificate of Occupancy (usually called the C/O) for the completed work.

Without the inspection, the property investor could have been facing a potentially dangerous situation somewhere down the road.

Building Permit fees

In general, the estimate of the cost of construction will determine the building permit fee that’s set by the building department. These fees tend to be reasonable, running (on average) about 1% of the total estimated project cost.

Develop a relationship

As a property investor, it’s always a good idea to get to know and develop a relationship with your local building inspector. You’ll find they can be quite supportive and helpful. Ultimately, they can become great advice-givers on potential projects in your town, helping you decide if a given project is even worth your investment dollars.

photos courtesy of thetimes-tribune.com, danvillevt.com, sheetsdesignbuild.com, alwaltershomeinspection.com

The Secret to Great Property Investing

Psst…

One of the greatest secrets to top-notch property investing is quite simple: you must become a ruthless negotiator. When you locate a potential money-maker property, you’ll want to treat your negotiation as basic warfare.

Win-win scenarios in negotiating?

Never. There should only be one party standing after a deal is concluded – and it had better be you. Machiavellian? You bet! Most investors in real estate make the mistake of taking pity on a seller, due to the circumstances surrounding a seller’s reason to leave their cherished home. A very humane, and admirable trait to be sure. But if you count yourself as one of these folks, do not go into property investing. You’ll get wiped out in short order.

The taking of grandma’s house. Boo-hoo.

So you’ve just walked through the home of the ninety-year old woman, living alone in the home she’s occupied for fifty years. Oh – and she’s suffering from Alzheimer’s as well. Now you get to be the one to make the astoundingly low offer on it. You should have no reservations about doing so…In fact, maybe you’re the first offer she’s gotten after many months she’s had her house on the market. You could be the answer to her prayers. She needs to sell her home, maybe to be able to move into a private nursing home. It’s not your business, nor should it be your concern. This is a business transaction, plain and simple. You should feel no remorse about “taking her home away from her.” Rather, you should only be thinking about how much money you’re going to profit from by renovating this property and then selling it.

Steal this house! (Some basic negotiating tips)

To paraphrase Abbie Hoffman, you should always be thinking about stealing someone’s house in any negotiation. Here are a few solid tips to effectuate getting a great deal on investment property:

From the first contact with the owner (and/or their agent), you should be trash-talking their house. Complain about every major and minor flaw with the home. You want to make them feel as though they will never be able to sell their property!

Lovers and other strangers…

Never fall in love with a property. Sounds easy, right? But be aware of your blind spots. For example, if you just happen to love antique homes with great character, period crown moldings, arched plaster doorways, stained glass windows and the like – it would be a good idea to steer clear of antique houses. You’ll unconsciously be drawn to renovating it to suit your own personal tastes, rather than what the preponderance of the market would like. You could easily be creating a money pit, for yourself, unknowingly. You’ll love the finished product. But you won’t enjoy the potential loss you may have to incur because you overspent on the rehab work.

Get ready for crunch time…

Always triple-check your numbers. When you crunch your numbers for any potential property investment you’re considering making an offer on, make sure you go over your pro forma income statement several times. Once you’ve determined the top amount you will possibly pay for the property, pick a strategy you’ll want to use when entering this negotiation (see article on negotiating strategies).

No time for wimps…

Become thick-skinned. Pay no mind to what the rest of the market is doing. It’s OK to make “insulting” offers (consider 25% or more off asking price to be “insulting”), as long as you fully understand the potential negative ramifications of this strategy – like having to bid upwards against yourself (more on this under negotiating strategies).

Time is on my side…Yes it is….

Use time in your favor. There are times when slowing the pace of your counter-offers down to a crawl can make the seller sweat. This tactic usually works well once you and the seller are getting close in price in your negotiation.

Calming the nervous seller…

Make sure you remove any doubts the seller has about your credit-worthiness. Next to price, the greatest fear of any seller is that you won’t be able to obtain your mortgage. They certainly don’t relish the thought of achieving a signed contract, only to find a month later that your lender is unable to offer you a mortgage commitment. Either be prepared to pay all cash for the house, or have your financing in place by having (at the very least) your pre-approval letter ready and current, to give to the seller when presenting your opening offer.

A riskier, but much stronger way to negotiate, would be to become pre-approved for a mortgage, and negotiate as if you were making an all-cash offer. Basically, you’d be signing a contract with no contingency for backing out, should your lender not extend a mortgage loan commitment to you. Your attorney will always advise against you doing this in order to protect your down payment that‘s in escrow. But you’re the investor here – it will be your decision if this is a risk you’re willing to take in order to negotiate from a much stronger position.

photos courtesy of atelurglurg.tumblr.com, spiderpic.com, managerial.ir, flickr.com, istockphoto.com, digilander.libero.it

The Appraiser’s Role In Property Investing

Key Component in Property Investing

Most property investors tend to think they have a good idea of the value of a potential house, but appraising is one of the key components in the investment process.

Recent mortgage industry failures notwithstanding, appraisers act as part of a rather complex “safety net” built into the real estate, mortgage and banking industries. It’s a safety net that has become extremely tight in recent years…In an effort to protect buyer, seller and lender alike, appraisers are very strictly regulated by state and federal guidelines.

An appraisal is ordered perfunctorily as part of the mortgage loan process on most houses. When a lender orders an appraisal for a house buyer, the lender simply requires a totally impartial expert opinion as to the fair market value of the property they’re going to offer you, the investor, a loan on.

The key words here are “impartial” and “expert.” Common sense dictates that lenders base their loans on valuation information that comes from someone who has no stake in the real estate transaction.

Valuation estimate

The formal appraisal that is generated by a licensed appraiser is a valuation estimate of a property – basically, a reasonable expectation of what price the typical buyer would be willing to pay for the property in its current state, under fair market conditions.

Appraising involves not only inspecting a property, but analyzing the community where that house is located as well. The appraiser will gather information about any given neighborhood, and will note in his appraisal report items such as the general conditions in the area, overall market stability, as well as what range of prices there are within that community.

When it comes time to go out and inspect a particular house (known as the subject” property), the appraiser will first measure the house to determine its gross living area. He’ll also check on room counts, layout and overall condition of the house. (If you’re the house seller, it’s helpful to point out any renovations you’ve made to the house recently.)

After the inspection…

After the completion of the inspection, the appraiser goes to his data sources to find recent sales of similar houses nearby. Ideally, these would be a minimum of three properties as close to the subject’s size, age, lot size, location style and amenities as possible, which have passed title within the past six months.

The appraiser would then use these “comparable” properties to relate to the subject property on an item by item basis.

For any significant differences between these properties, value adjustments are made. It is in this comparison process that the artistry of the appraiser is brought out. The appraiser uses his best judgment and experience to determine what value figures to use to adjust between parcel sizes. For instance, houses with or without central air conditioning, or houses of different architectural styles or ages.

Since there is no exact equation that’s used in the appraisal process, lenders obviously place a great deal of faith in the “best judgment” an appraiser can supply.

photos courtesy of prawnik-online.eu, allocated.com, growingseattle.com

Under Valued Appraisers (fflop.wordpress.com)

Assembling Your Property Investment Team – The Real Estate Attorney

One of the keys to your dream team

The purchase and sale of your investment properties will always be significant events in the investing process. So it’s obviously good protection to hire an attorney who specializes in real estate law for such complicated transactions.

It’s important to have a professional on your side as your advocate. You’ll want an attorney who’s been there before in many types of real estate matters. Because closings are much more complex now than ever before, with more legal paperwork being required by all parties to a transfer, you’ll need someone who’s very familiar with the process.

Whether you’re simply starting your search for an investment property, or about to place it on the market for sale, you should be looking for an attorney before you do either. And you’ll want to use the same attorney over and over, making them part of your property investment team. You certainly don’t want to be scrambling for an attorney to represent you right after you reach a verbal deal.

As the seller of property, the time period between an accepted offer and getting a contract out to a potential buyer is critical, so you really want that time gap as small as possible. Any delays in getting out a contract could kill a deal. And looking for the right attorney who suits you is time-consuming.

If you’re the purchaser of a house, an accepted offer is simply not legally enforceable without the strength of a written contract behind it. And not having an attorney already on board could delay the process. You could end up losing that great investment property deal.

Firming up the contract…

The attorney’s job in real estate transactions is very clear, regardless of which side of the table they’re sitting on. As the seller’s attorney, your attorney will ensure that the contract with the buyer is as firm as it can be.

If the attorney is working for you as the purchaser, they will make sure that a contract locks up the house at the agreed upon price and terms, subject to the kinds of protections you’ll need. (For example, being able to get out of the contract if you can’t obtain a mortgage).

Starting your search…

You can start your attorney search by asking for referrals from friends and family, or other real estate professionals. Also, most local county bar associations offer referral services. When doing your search, you’ll want to discuss several key items with prospects. First, ask how much experience they’ve had performing real estate closings.

Next, ask what sort of experience they’ve had with planning and land use issues (so you can ascertain their familiarity with easements, Certificates of Occupancy, building permits, etc.) since you don’t know what problems will come up prior to your closing

You‘re really looking for someone with a broad background in real estate matters. In addition, see how well your prospective attorney relates to you. Do you feel comfortable with them? Are you compatible?

You‘re going to be on the phone extensively during the whole buying or selling process, so you certainly need someone you can trust and work with easily.

One last note…

Finally, most attorneys charge a flat fee for closings. And they tend to be within a fairly tight range of price within your local area. Don’t choose an attorney simply on price alone. It doesn’t make sense to cut corners to save $100 or so for each of your precious investment transactions.

photos courtesy of find-a-los-angeles-lawyer.com, jamesportmeetinghouse.org, berkscourts.us

Assembling Your Property Investment Team – The Engineering Inspector

Another big part of your team…

When choosing an inspection engineer (also known as a home inspector), ask for referrals from other professionals in the real estate field, as well as friends and family.

Price shouldn’t be a big part of your decision, since most home engineering companies charge within a fairly tight range in any given geographic area – usually between $300 and $500 for an average sized single family house.

The home inspection gives the property investor a heads up by looking at a house completely from the outside foundation up through the roof, to foresee any potential (or current) problems that the house may have.

The inspection process…

Most house inspectors like to start on the outside around the foundation, and then explore a building’s exterior walls up to the roof, on to the walkways, steps and any surrounding retaining walls.

They will review with the investor what is or is not catastrophic in nature., in regards to defects with the house. And then they will offer advice on what can be done to repair them, along with cost estimates to correct these potential problems.

If, for example, a gutter is found leaking, they will note the cause and effect of the leak: that water can get into the side wall of the house and rot the trim, or actually get into the structure internally.

Inside the house, a home inspector will explain to buyers about the heating and electrical systems of the particular property, and how they operate. They will look for obvious problems in all the systems, and will give a generic overview of the entire system.

Most engineers prefer that you accompany them on their inspection. They like to teach you first-hand about the house you may be purchasing – and any inherent defects it may have.

Some engineers prefer to studiously go through a house taking copious notes without interruption. Their written reports usually spell out every conceivable problem with the house. It’s best to go over the written report with them to ascertain exactly how important each defect truly is.

Thorough inspections

Both styles of house inspection are very thorough. However I happen to prefer getting up close and seeing the problems with your potential investment, and not just reading about them in a report.

Inspection engineers can also be helpful in giving a rough idea of costs to correct certain problems. If the problems are major, and involve, for example, structural repairs that might cost thousands of dollars to fix, a price renegotiation with the seller will definitely be in order.

But minor house defects costing in the hundreds of dollars are rarely a good idea to reopen negotiations – that just tends to antagonize sellers. And you could end up losing the deal on your next investment property. So don’t automatically use an engineering report to renegotiate price with the seller. It can be a risky proposition.

photos courtesy of sanjeeda-sheikh.com, spoki.lv, janelledunn.com, aceenvironmentalstl.com

Assembling Your Property Investment Team – The Contractor, Part 1

An essential team member…

Most contractors will agree that their greatest asset is their reputation. Any contractor who’s been around awhile has that all-important reputation to protect.

In selecting the right contractor, check out all references your potential contractor supplies you with. Make sure your questions to his previous customers deal with the quality of the work performed, and whether past projects were completed in a timely fashion, and on budget. Any payment problems or cost overruns the prior customer may have incurred with a particular contractor should be discussed to see if they were reasonable cost overruns.

It’s also a good idea to visit some of the houses your potential contractor has renovated as well, to check out first-hand the quality of construction. And you may want to check with some other sources, too.

Your local building department as well as the Better Business Bureau are good places to start to see what sort of track record a particular contractor has had. You’ll be looking for any financial or legal problems they may have encountered in the past.

Fully licensed?

In addition, you’ll want to make sure your contractor is not only fully licensed with your local county, thus ensuring his reputability, but you’ll also want to make sure he carries his own workers compensation insurance for himself and his own workers.

For small projects, you’ll want to be sure your contractor is a good “fit” for your personality. You’ll be working with him extensively on a daily basis, so you must be able to communicate ideas well with him. Make sure he’s a good listener, and understands the scope of renovations you’d like to accomplish within a set budget. Also check to see that he’s being proactively creative – coming up with his own ideas that you hadn’t thought of that will either save you money, or increase the desirability of your house.

Contracts

When your property investment renovation is going to be a large one, make sure everything is in writing. A contract is only as good as the contractor. Any renovation project must be implemented in the spirit in which it was negotiated.

Contracts for extensive renovations should contain detailed specs and drawings on a room by room basis, including the exact materials to be used. (With major rehab projects, it’s the architect’s responsibility to come up with the specs so that there’s little open to interpretation.) A contract should also be very specific as to how to deal with any changes an investor would want during the renovation.

Change orders…

Customarily these “change orders” should be acknowledged and signed for by the purchaser at the time of the change in plans or materials. In order to avoid problems during rehab, there must be a symbiotic relationship between the contractor and the investor.

The contractor has his job to do, and any reputable one will follow the contract explicitly – including finishing the project in a timely fashion. And contractors expect to be in constant contact with investors through the entire renovation process.

Renovating investment property is a two-way street, and contractors should not be abused by investors either. As long as the project is progressing on time as per the contract, investors should refrain from overusing that well-known quote from “The Agony and The Ecstasy,” “when will you make an end?”

photos courtesy of local.ctpost.com, make-my-own-house.com, local.yahoo.com

Assembling Your Property Investment Team – The Contractor, Part 2

Other criteria to consider…

In selecting a contractor as part of your investment property team, there are a number of other criteria to keep in mind besides price alone. Though price certainly is a key criterion.

As mentioned before, you’ll want to be as specific as possible about your renovation needs when comparing contractors. For example, if you plan on rehabbing a kitchen, drawing a layout would be a big plus. You should include all necessary dimensions and existing layout changes , as well as an exact materials list for the new kitchen.

Some major chain remodeling box stores (for example, Home Depot and Lowes) provide layout assistance for free as well. Use them. The key ingredient here is to ensure that all contractors bidding on your project are quoting prices based on exactly the same design layout and materials.

Otherwise, you can’t properly compare pricing from one contractor to another.

At the very least, you’ll want to obtain at least three licensed contractor bids on the proposed project. However, you don’t necessarily want to take the lowest bid.

Too good to be true?

If a low bid seems too good to be true, and is way out of line with other bids, it should raise a red flag that you’ll need to investigate further with that contractor.

You should also carefully check all references supplied by each contractor. Keep in mind that references will usually be glowing, so your questions to them should be pointed and deal with the quality of work and whether the project was completed on time or not. You should discuss any payment problems or cost overruns the reference might have incurred with a particular contractor.

Checking with impartial sources

As a reminder, it’s always a good idea to check with more impartial sources as well. Your local building department as well as the Better Business Bureau are good places to start to see what sort of track record each bidder has had. Look for any financial or legal problems they may have had in the past as well. You’ll certainly want to also confirm that each contractor is fully licensed within your municipality too.

Payment schedules

Besides price, part of your negotiation with any contractor should be some form of “pay as you go” payment schedule.

Try to lessen the intervals in payouts by making smaller payments more often. For example, regular weekly payments are always better for your protection than monthly payouts would be.

In this way your payments can never get too far behind the actual construction work that has progressed. You don’t want to find yourself a quarter of the way into a project that you’ve already paid two-thirds for already – especially if the contractor you so meticulously hired runs into financial problems during construction. If he is starting to run substantially behind schedule, you’ll have the leverage to delay your next payment until he’s back on schedule.

Of course, the greater the amount you can withhold until successful completion of your investment property project, the greater your protection will be.

photos courtesy of kitchen-ideas-for.com, loyallabor.net, buildingguide.co.nz

Should You Do Your Investment Property Renovation Work Yourself or Not?

The best way to save on costs?

As a property investor, you’ll look for any way to save on costs when purchasing and fixing up a property for profit. Invariably, the question will come up, should I do my own renovations?

To paraphrase an old Clint Eastwood line, a property investor’s “got to know his limitations.” Ultimately, you’ll want to consider these points in making your decision….

The first set of concerns you’ll have to weigh between any do-it-yourself rehab project or hiring a contractor are the various types of cost savings issues.

On the one hand, you have the contractor’s price for your renovation. Subtract the cost of materials you’d have to pay for the job without any wholesale discount the contractor usually gets for materials. Now you’ll have your real “time cost” for performing the renovation.

The time factor

Next, determine how much actual time you feel it will take you to do the renovation.

Also, consider that a licensed contractor can probably have the job finished in a fraction of the time it would take you to accomplish it. (Of course, if you’re on a tight budget, you may not necessarily have a choice).

In most cases, contractors have redone kitchens, baths, etc. on a regular basis. This might be your first time. And your lack of expertise will obviously increase the time spent on the project relative to a contractor’s time.

And you must also consider the lost opportunity costs of your time – what other investment property tasks you could have performed instead. (Of course, if doing renovation work is therapeutic for you, then the time factor is not so important here.)

Quality of materials

Also consider the quality of materials to be purchased. Do you have access to the same materials for the same price as a contractor does? Most contractors have a set “supplier list” that they purchase from over and over again for their many jobs. This affords them the best materials at the least cost.

Another key issue to take into account in your decision-making, is that do-it-yourself projects can sometimes be done incorrectly. These jobs can involve costly repairs when not done properly – and may ultimately require a contractor to come in to fix them. Ouch.

Tax ramifications

Another consideration for your bottom line, is that any amount spent on a contractor on an investment project will mean a reduction in the cost basis of the property when it comes time to sell the house. Thus, a lower tax bite. When you do-it-yourself, you cannot claim a deduction for your own time. (The investor’s time performing the job, while valuable, has no effect on the cost basis of the property.)

Finally, always weigh the cost factor of hiring a contractor with their ability to guarantee the workmanship and materials. A licensed contractor will service any items found defective during or after construction.

photos courtesy of alttext.com, gideonsword.net, sc6.blogspot.com

Selling Your Investment Property: Renovations and Property Taxes

The property tax trigger

When it comes time to sell your investment property, any renovations you completed with a building permit will always trigger an increase in property value – and taxes. And your potential buyer will want to know how much more those taxes will be since you did the renovations.

The tax raising process

So let’s review the process by which taxes will be raised. Remember, you are helping to improve the overall quality of the community – and the community gets to share in this improvement as well – by increasing taxes on the increased value of the property.

When you obtain a building permit for any house renovation or addition, your town assessor will be notified by the building department. Assessors will want to see the work that’s being done, and will make a determination as to how much value is being added to your investment property.

After the town assessor determines the value added in any improvement to a house, he then must “equalize” the assessment value. Basically, this means he has to re-align the value relative to other neighboring communities within your state.

As an example, some communities will have equalization ratios that run about 20% of the real market value of the work that was done. (In a truly simplified world, all homes would be assessed at 100% of their market value, and no equalization ratios would need to be employed – but this is a rarity.) In this example, with the equalization ratio of 20% of real market value, a newly added deck that adds $10,000 of value to a property will be assessed at roughly $2,000. And if taxes were running, as an example, about $100 per $1,000 of assessed valuation, that $2,000 increase in assessed value would add roughly $200 to the annual property taxes on the property.

Construction cost is irrelevant

It’s very important to note that your exact cost for building that deck is not a salient point in determining your increase in assessment. Rather, the assessor only looks at the real market value as the base determining factor. Since assessors must be equitable, the assessor will treat two identical decks as equal – regardless if one was built by a contractor at a cost of $10,000, while the other was erected by your brother-in-law for half that amount!

The assessor will always look at how much value that addition is adding to your property, and he’ll always strive to assess equally.

Renovations like decks, extra rooms and baths are all relatively simple to determine valuation, since the assessor can use special valuation tables based on these basic types of house improvements. Square footage measurements are taken, and multiplied by a set amount per square foot for similar style homes. In essence, these types of renovations are easy to quantify as to value added.

House alterations

What makes an assessor’s job harder however, are more subjective alterations to a house. For example, a total kitchen remodeling job is much more difficult to assess.

In those cases, it’s a real judgment call on the increase in value. Decks, garages and square foot increases are more tangible and easier to assess. When in doubt, the assessor will refer to the building permit to see if the dollar amount of the work to be done seems reasonable.

If not, your assessor may adjust the added value accordingly. Most assessors would agree that assessing alterations is not an exact science, but assessments are equitable.

photos courtesy of activerain.com, exomatiakaivlepo.blogspot.com, westmainworldchangers.com