Comparing (Bruised) Apples to Oranges

To Help Clear Housing Market,
Peg Tax Value to Last Sale Price

“Believe me, it’s not what it is.”
--New Yorker cartoon

That's what's the woman caught in bed with another man, says to her husband standing in the bedroom doorway.

And that's what government authorities are effectively saying to anyone who buys foreclosed properties at a deep discount. Namely, what you paid isn't fair market value, so therefore it won't serve as the new, tax assessed value used to determine future property taxes.

Bottom line: distressed, beat-up properties currently listed for $50,000 or $100,000 will be taxed as though they are still worth $200,000, $300,000 -- or even more -- regardless of what the Buyer actually pays.

Bruised Apples to Oranges

Certainly, poor condition and tight credit explain why many of these properties are sitting unsold, clogging markets nationally. However, the prospect of being stuck with an annual property tax bill of $6,000 or $8,000 -- compared to principal and interest payments of perhaps $4,000 - $6,000 -- is at least an aggravating factor.

Policymakers nationally increasingly "get" that the key to fixing the sick economy is fixing the housing mess. In turn, the key to helping housing is stemming the wave of new foreclosures --and helping the market absorb existing foreclosures. Short-sighted, reality-suspending tax policies make the latter task more, not less, difficult.

The solution is for the new Congress to pass a law requiring local taxing authorities to use the most recent property sale price as the new, tax-assessed value for every sold property, regardless of legal status (foreclosure, "short sale," etc.)

"Invalid" Sales

Such a policy makes eminent sense, for three reasons:

One. It reflects economic reality.

Foreclosed properties sell at huge discounts from non-foreclosed properties for a good reason (more like 15 or 20). They're typically neglected, uninhabited, hard to inspect (the electricity and water can be shut off), and sold "as is." They also can come with a trail of third-party fees and liens that collectively put a legal cloud on title, and can add significantly to the purchase price.

Who wouldn't expect a significant discount to take on such a challenge?

Two. Comparing the sales price of foreclosed homes to non-foreclosed homes -- as government policy now requires -- is like comparing (very bruised) apples to oranges.

In Minneapolis, foreclosures aren't considered "valid sales" for establishing tax values because they involve "duress." (See, "Sticky Property Taxes"). As a result, tax assessors must look for "traditional" (non-lender mediated) sales to calculate the "real" value of the foreclosed property.

Good luck.

In some markets nationally, 50%-75% of all sales are now lender-mediated. While the overall number is lower in the Twin Cities -- approximately 40% -- it masks a wide variation by neighborhood.

In well-to-do areas such as Edina and Wayzata, the percentage of foreclosures is minuscule -- well under 5%. However, in more "economically challenged" areas, such as Minneapolis' Camden and Phillips' neighborhoods, the percentage of foreclosures now appears to be 80% or higher.

You can't price off of a peer group that doesn't exist.

Three. The government's presumption of "duress" is obsolete.

Traditionally, "fair market value" has been defined as whatever a Buyer and Seller, acting at arm's length and without duress, decide it is. By definition, bank-owned properties are deemed to involve duress.

However, the fallacy is that "duress" and "fair market value" are mutually exclusive.

Foreclosed or not, a property that's been on the market for any length of time and fails to sell is . . . overpriced. The solution is to incrementally reduce the price at regular intervals -- as many times as is necessary -- until it is sufficiently attractive to entice a Buyer (or several -- sometimes deeply discounted properties trigger bidding wars once they truly are attractively priced).

It defies market reality for the government to overrule the foregoing price-setting mechanism and substitute its own, artificial procedure(s).

If government really wants to help the housing market, it should focus on removing obstacles in Buyers' path -- not placing more in their way.