Beware the overzealous town assessor
In the current climate of depressed property valuations, and for the past several years since the beginning of the housing crisis, property assessments have plummeted as house values have declined across the country. The net result: a severe decrease in property taxes in communities throughout the nation. Obviously, the strain on local municipalities has been terribly damaging, as belt-tightening is performed by town councils in every region of the country. And when you’re investing in property, you need to know that you could be a target.
The latest trend
As part and parcel of the current real estate slump, town assessors now usually look to find ways to offset these decreases, using any legal means possible. The latest trend has been for many assessors in numerous states to take sales data from recent foreclosure sales to property investors, and throw the sales prices out the window. They then attempt to jack up property assessments on these investment properties many times the actual sales price. This, of course, yields much greater tax revenues from these houses. So as you continue investing in property, the tax consequences could be devastating the longer you hold onto them.
The main rationale of these assessors has been that foreclosures and short sales sold to real estate investors were sold by banks while under “distress.” And, following this logic, distress yields market values far below what a “normal” operating marketplace of real estate transactions would yield.
What that logic fails to account for, is that the entire real estate market has been in distress for the past several years. Property owners, both homeowners and those investing in property alike, have seen the values in their properties plummet by about one-third. In much harder hit areas, values have declined by well over fifty percent.
The employment of pretzel logic by these overzealous and opportunistic assessors also assumes banks have an incentive to unload their portfolio of foreclosures quickly, thus creating further distress. Their argument is that ultimately, these sales are not “arms length transactions.” An arms length transaction is simply one where the seller and buyer do not have a relationship with one another.
The illogicality of their argument is that when banks place their portfolios of foreclosed properties on the market, they are traditionally listed using real estate agents. Thus, these houses are available to all potential buyers. And the free market system will act to adjust the selling price accordingly. You know full well that when you are investing in property, there’s always investor competition for the most desirable houses.
Market analyses help set prices
Further, banks set their asking price for each property in their portfolio based on information from broker opinions of value or listing agent comparative market analyses. And once an initial asking price is set, banks set limits on how much they will lower that price the longer a property remains on the market. So the notion that the banks are selling in some sort of distressed mode can’t be further from the truth.
Rather, they are making informed, analytical decisions based on professional recommendations as to the current market value for each property. Just because a foreclosure is purchased by an individual investing in property for a fraction of what the property was once worth is irrelevant. The new selling price IS the market price
What if you get a reassessment letter?
So what should you do if your local assessor’s office sends you a letter informing you of an increase in your assessment (and eventual increase in taxes as a result)? The first rule of thumb in deciding whether to fight the new assessment is to see if the new assessment is greater than ten percent more than what you believe the market value of your investment property should be. If it is, then it’s worth fighting (also known as grieving). Every municipality is different in when you can grieve your assessment. In that reassessment increase letter, they will notify you of the date when you can grieve your valuation in your specific town.
Use a grievance attorney?
You next have to decide if you will grieve the assessment on your own, or if you should use the aid of a specialized grievance attorney. These attorneys traditionally will charge you a percentage of your first year tax savings as compensation for their services. If they are unable to obtain tax savings for you, you would not owe them anything. But you’ll find they won’t take your case unless they feel there is a certainty of winning some savings.
If you decide to fight the assessment increase yourself, you’ll quite simply need to show evidence of your current market value. And that value needs to be closer to your idea of market value rather than the assessor’s valuation. Recent sales price data is traditionally used to support market valuation. If you’ve made improvements to a house as you are investing in property, bring your receipts for the work done to show the exact amount of “added value” you put into the property since you purchased it.
As an investment property, you can also impute market value based on the net income approach to valuation. As an example, if rental property in your area usually sells for eight times net income, and your specific property’s net income times this multiplier shows a market value well below the assessor’s valuation, you should by all means use that data in your grievance as well.
Always know your current market value
So be aware that with the current state of our economy, local assessors will be trying to squeeze out every penny from investment property owners through constant re-assessments. Just be sure to always have a handle on the current market value of each of your investment properties at any given time. And if you do get that assessment increase letter in your mailbox, decide if the increase is worth the fight. If it is, decide on whether to hire a specialized grievance tax attorney, or do the grievance yourself. Either way, do not let assessors get away with outrageous over-assessing as you continue investing in property each year.
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