taxes

Value of Tax Value

The City of Charlottesville released their 2013 tax assessments this week. Mailings have been sent to home owners, and the web site has been updated to reflect the changes.

Assessments cause all kinds of a ruckus. There is an erroneous perception that prices should instantly adjust to match these new numbers. Nothing could be further from the truth. Reality is, this is the City’s best effort to meet state requirements to estimate the values of the parcels in the city. No one in the assessors office would argue they are perfect. I won’t go so far as to say they are even close in many cases.

There are, however, certain times when assessments should be darn easy. Like the day a home sells. If a home sells for $745,000 after being offered on the open market, and the transaction is indeed an arms length transaction, it makes total sense that the City would be able to assess that house without really thinking about it. The value at which a seller is willing to sell and a buyer is willing to buy is $745,000. That is the definition of market value. And that’s why it’s truly bizarre to see the assessment today on this house at $381,000. (Assessing this home at 51.2% of its market value.)

From the City assessors web site:

Real Estate Assessments are required by the Codes of Virginia and the City of Charlottesville to be at 100% of fair market value.  Assessments are made each year by the City Assessor’s Office and are effective January 1.

and

As required, the City’s assessment is an estimate of fair market value as of January 1 each year, based on property sales for the previous calendar year.

The City breaks down the city into neighborhoods and then samples that neighborhood to determine what is happening price wise over the course of the year. Then, barring changes to a home, they apply a % change to all the houses in that neighborhood. There are certainly some places where there is more specific work being done, but in general, this is the practice. I pulled up a sampling of 10 homes in the neighborhood that is bounded by Rugby Road, Emmett Street, Westview Road, and Wayside Place. The tax assessments I pulled changed from -4.68% to -4.7%. You can’t tell me that is an accident. So, the question is, how accurate is this practice. I would say we can bicker about whether -4.7% is the correct amount, but in general, I agree with the practice. If my neighbor’s home goes up 5% or down 3%, it is fairly accurate to say mine did too — UNLESS one of us has done improvements or allowed our house to waste away, in which case, they certainly change at different rates.

So, I focused on this one neighborhood and pulled every house that sold in 2012 to see if the new 2013 assessments were accurate for these homes. Nine homes total ranging in sales price from $367,000 to $1,250,000. How’d they do? Mixed Bag.

  • 938 Rosser Lane – Sold for $367,500 – Assessed for $443,600 – 121% of Sale Price
  • 901 Rosser Lane – Sold for $450,000 – Assessed for $449,200 – Spot On.
  • 1865 Field Road – Sold for $469,000 – Assessed for $511,900 – 109% of Sale Price
  • 1825 Edgewood Lane – Sold for $530,000 – Assessed for $734,100 – 139% of Sale Price — (NOTE: On the market for nearly a year)
  • 1859 Wayside Place – Sold for $706,000 – Assessed for $590,000 – 84% of Sale Price
  • 1863 Wayside Place – Sold for $745,000 – Assessed for $381,600 – 51% of Sale Price
  • 920 Rosser Lane – Sold for $753,000 – Assessed for $735,000 – 98% of Sale Price
  • 1872 Edgewood Lane – Sold for 890,000 – Assessed for $778,800 – 88% of Sale Price
  • 1820 Edgewood Lane – Sold for $1,250,000 – Assessed for $993,000 – 79% of Sale Price

Don’t get me wrong, I totally respect the fact that assessing homes that the City has likely never been in is extremely hard. And I respect the fact that the city has a good process. But no one can argue that a group of nine homes that all sold in the past year, arguably the easiest homes to assess, range in values compared to their sale price from 51% to 139% all in the same neighborhood is anything close to useful, valuable, or accurate.

My point here is not to say that all assessments are bad, or that we should be challenging every one. What I want people to realize is that basing listing and offering prices on City (or County) assessments is dangerous. While it can be a guide, and certainly should be considered, it has to be a single tool of many in pricing a home. We look at comps all day long. And the price you paid four years ago for your home will affect its sale price far more than the new City assessments. Prices in the Venable neighborhood did not go down 4.7% this week with the new assessments. The only thing that changed is that the taxes these home owners will pay went down by 4.7%.

 

 

What Makes Something Relevant

Across the blogosphere I continue to read about tax assessments and predictions of value.

Here

Here

oh, and one of my personal favorites… Here

HomeValue.gif

The question I have is, what makes something relevant? Are tax assessments a good gauge of future selling price? Are they an accurate reflection of current value? What makes them so, … or not?

When I moved to Charlottesville 13 years ago, taxes were not on-line. I did not go to the City Hall to pull the file on the house I bought to check on taxes. For two reasons. 1) I didn’t realize how easy it would be and 2) I have no clue if there was any correlation at that time between tax assessments and selling prices.

Somewhere along the lines, access to this information has become common place and easy. But does that mean that it is relevant? If 5% of buyers pay attention to tax assessments when making an offer, then it is unlikely that they matter. But if 90% of buyers make their offers based on tax assessments, then the values are highly relevant, but that doesn’t answer if they should be.

Most homes in my neighborhood went up 5% in our assessments this year. All the neighbors with whom I spoke were outraged, and several asked for data to support their cause in fighting the values. To one neighbor, I suggested he not fight it at all. In fact, I argued that he should fight for a higher value. Why? Because he is likely to sell his home in the next three years. If people are going to base their offering price on the assessed value, the last thing he wants to do is fight for a lower value.

If a home owner can get the tax assessment down by $25,000 then they save roughly $275 a year, but may lose $25,000 when they go to sell the house.

I watched last year at a city house that was on the market for substantially more than the assessed value. It did not sell through the Fall, and when the assessments came out in Feb, the neighborhood in which the house was situated had assessments remain completely flat. But, the assessor, I guess, looked at this listing and figured the seller thinks it’s worth more, I can get some more tax money from the owner, and thus raised the assessment.

Whether that new assessment had any bearing in the eventual sale of the property, I don’t know… but I do know that nothing else changed in the neighborhood to increase the value. Therefore, the new “higher valuation” really was a joke. So, why should the taxes be relied upon?

So, do people pay attention because they are accurate reflections of value? Or are they accurate reflections of value only because people do pay attention?

City Assessment Data – Part 1

Originally Published February 5, 2009

Ever since I wrote a few days ago that it bothered me that I didn’t have on-line access to my city assessment history, I have been fixated on this. To the point that yesterday, I went and plopped down a check in the City Assessor’s office. In return they were kind enough to sell me a CD of 2008 and 2009 data in Access form. I have had to re-establish a broken relationship with my PC as the Mac is simply not a data friendly machine. This relationship is taking time to mend, but I’m getting there. This study has about 10 points, each of which will need to be its own blog post, so I am going to see if I can get along with my PC long enough to put it down the first bit for you now. Read on…

First things first, as you can imagine, fields are not the same in the MLS as they are in City taxes, so that fouls things up. Secondly, the terms used in the MLS are not the same as in the City records. So, for a house on Alderman Rd, the MLS records read “ALDERMAN RD (CHARLOTTESVILLE)” if you are lucky and the taxes read “ALDERMAN ROAD”. After 7 Update queries of trying to fix all the issues, I still never got any records to match up when the street name was a number. So a small disclaimer here. Of the 337 detached home transactions in Charlottesville during 2008, I was only able to create complete records for 284 of them. Still, a pretty good percentage of the whole.

First off, lets talk about accuracy of data.

Of the 284 listings, 78 times, the Realtor who listed the property stated that the house has more square footage than the tax records. This can be answered for four reasons.

  1. The tax records do not reflect homeowner additions / improvements. In this case, most of the time, a homeowner has finished a basement or a garage and has not reported it to the City.
  2. The homeowner disagrees with the City. I had a listing last year in which the sunroom had heat and was a finished space. The attic was finished but was not listed in the taxes as square footage. We had a licensed appraiser come out and measure the space who found that the ~2,400 s.f. house was actually over 3,000 s.f.
  3. The homeowner provides information to the agent that is incorrect.
  4. Math error.

Of the 284 listings, 148 had the same information as the tax records.
But here is the crazy part: In 58 listings, the Realtor listed LESS square footage than the tax records. I am sure that there are some reasonable explanations here, but I’m not sure that any of them can be used to explain misrepresenting a home. How does a seller benefit from having their square footage understated in the MLS? In more than a handful, I noticed that the Realtor had not counted square footage in the basement, and instead reported the above grade square footage. (More on this in another post.)

City Tax Assessments

Originally Published January 31, 2009

Recently, I had the privilege of being on the local news discussing the tax assessments for the City of Charlottesville. While we spoke for ten minutes on the camera, they aired only about 15 seconds of thoughts. There was much I wanted to say, and much that I think needs to be fully disclosed about Tax Assessments.

  1. Tax assessments are NOT appraisals. They do not indicate what a house should sell for. They indicate the city’s best guess at what market value is.
  2. Tax assessment work begins months before the numbers are actually mailed out. In Charlottesville, if an assessor began work before November of 2008 – which they did – they could not have seen that sales volume was going to drop by
    more than 55% for November and December.
  3. Throughout 2008, properties were selling below tax assessments. In 2009, it is likely that the spread between sales price and tax assessments will expand.
  4. Just because the city assessment averaged a gain of 2.59%, does not mean that every assessment went up the same amount. The Greenbrier neighborhood fell by 10% in assessed value.
  5. The real goal of assessments is to have home to home valuation ratios equalized. So a house that is worth twice as much as another house is assessed at twice as much so to even out the taxes paid.
  6. Tax assessments going up does not mean that taxes will go up, and tax assessments going down does not mean taxes are going down. The city sets assessments, then sets a budget, then sets a tax rate to accomplish that budget. In reality, this means that taxes almost always go up, whether your house is worth more or not.

In 2009, expect taxes to go up, and sales prices to slip a tad more. I would not be surprised by an additional 5% decline in 2009. The big problem is going to be with such limited number of transactions, determining the right price is going to be more and more difficult. We just don’t have a lot of comparative sales.

Tax Credit

Originally Published November 11, 2008

For those who haven’t seen the tax credit that is currently available, a quick review: If you have not owned a house in the last three years, and you make below a pretty hefty threshold you qualify for a $7,500 tax “credit” if you buy a home this year. Well, the tax credit has not done a lick of good in spurring on a buying spree of homes this year. Somehow a $7,500 credit isn’t appealing to people when they realize that actually, it isn’t a credit at all, but rather a loan. Well, there may be some changes on the horizon to the credit.

It was reported this morning that the National Association of Home Builders Association is lobbying for changes in the tax credit. The argument is that the credit has not had the intended effect, and thus needs to be improved until it has the effect needed.
I wrote earlier this year about the credit / loan program and stated that it is a poorly presented program, but no matter how you look at it, it is a great deal, and buyers should want to be a part of the loan. That doesn’t mean that I think the loan is enough reason to buy a home, but if you are going to buy a home, you should not snub the opportunity for some free cash.
But here come the lobbyists and the new proposal. Gone would be the first time home buyer provision, gone would be the repayment plan, and gone would be the $7,500 limit. In its place would be a 10% credit up to $22,500 with no repayment at all.

So lets get this straight: Since the lenders are no longer willing or able to lend to 100%, let’s let the IRS be responsible for ensuring that buyers who have no ability to save for a down payment still get the 10% the banks want to see.

Instead, lets take the money that would cost and provide some real relief that would end the foreclosure crisis. That alone would take homes off the market and thus bring inventory levels into line, and thus stabilize the prices, and entice non-homeowners to jump back into the market.

JP Morgan and Chase have both announced plans to try and do this WITHOUT government intervention. They understand what is really driving the crisis, and we’ll see if other banks will follow suit. Why write off bad debt if you can salvage the underlying security? Chase is trying a real tactic of readjusting the payments and keeping people in their homes. JP is simply not going to foreclose on more homes until after the New Year. I hope more banks jump on board, and I hope the government will support them in protecting their actions with guarantees akin to my Davis Plan.

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