Property Tax Appeals

'Shrunk to Fit': Tax Values in a Declining Market

Homeowners across the country are challenging their property tax bills in droves as the value of their homes drop, threatening local governments with another big drain on their budgets

--Jack Healy, "Tax Bill Appeals Take Rising Toll on Governments"; The New York Times (7/4/09).

Which would you rather have, 85% of $100, or 100% of $85?

In fact, they're exactly the same.

Add three (or four) zeroes, and that describes today's property tax environment in much of Minnesota.

Conservative No More

Until recently, most local tax authorities seemed to observe an unspoken rule that, when it came to assessing homes, conservative was better.

So, a house with a fair market value of, say, $250k might only be assessed at $200k. (Of course, another reason for conservative valuations -- at least in a rising market -- is that they're set two years ahead of time).

Today, local governments need every penny they can get. And yet, the housing market is falling, prompting homeowners to challenge their property tax assessments.

What many homeowners are finding out is that their home has "shrunk to fit" the more conservative tax assessed value. In other words, the $250k home that was taxed as though it were $200k now really is $200k. Voila! No tax refund.

Of course, tax assessed value is just one component in determining the tax owed; the other component is the tax percentage, also called the mill rate.

If the mill rate goes up more than your tax assessed value drops -- a distinct possibility these days -- your property taxes rise, not fall.

"Rehab Glass" Half Empty

In Buyer's Market, Rehab Discount Widens

Less than three years ago, the discount on a solid-but-dated home was quite small -- maybe 10%.

Today, at least anecdotally, it seems to me that the corresponding discount has widened considerably, to perhaps double that. (Note: at any given time, there are two kinds of Buyers for rehab properties: owner-occupants, and resellers -- "flip" refers to something illegal).

What explains the change?

Reasons #1, #2, and #3 all have to do with the economy: it stinks. Unemployment is up, confidence is down, and the supply of homes needing rehab is much greater. Meanwhile, mortgages may be cheap, but they're only available to borrowers with strong credit.

Related to all the foregoing is a palpable change in psychology.

When the market's going up, contemplating a rehab is exciting. It's easy to see potential everywhere you look -- and imagine the pay-off waiting for you when it comes time to sell.

In a soft market, however, prospective Buyers focus more on risk.

Will the market drop before I'm ready to sell? Is my budget and timetable for doing the work realistic? What if subsequent Buyers don't like the finished product?

And certainly this question: will I have an even better opportunity if I wait?

Needless to say, such psychology puts a damper on Buyers' enthusiasm -- and consequently, what they're willing to pay for homes needing substantial updating.

Of course, the flip side is this: precisely because of the foregoing mindset . . . there's a lot less competition for the multiple opportunities out there now.

Downtown Minneapolis Condo Deal?

Deep Discount

Where: Grant Park Condominiums
What: #2710 (penthouse)
Key Stats: 2,017 sq. ft.; 3BR/3BA
How much: $749,900
Originally Listed: 7/26/2005
Original List Price: $1.195M

Even in a slow market, 3 1/2 years is a long time to wait for a Buyer. And eleven(!) price cuts, totaling almost half a million, is a lot of ground to yield.

What gives?

While I've been in the building, I haven't seen this specific unit, nor have I looked at the "comp's" ("comparable sold properties").

With those caveats, you'd guess the owner is suffering from some combination of a too-high initial asking price (they listed just before the peak in 2006); a weak downtown condo market, with lots of upper bracket competition; and a "B" location on the Southeast corner of downtown (the most expensive condos are concentrated further north, on either side of the Mississippi).

So is the price right now?

Without doing more digging, about all you can confidently say is, "it's getting closer . . ."