Grieving your taxes is so simple!
When searching for investment property, it’s always important for you to review the asking price relative to the current assessed valuation on the property. If the assessment is close to the asking price (within ten percent), then you’ll have a quick reading of the appropriateness of the seller’s asking price: namely, it will be in line, and your negotiating will not deviate too far afield. (This doesn’t mean you shouldn’t make a lowball offer – by all means, be my guest if that’s one of your acquisition strategy techniques. Just know there will be a low probability of “stealing” the property.
However, if the assessment is significantly lower than the asking price, you should be wary about what could possibly be wrong with the property. It’s a question to be asked of the seller and his real estate agent, if he has one. Maybe the property had a major winter pipe burst and subsequent flooding at some earlier date, and the municipality adjusted the value of the property downwards to reflect the damage (assuming it was never repaired). Regardless, always make a point of asking what the reason for the differential could be before you make an offer.
When the assessment is higher…
The third possibility when reviewing asking price compared with assessment is that the assessment is significantly higher than the asking price. In this scenario, watch out! Besides asking the seller why such a large deviation exists, also ask why the seller never grieved his real estate tax (asked for a reduction in the current assessed value that the town assessor placed on the property). I have seen many occasions where sellers just don’t bother to ask for a tax reduction by grieving their taxes – usually out of sheer laziness and stupidity. This is unfortunate, since it cuts into their bottom line significantly year in and year out, with their continually paying a higher amount of taxes than they need to pay. Make sure it doesn’t cut into yours if you acquire the property.
Tax grievance 101
When you make an offer and close on a property with a final sales price much lower than the assessed value, you in effect must take on the duty of grieving the taxes. Interestingly, “grieving the taxes” on a property is a misnomer. What you’re really doing is grieving the assessment. The taxes on any particular property in a municipality are solely based on the assessed valuation of the property. And while each property in a town may be assessed at completely different values, the tax rate will always be uniformly the same for every property owner.
The time consuming process
Grieving your taxes is not difficult, but it can be time consuming. And it always takes a fair amount of time to realize the benefits of “winning” a real estate tax appeal that provides you with a property tax reduction. If you purchase an investment property and know you’ll need to grieve taxes on it, don’t wait. The day after you close on the property, you should go right to your local town assessor’s office, and show them proof of the sales price from the closing documents. On some occasions, assessors may agree with you that the difference in assessment and sales price is so overwhelming, they may be inclined to lower your assessment without the need for a formal grievance procedure (which is a court function).
In this instance, they may throw out a new assessment valuation to you for your approval. Be careful – they are negotiating with you! And you may not even be aware of this. The number they throw out will probably be somewhere between the sales price and the current assessment. It will be up to you to decide whether to accept it, throw out another “negotiable” number to the assessor, or move forward with the paperwork for a formal tax grievance. My advice: shoot for a figure within ten percent of the actual sales price. If you get it, be done with it, and be happy with what this will mean for your ultimate property tax reduction.
Time for paperwork
If you and the assessor can’t agree on a number, or if the assessor is a stickler, you’ll need to fill out the paperwork the assessor will supply you with for the formal tax grievance. The assessor will tell you when their local municipality “tax grievance day” is, and you’ll need to have filed all your paperwork before that date. (So if you buy a property in December and the tax grievance day is in June, that’s tough luck for you. You’ll have to wait, since, like Christmas, the day only comes but once a year.)
Besides standard data to be filled out on grievance forms, sometimes the sales price isn’t enough. If you make improvements to the property, you’ll need to do your ”homework” and look to supply other, independent professional opinions as to the most current value of your property. Examples of independent professional opinions that would be appropriate as tax reduction services, would be an outside appraisal (which you would have to pay for) or a local real estate broker’s opinion of value or Comparative Market Analysis (CMA). (They will create a CMA for free in order to ingratiate themselves to you for a hoped-for future representation – either as a property manager, exclusive agent for finding tenants, and/or agent when it comes time to sell the property).
Filing your tax grievance
Armed with his independent professional opinion on the current value of your investment property, you’ll be able to confidently file your grievance paperwork – which is your real estate tax appeal. At some point (usually within a month or two) after tax grievance day, you’ll receive notification of your tax grievance court date. On the appointed day, you will go in and represent your valuation to the court grievance judge (don’t worry – they will usually be an independent attorney – not a criminal case judge). And the town assessor will represent the town’s opinion of the value of the property. It will then be up to the judge to ultimately decide the fair market assessed valuation on the property. This will take several more months, and you will be notified of his decision by mail.
Using the time factor against assessors
It should be noted here that many assessors don’t have the time or wherewithal to attend grievance court hearings for every tax grievance in their municipality. So what do they do? Negotiate ahead of time with you. Many times you’ll get a call from the assessor, probably within a few days or a week ahead of the appointed court grievance date. And they will begin that negotiation I mentioned earlier in this article. Interestingly, at this late a date, you have the upper hand in the negotiation. You know they don’t want to go to court. And times running out. In this scenario, you can probably negotiate a number for valuation of the property within five percent of the sales price. Or in the case of your having made subsequent improvements to the property, within five percent of the professional opinion of valuation you already provided in your filing papers.
The long wait…
Whether you negotiate the new assessment, or go through the process all the way and have a judge decide the valuation, it may take yet another full year before the new assessment “hits the rolls,” or is recorded and actually comes onto the assessment rolls of your town. Only after this new assessment is actually recorded by the town and appears on your tax rolls, can you begin to realize the tax savings of a reduced tax grievance assessment. However, the savings will show up every year from there on – tax reductions that give a great boost to your expense savings, yielding you a higher net income on your investment property, like a gift that just keeps on giving.
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