"The Edgewater" in Uptown

Minneapolis' Most Discounted Condo?

I've blogged previously about deeply discounted single family homes in the Twin Cities.

A second-floor condo (#201) in The Edgewater (pictured above) may very well be the Twin Cities' most discounted condo.

Now at $749,823, the unit was originally listed for $1.981 million almost exactly three years ago.

That's a whopping 62% reduction!

"But Can You Afford the Property Taxes?"

The catch?

Not the A+ location, just off the Northeast corner of Minneapolis' Lake Calhoun.

And not the 2005 building it's in, a gleaming glass-and-stone structure with sleek walls of windows, great views, and open floor plans.

Rather, my guess is that it's the $19,000 annual property tax bill that is still attached to the unit, courtesy of its $1.35 million tax assessed value.

Opportunity Knocks

Does such a mismatch spell opportunity?

In this case, I think it does.

That's because the property isn't a short sale or foreclosure, where the tax authorities can (and do) argue that the ultimate purchase price doesn't reflect fair market value since it was a "distressed sale" -- and therefore disregard the sales price.

Translation: if you pay say, $725,000, that's also presumptively the new tax assessed value -- and that $19k property tax bill plummets.

In fact, if the Buyer closes in the next few months, they still have time to contest Hennepin County's 2012 assessment (determined January 2, 2011).

Mill(stone) Rate

2011 Hennepin County Property Taxes

Every time I think I'm a Democrat, they do something stupid. Every
time I think I'm a Republican, they do something greedy.

--Jay Leno

What do you call proposing to steeply raise property taxes against a backdrop of weak home prices and an economy just emerging, maybe, from recession?

How about, greedy and stupid?

Like a couple hundred thousand other homeowners in Hennepin County, I got my proposed 2011 property tax statement yesterday.

My assessed tax value: down 3% from last year.

My proposed 2011 property taxes: up 12%.

WTF?!?

Add: Arrogance

How can property taxes being going up at the same time assessed tax values are going down?

Because of something called the "mill rate," or the percentage tax levied on each $1 of assessed value, which has been increasing.

Good thing my Realtor's income, 401(k), and interest on my savings have all gained so smartly the last year, allowing me to easily foot that increased property tax bill.

Not.

Most homeowners -- myself included -- will figure out some way to come up with the extra dough.

But we'll have to compensate by finding savings elsewhere.

Such does not a robust recovery make.

P.S.: And no, I'm not expecting a 12% increase in the services I receive for my increased property taxes.

Tax Assessed Value as Yellow (or Red) Flag

List Price = $800k, Tax Value = $400k

As I've written previously, a home's tax assessed value isn't particularly relevant for establishing a home's actual, what-will-it-sell-for market value.

Rather, fair market value is determined by: a) scrutinizing the comp's, or comparable sold properties, to set a list price; then b) testing it on the market.

While in theory the tax value should approximate market value, there are all kinds of reasons why they can diverge.

So why do Realtors still consult the tax assessed value?

Speaking for myself, I always check to see if the assessed value appears too low.

Especially if the home hasn't sold recently, that can be a sign that major remodeling was performed without the requisite permits.

If the home has sold recently, it's possible that the appropriate permits were pulled, but that the new tax assessed value simply hasn't caught up yet.

From $550k to . . . $166k

70% Off!

Where: 30xx Colfax Ave. South in Minneapolis' Uptown neighborhood
What: Uptown Triplex with 2,700 FSF
How much: $166,250
When: listed yesterday (9/30) with Coldwell Banker Burnet

Once upon a time -- like 2006 -- this Uptown property was listed for $550,000.

Today, it can be purchased from its bank-owner for $166,250.

It comes with a $7,000 property tax bill, but since that's pegged to a tax assessed value of $398,500, you'd certainly expect that to drop.

What's Selling . . . Fern Hill

Where: 2537 Joppa, in St. Louis Park's Fern Hill neighborhood, 2 blocks west of Cedar Lake.

What: 1 1/2 story home built in 1950 with almost 2,000 finished square feet.

How (much): listed for $285,000

When: market time = 2 weeks (listed August 27); scheduled to close Oct. 15 (currently "Pending" on MLS)

Who: sold by Ross Kaplan, Edina Realty City Lakes; co-listed by Linda Platt and Jonathan Spar, Edina Realty

How did this 1950, 1 1/2 story two blocks from Cedar Lake sell in two weeks?

For starters, it helped that it was . . . two blocks from Cedar Lake.

So did an attractive list price, $285,000, that discounted for needed updating -- and then some.

Plus nice curb appeal, a .24 acre lot, and an especially open Living and Dining Room with huge picture windows (pictured above).

Other Factors

So what about the tax assessed value, $404,400?

That certainly didn't hurt the Buyer's perception of value.

However, as I've blogged previously ("Selling Price as % of Tax Assessed Value"), the tax value can be artificially high, especially when it's been years -- or decades -- since the home has changed hands (as was the case here -- the Seller bought the home in 1975 . . . for $46,000!).

$700k Below Tax Value

Not $700k -- $700k Below Tax Assessed Value

Where: 1415 June Ave., South Tyrol Hills in Golden Valley

What: 4 BR/5BA home built in 2002 with almost 5,400 finished square feet.

How much: $799,900 asking price; tax assessed value: $1.504M

When: originally listed for $1.679 million in March, 2009

Who: Listed with RE/MAX Results

Well, 1415 June Ave. (pictured above) certainly looks like a deal.

So what's the story?

I haven't been in, so that's a big caveat.

However, the combination of lender approval (it's a short sale), needed repairs, and a hefty tax bill (almost $24k annually, but certain to come down) aren't helping.

Still, I'm not aware of a home sporting a bigger discount from tax assessed value currently on the market in the Twin Cities.

Selling Price as % of Tax Assessed Value

Tax Assessed Value as Benchmark

No, I don't have any hard data backing me up (and don't have the time to compile it), but at least anecdotally, it sure seems that there's a correlation between year built/last sale, and fair market value.

Here it is:

The newer the construction date/last sale, the higher the percentage; the older/less recent, the lower.

Put another way: the reliability of tax assessed value fades the older a home is and/or if it hasn't sold in awhile.

So, for example, a 2009 townhome with a tax assessed value of $200k is likely worth pretty close to that.

By contrast, a 1975 townhome occupied by the original owner, with the same tax assessed value, probably has a fair market value quite a bit lower -- as much as 20% less, or $160k.

Updates (or lack thereof); nearby competition (or lack thereof); location, etc. all affect -- but don't alter -- the basic relationship.

BIG Edina Discount

Great Value Overlooking Lake Edina

Where: 4904 Poppy Lane in Edina

What: 4 BR/3BA walkout rambler with 4,200 FSF and pool overlooking Lake Edina

How (much): $699k

Who: listed by Steve Stewart; broker is Edina Realty

Historically, homes in Edina enjoyed some of the best appreciation in the Twin Cities -- and weathered economic downturns much better.

Not this recession -- especially for upper bracket Edina homes (and true of upper bracket homes throughout the area).

Exhibit A would be this sprawling rambler overlooking Lake Edina.

Originally listed at $1.1 million a year ago, the price was just reduced Monday from $825k to $699k -- now a whopping $180k below the tax assessed value ($880k).

I saw the home earlier this Spring, and thought it was a value $100k higher!

Oh, Yeah: There's a House, Too

Where: 28xx Benton Blvd.

What: 4BR/3BA home with 3,400 FSF; built in 1921

How much: asking price $1.050M

When: originally listed July 20, 2009

Who: listed by Coldwell Banker Burnet

Normally, the land underneath a home accounts for one-quarter to one-third of a home's tax assessed value.

So, for a home worth $300k, the land would likely be valued at $75k - $100k.

And then there's this home, set on an almost one acre lot backing up to the Kenilworth Channel (connecting Cedar Lake and Lake of the Isles, southwest of downtown Minneapolis):

Land value: $819k

Building value: $214k

Total tax assessed value: $1.033M

If there's a (habitable) home in the Twin Cities with a higher land-to-building ratio . . . I'm not personally aware of it.

Cedar Lake Steal?

Where: 16xx Cedar Lake Parkway, just northwest of Minneapolis' Cedar Lake

What: 2,500 sq. foot. contemporary overlooking the lake
How (much): list price is $247,900

When: (re)listed January 22

Who: co-listed by Teams International and RE/MAX Associates

You could easily spend $1 million-plus (still) for a home overlooking Cedar Lake in Southwest Minneapolis.

So, it's attention-getting when a home just off the lake is for sale for only $248k -- down from $549,000 when it first hit the market in October, 2008. That's less than half(!) the $522,500 tax assessed value.

So, what's the catch?

It turns out that there are several.

They include a wood exterior that's in such bad repair that mold is evident on several interior walls; a plastic swimming pool -- practically full -- positioned below a major roof leak (one of several that were visible); and an incoherent floor plan with only one bathroom in the whole house (and that practically in the middle of the Kitchen).

So, it's a pass, right?

At least for my client.

However, even if the house is a 'goner -- likely in my opinion -- the land alone is still worth the asking price.

Apparently, someone else agreed: the listing agent's front desk said the bank-Seller (a shock, I know) has just accepted an offer.

Don't Go By Asking Prices

Sold! (For 1/3 of Tax Assessed Value)

What: 3BR/3BA walkout rambler with almost 2,600 FSF

Where: 2625 Quentin Ave. South, in St. Louis Park's Fern Hill neighborhood

How much: originally listed for $226,800 on Aug. 5.

When: closed Nov. 18 (Thursday); just posted on MLS this morning.

"Exhibit A" under the category, "don't go by asking price" would be this Fern Hill rambler.

Originally listed for $226,800 back in August, this foreclosure had a tax assessed value of $387,500. That consisted of $158,700 for the land, and $228,800 for the building.

The bank-owner took two, 5% price cuts, then finally got a deal in late October.

It closed Thursday.

So . . . . drum roll . . . . what did the Buyer pay?

Try $130,000.

No, that's not a typo.

Why So Low?

The short explanation is "supply and demand."

The longer explanation is that the house is a tear-down, due to the worst mold damage I've personally ever seen (I showed the house multiple times).

So, you toss out the building value, and focus exclusively on the land.

As I've blogged previously about valuing tear-downs, the analysis -- based on back testing dozens of Twin Cities deals the last 6-8 years -- is to determine the top of the block, add 20% for well-done, new construction, then divide by 3.5.

In this case, the corresponding formula is $400k x 120% = $480k; $480k divided by 3.5 = $137k.

Bingo! (Take off a little extra because of tight credit for new construction, and a soft market for more expensive homes.)

P.S.: and yes, you need to know the "comp's" -- which I do -- to know that the top of the block is $400k.

40% Below Tax Assessed Value

Where: 16xx Cedar Lake Parkway (just northwest of Cedar Lake in Minneapolis)

What: 3 BR/2BA Contemporary with almost 3,200 finished square feet.

How much: listed for $320k

When: originally listed in Oct. '08 for $549k.

Who: listed by RE/MAX Results; agent is Michael Kohler

In today's market, it's increasingly common to see homes for sale trumpet that their asking price is below the tax assessed value.

It it is not common to see a home selling for almost 40% -- or more than $200k -- below tax assessed value, as the home pictured above is.

It comes as hardly a surprise, then, that this a short sale.

The home originally listed in October, 2008, for $549k.

"Such a Deal"

Is it REALLY "Below Market Value?"

As many Sellers already know, it's a tough market out there, especially in the higher brackets.

So, to let prospective Buyers know that their home is a deal, more Sellers (or their agents) are peppering their marketing with phrases like, "asking price less than market value."

Is it?

"That's Easy For You to Say"

Without doing the "comp's" (comparable sold properties) or knowing the neighborhood, it can be hard to tell. And if it's a property that you love and want to buy, you may not to wait around to find out.

However, if a home really is under market value -- and it's not north of, say $600k -- it'll sell, quickly. Even in today's Buyer's market.

If it lingers for weeks (or months, or longer) . . . by definition, it's not "less than market value."

P.S: And no, asking less than tax value doesn't automatically make a home "below market value" these days. Depending on the part of town, I'd estimate that perhaps 50% of the homes currently listed for sale are under tax assessed value.

P.P.S.: one of my favorite New Yorker cartoons shows a father and son standing in front of a storefront covered with signs screaming "Must Liquidate," Going out of Business!!,""90% Off!," etc.

The caption: 'some day, son, this will all be yours."

"Frozen in Amber" Homes

What Does Tax Assessed Value
Say About Market Value?

In a Buyer's market like today's, more and more listings announce that the home is "selling for less than tax assessed value" -- sometimes substantially less. The inference is that the home is a bargain.

Is it?

Not necessarily.

One situation where tax assessed value can be well above fair market value is when the Seller has been in the home for decades.

While their neighbors have been steadily updating and renovating over the years, the long-time homeowner has stood pat. So, thirty years later, the kitchen, mechanicals, and decor are all quite dated.

Even worse, the floor plan and amenities may be obsolete. The upstairs may only have one, hallway bath; if the home has hot water heat, switching from window a/c units to central air may be prohibitively expensive; and the one-car garage that was fine 30 (or 70) years ago just doesn't cut it.

Unfortunately, to the tax assessors most of these lagging characteristics seem to be invisible. They assume that the housing stock in a given area is relatively consistent, and as the neighboring homes change hands at ever-rising prices, the tax assessed value of the "frozen in amber" home rises, too.

Over time, the gap between the tax assessed value and fair market value of such a home can become increasingly wide.

I've personally seen instances recently where the tax assessed value was more than 20% too high. And that was for homes that weren't foreclosures or short sales!

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.

Property Tax Pitfalls

How Foreclosure Buyers Can
Reduce Their Property Taxes

Q: When is fair market value not "fair market value"?
A: When it's a foreclosure sale.

Because of the process(es) described in "Sticky" Property Taxes, foreclosure buyers should not expect dramatic property tax relief any time soon after closing their purchase. Even worse, unless they're careful to document the initial condition of their property, they may inadvertently be penalized for any home improvements that they subsequently make.

That's because many cities calculate each home's annual tax assessed value as of a fixed point in time (in Minneapolis, it's January 2).

As an example of the potential property tax pitfalls, assume that someone buys a dilapidated foreclosure January 1, 2009 (eleven days ago) for $60,000. Further assume that the foreclosed property's tax assessed value is currently $200,000. While that would make the purchase price 70% below the tax assessed value, in this market such discounts are increasingly commonplace.

So the new buyer's tax assessed value for 2009 is $60,000, right? Wrong.

Because 2009 property taxes are determined January, 2, 2008, the 2009 taxes are already set. That means 2009 taxes are pegged to the old, $200,000 assessed value.

Comparing Bruised Apples to Oranges

So at least the Buyer's 2010 property taxes will reflect the $60,000 purchase price, right? Wrong again.

As of January 2, 2009 -- the date relevant for establishing 2010 property taxes -- the foreclosure was merely a pending sale, as far as the city and county are concerned. It won't be until 6-8 weeks later, when the sale is typically recorded, that the government will know otherwise.

That means the default value for 2010 property taxes is the old, $200,000 tax assessed value.

However, thanks to an informal appeals process, taxpayers effectively have until mid-April to dispute property tax values set January 2. Here's where it gets interesting.

The foreclosure Buyer will definitely want to contact the city assessor assigned to his neighborhood -- the assessors each have geographic territories -- and challenge the $200,000 assessed value. But the $60,000 he just paid is not deemed relevant for establishing property tax values, because foreclosures are not deemed "valid sales" for comp purposes.

Instead, the city assessor can only consider recent, nearby sales of homes that were not bank-owned. In practice, that means that the home's new tax assessed value won't be $60,000, but an amount much closer to $200,000 -- most likely at least $140,000 (in practice, a 30% reduction from the previous year's tax assessed value appears to be the maximum) .

The new owner must also carefully document the condition of the home at the time of purchase.

Otherwise, any post-closing improvements done by the new owner may have been deemed to exist as of January 2, driving up the following year's property taxes!