Property Assessment

What First Time Homebuyers Should Know About Real Estate Assessments & Taxes

Important Information Concerning One of the Highest Reoccurring Costs of Homeownership: Property Taxes
 
As a first time homebuyer you are not expected to be a tax expert, but after initial concerns about how much home can you afford and financing terms, one of the most important reoccurring costs of homeownership is real estate taxes.  I know, boring but important.  This is one of those items that if you don’t take some time to educate yourself on the basics, you’ll get extremely excited once your lender’s escrow company notifies you that they are increasing the monthly cost to cover increased real estate taxes.

Here is a full-text article that details and gives examples of the nine basic things an informed first time homebuyers should know about real estate assessments and taxes in their community.

This full-text publication will be available for a limited time.  After the first 10 days of posting the full-text article will only be available to Property Assessment blog subscribers.

As always please provide us with your feedback so that we can improve our publications.

Use Caution Before Changing Property Tax Laws

Change to Reflect Value Declines May Not Be Best Long Term Solution

The Problem
Many property owners are outraged by the fact that their property assessments are not declining as fast as market values, or in some instances even increasing.  Throughout the country news stories are reporting on the concerns and outright disbelief expressed by property owners that assessments are not adequately reflecting real estate market realities.  There has been such an outcry that many have asked state legislatures to do something, including requiring more frequent reassessments.  But this might be one of those situations that calls for being careful what you ask for because you might just get it, and then live to regret it dilemmas.

Why Property Assessments Lag the Real Estate Market
While there are many reasons that property assessment lag the actions of buyers and sellers in the real estate market, here are some key reasons:

• State tax laws prescribe how often properties are reassessed (annually, or everywhere from every two to ten years) and the effective date for the reassessment (the date of the estimated value).
• Generally accepted assessment practices require that mass-appraisal methods be used to value large quantities of properties during each reassessment. These mass-appraisal methods use computer models that allow a relatively small staff of assessors to value thousands of properties that consider comparable sales during a 12 to 18 month period (or perhaps longer) before the effective date for the reassessment.
• Local assessors need time for other administrative functions as well as completing reassessments. Although the computerization of the assessment process over that last 30 years has enable assessors to value properties more frequently, reassessments are not the only duties of local assessors. Assessment offices also manage large real estate databases which require records maintenance that include property ownership changes and physical changes in properties (new construction, zoning changes, subdivisions, etc.).
• During a typical reassessment cycle (pre-2007 or 2008) considering market activities 12 to 18 months before the effective date of the reassessment actually helped to keep assessments conservative. Because the valuation of real estate is not an exact science (either by independent single-property appraisers or mass-appraising assessors), having an extensive study period helped to keep values conservative and helped document support for value increases.

Possible Actions
Among the possible actions under consideration by property owners is to increase the occurrence of reassessments.  But this action could be shortsighted if their goal is to have lower assessments that result in lower real estate taxes.

What property owners, tax advocates, and tax policy groups need to remember is that the reasons that assessments are lagging behind a falling market are the very same reasons that assessments lagged behind a raising market.  Up until mid to late 2007 many real estate professionals were telling buyers and sellers that real estate assessments were typically 90 to 95 percent of the current market value of their properties.  That was because assessments were lagging behind the raising market.

I'm very much a proponent for annual assessments for the very reason that property owners understand value changes best if they are only lagging the market by 12 to 18 months, as opposed to several years.   But I do not advocate annual assessments as a means to achieve lower assessments and the possibility of lower taxes.  When normal real estate markets return (hopefully sooner than later) assessments will rise more frequently, if state tax laws are changes to more frequent assessments.

Also keep in mind that real estate taxes are comprised of two elements, assessed value and the real estate tax rates.  In a community that depends on property tax revenues for services (fire/police protection and public schools, etc.), if property assessments are lowered real estate tax rates can increase resulting in higher taxes.  This is very scenario is now playing out in communities across the nation.

For more information about property assessments and taxes read our Property Assessment blog.

Watch for Public Hearings on Real Estate Tax Rates in April and May

Actions During the Next Few Months Will Impact Real Estate Taxes

Property owners who are concerned with how much they will pay in real estate taxes in the upcoming year should pay close attention to the actions of their local taxing districts during the months of April and May.  According to the property tax laws of most states, city,  county, and regional taxing authorities are required to hold public hearings before adopting real estate tax rates if assessments increase or if they expect to increase the rate of taxation.

But it's important to keep in mind that most state tax laws concerning real estate assessments and taxes were written from the old axiom that assessments always increase.  Recent news from Michigan emphasized this situation when many cities and counties chose not to send out assessment notices if the assessed value stayed the same or declined.  The Michigan statutes require that assessment notices be mailed only when assessments increase.  So if you wanted to confirm your belief that a declining local real estate market should cause your assessment to decline, you needed to either call the local assessor’s office or access the information online.

Other state tax laws having to do with advertising public hearings on real estate tax rates can also be tied to assessment increases.  In Virginia a special notice of public hearing on the proposed real estate tax rate is required whenever assessments increase more than 1%.  Despite this, most local governments advertise the public hearing regardless of whether assessments increase or decrease.  Fortunately, most Virginia taxing authorities look to the state tax laws for minimum requirements rather than dictating common sense, especially in matters as important as real estate assessments and taxes.

Real estate taxes are one of the largest reoccurring costs of homeownership.  Although most residential property owners have an escrow account with their lender that includes annual real taxes, it's important that owners, especially first time homebuyers, understand the basics of property taxation.

Now is the time of year to stay attuned to the assessment and real estate process.  Once the assessment appeal process deadlines have passed and real estate tax rates have been set you’re committed for the next tax year.

2-Day IAAO Assessment Appeal Preparation & Trial Seminar June 7-8

Timely Educational Opportunity Offered by IAAO

On June 7 and 8 the International Association of Assessing Officers (IAAO) will present the 2010 Preparation and Trial of the Property Tax Assessment Appeal Seminar in Kansas City, Missouri.  This seminar offers a great opportunity for professional property assessors to prepare for increased challenges to assessments, especially by owners of commercial, industrial, and special use properties.  I attended a similar seminar before the commercial real estate market decline in 1991 and what I learned proved to be very valuable for trial preparation.

The seminar will present a case study based on an actual trial which either has been appealed or is under appeal. The mock trial focuses on a proceeding before the Review Board of the State of Utopia.  The subject of the proceeding is a well-known building in the City of Eden that is an approximately 10-year old, mixed-use commercial property. The subject includes hotel, office and retail space.  The property is located in one of the most successful retail districts in the City of Eden, and perhaps in the entire country.

Early bird registration closes April 20th.  Continuing Legal Education (CLE) credit deadline is April 20, 2010.  CLE approval is pending for the following states: AR, FL, IA, IL, KS, MO, NE, OK, TX, and WY.  IAAO professional designees will earn 13.5 hours of recertification credit.

For more information visit the IAAO website at http://www.iaao.org.

Ask the Assessor Q&A Webpage Launched

Are property assessors approachable?

Have you tried one of the many question and answer websites available today?  I've monitored several of these Q&A sites (also advice and discussion sites) that focus on real estate quite actively since January.  I've visited other general Q&A sites for more than a year (Business.com Answers, e-How, and WikiAnswers).  While these sites are quite popular and getting more so every day, I'm still surprised that many people don't go to the best source to get their questions answered.  For example, if you have a question about a personal medical condition you might go to a website that specializes in medicine or illnesses.  You wouldn't go to a Q&A website for veterinarians.  But time after time I see property owners asking real estate associates and brokers (and wannabes) why their assessments changed or tax bill increased.

Although many real estate professionals have had a lot of experience with real estate assessments and taxes, it's way too easy to get into gray areas and perhaps mislead clients.  For example I continually get phone calls from property owners after the assessment appeal deadline who say "when I asked about the high real estate taxes at settlement I was told that if I contacted you I could appeal the assessment."  Sorry, most states have deadlines for filing assessment appeals.  If the real estate assessment is initially determined by the local assessor and you need to contact the assessment office to challenge the assessment wouldn't it make sense to go directly to the source?  Notices of assessment that are sent as part of each reassessment include contact information for the local assessor’s office.

But I know I'm over simplifying this situation.  Perhaps professional property assessors (and I like to include myself in this category) aren't doing enough to let the public know that they can and should approach us with their questions?  What if it's just a matter of effective community relations and outreach?  Because property owners have developed a relationship with their real estate professional maybe they feel more comfortable approaching them with their concerns.

It's been said that if you are really listening to others you are ready to change your thinking based on what they are saying.  I plan to interview and survey several assessors during the remainder of the year to investigate this issue further.  In the meantime Property Assessment has added an Ask the Assessor webpage to their site so that property owners (and others) can pose their questions.

As always, your comments and suggestions are appreciated.