Protesting Commercial (Real Estate Appraisal) Property Taxes

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Are you accustomed to seeing large numbers in the “property taxes due” column of tax statements? Property owners in Texas, a state with notoriously high property taxes, may be forced to budget a “big chunk” of their operating budgets each year for property taxes. You should always be looking for a way to increase the return on your investment, and reducing property tax expenses can have a significant impact on your bottom line.

Market Value vs. Assessed Value Many investors have asked why Texas property taxes keep increasing even though their revenue has declined and operating expenses have increased. Since appraisal districts value so many properties, they are often not aware of “softness” in a submarket. In addition, some appraisal districts have been slow to recognize the huge increases in insurance expenses. Since property taxes are such a material expense, investors have realized they need to review assessments annually. Most Texas real estate investors appeal their property tax assessment annually.

Why Property Taxes are Important Property taxes are one of the largest line item expenses incurred by property owners. When attempting to cut excess property taxes, even sophisticated property owners may not know all their rights. For instance, the current Texas Property Tax Code allows property owners to seek an equity adjustment based on comparable properties that are appropriately adjusted.

Does Unequal Appraisal Apply at Informal Hearings? The legislature also introduced a provision in 1997 attempting to allow property owners to appeal on unequal appraisal during the administrative hearing process (informal and appraisal review board hearings). Unfortunately, the wording of the statute was not clear. Some appraisal districts have chosen not to consider appeals based on unequal appraisal at the administrative hearings. It’s a shame that many appraisal districts rebuff administrative appeals based on unequal assessment. Property owners become very angry when they feel they have been taxed unfairly. Fortunately, most cases of inequitable assessment can be resolved through a judicial appeal.

Why Aren’t Properties Assessed Equally? You may be wondering why properties aren’t assessed equitably. Reasons include data errors, focusing on recent sales and inconsistencies in the informal and appraisal review board hearings due to the personal element. Since an appraisal district may track over a million real property accounts, it is unrealistic to expect all of the data to be accurate (the large number of properties also affects their ability to accurately estimate your property’s value). Overstating the quality of one property while understating the quality of another property could lead to an inequitable assessment. At times, some appraisal districts have focused on recent sales without reassessing all the properties in the surrounding area.

Once the preliminary research is completed, the owner should determine the market value of the property and whether it is in line with the total assessed value. There are three approaches that are employed in concluding market value: cost, income and market. The property’s occupancy rate, rental rate, operating expenses, net operating income and other factors, as well as sales prices of comparable properties, are valuable sources of information in determining market value. If the property owner determines that the assessed value is higher than the market value of his property, he should file a protest with the local appraisal district. This can be done either by the property owner or his designated agent. Property tax protests must be filed by May 31 in Texas; deadlines vary by state.

Preparing for Your Hearing Once a protest has been filed, a protest hearing will be scheduled. Four types of data should be compiled for the hearing: pictures of the subject property, an income analysis, comparable sales data and assessment comparables. Pictures of the subject property should indicate the quality and condition of the improvements on the property. If there is deferred maintenance, document it with pictures and bids. An income analysis should include a profit and loss statement for the previous year and a rent roll for a date near January 1 of the current tax year (most states use January 1 as the effective date for assessment.) The analysis should also detail market rent, market vacancy and market expenses (including reserve for replacement) to derive net operating income for the property (neither depreciation nor debt service should be deducted when calculating net operating income).

If your property has above-market occupancy or rental rates or below-market operating expenses, you should make adjustments when calculating net operating income. If you operate your own property, your income analysis should include an allowance for labor and management fees (if they are not in the profit and loss statement). Revenue not directly related to real estate rental (box sales, truck rentals, etc.) should be excluded. Related expenses should also be excluded. The net operating income is then capitalized to derive an indication of value for the property.

An appraisal may be appropriate to support the value conclusion. Comparable sales are given strong consideration at the hearing because they are an indication of market value. Data from sales of comparable properties for the past year or two should be collected and reviewed. Assessment comparables are given strong consideration at some appraisal districts but not considered at others. Pictures of competing properties that are assessed for less than your property can be an effective tool for cutting your property taxes. Prepare a table summarizing your property and the assessment comparables.

Attending Your Hearing(s) (Informal and Appraisal Review Board) Once all the pertinent data has been collected and analyzed, the protest hearing process begins. The initial protest hearing is called an “informal” hearing. The informal hearing involves a meeting between the owner, or his designated representative, and an appraiser from the appraisal district. If the owner is not satisfied with the offer made by the appraiser, he may proceed to the next level of the protest process, an appraisal review board hearing (in some states this is referred to as the board of equalization). The appraisal review board hearing, also referred to as the “formal” hearing, involves a meeting with members of the appraisal review board, an appraiser from the county appraisal district (who may be different from the appraiser at the informal hearing) and the owner or his designated representative. The Appraisal Review Board panel may set a value which is equal to, lower than or higher than the level proposed by the staff appraiser at the informal hearing; therefore, the offer made at the informal hearing deserves careful consideration.

The majority of protests are resolved during the informal and formal hearings. However, in a small portion of protests the property owner believes the assessed value can be cut further by filing a judicial appeal. Although few owners pursue the final opportunity to reduce their taxes, owners have the option to file a lawsuit to contest the assessed value. It is probably financially feasible to file suit if the judicial appeal will reduce the assessed value by at least $200,000 to $300,000. This rule of thumb is for Texas; it may be higher or lower in other areas. In Harris County (Texas), for example, about 500 to 800 property owners annually determine there is still enough discrepancy after completing the informal and formal hearings to further pursue an adjustment in the assessed value by filing suit. Litigation in Texas must be filed within 45 days of receiving written notification of the value set at the formal hearing. This process can result in additional reductions in the assessed value; however, it typically takes 12 to 24 months and requires services from both an attorney and an appraiser. Although relatively few owners under-stand how to pursue judicial appeals, they can be a very effective tool in lowering property taxes.

With property taxes making up such a large percentage of operating expense, a commercial property owner I know was recently pleased when his consultant informed him that the company saved over $123,000 in property taxes. Some owners will realize less savings than those, but every little bit helps your bottom line.

To view this article and more written by this author, please visit {A HREF = http://www.poconnor.com}protestingpropertytaxes

About the Author

Patrick O’Connor, MAI is president of O’Connor & Associates. The firm, in business since 1974, specializes in nationwide real estate appraisals, research, and state and federal tax reduction services. O’Connor is frequently acknowledged by national publications as a respected source of information on real estate trends.

Real Estate Appraisal – Real Estate Appraisal – Do Your Own

For single family homes, there are two basic methods used in real estate appraisal. They are replacement cost analysis, and using comparable sales. A third appraisal method, based on capitalization, is used for income properties, and is covered in another article.

In figuring replacement cost the question is: What would it cost to buy this land and put this house on it? If the land (improved) would cost $40,000, and the house could be built for $150,000, the value indicated would be around $190,000 – if the house is fairly new. If it has used up 10% of its useful life, you can deduct $15,000 for depreciation.

Replacement cost is not really a very useful measurement. It is difficult to say what the land is worth in a city center where none is left for sale, for example, and tough to gauge depreciation. It is used as a secondary method, and for unique homes that can’t be compared easily with others. The primary method of real estate appraisal used for homes is a market analysis using comparable sales.

Real Estate Appraisal 101

To get a good idea of what a home should sell for, you need to compare it to homes that have sold. Find at least three similar homes in the same area that have sold within the last year, preferably within the last six months. This information is available in the county records, or from a real estate agent with access to the MLS (multiple listing service).

Now the confusing part. You start with the selling price of each of your comparables. If your subject home has a second bathroom, and the a comparable doesn’t, you add the value of the bathroom to the sales price of the comparable. If a comparable home has a blacktop driveway, and the subject home doesn’t, you take the value away.

You are rectifying differences, to see what comparable homes would have sold for if they were like yours. So if a comparable sold for $140,000, and a bathroom is worth $15,000 in your area (ask a real estate agent for help with these figures), you ADD $15,000 for the bathroom it doesn’t have. Then you subtract, say $4,000, for the paved driveway it does have. This gives you a comparable sales price of $151,000.

You do this with all differences between the subject home and each comparable. When done, you average the three comparable prices. So if the three comparables have adjusted sales prices of $151,000, 162,000, and 149,000, you add the three figures and divide by three. The indicated value of the home is $154,000.

Of course all appraisal is an inexact science. If you can only find comparables sold over a year ago, you have to estimate appreciation in the area. If one sold with seller financing, you have to decide how this affected the price. For all of it’s flaws, however, for single family homes, this is the most accurate method of real estate appraisal.

About the author:
Steve Gillman has invested in real estate for years. To learn more, and to see a photo of a beautiful house he and his wife bought for $17,500, visit http://www.HousesUnderFiftyThousand.com

Operating Systems Home Inspection from A to Z – DVD – Real Estate Home Inspector, Homeowner, (Real Estate Appraisal) Home Buyer and Seller Survival Kit Series

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The OPERATING SYSTEMS DVD topics include: heating systems (gas, oil, steam, hot water, and hot air heating), air-conditioning, water heaters, plumbing, well water system, septic system, electrical system, gas service, and auxiliary systems. Health Concerns topics including: asbestos insulation, radon gas, and water testing.

The INTERIOR and EXTERIOR inspection topics are covered in our other DVD that can be purchased separately. The INTERIOR and EXTERIOR DVD topics include: roof, chimneys, siding, eaves, gutters, drainage and grading, windows, walkways, entrances and porches, driveways, walls and fences, patios and terraces, decks, swimming pools, exterior structures, wood destroying insects, garage, kitchen, bathrooms, floors and stairs, walls and ceilings, windows and doors, fireplaces, attics, ventilation, insulation, basement/lower level, water penetration.

This is definitely the best home inspection DVD series on the market! Created by Guy Cozzi who is a licensed appraiser, home inspector, consultant, and real estate investor. This top selling author has been quoted as a real estate expert by the New York Times and many other publications. He has been a guest speaker on real estate investment TV shows for years. Guy Cozzi has taught thousands of people how to inspect, appraise and invest in real estate and provides advice to many banks and mortgage lenders.
Customer Review: Excellent DVD! We use this to train our home inspectors.
I own a very successful home inspection business in California. We use all of this authors products to train my staff since they are the by far the best products for real estate training on the market. We originally found out about these products through excellent book reviews in the local real estate publications. From that we learned the following details and decided to purchase the whole “Real Estate From A to Z” series by this author:

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Monopoly

Monopoly Hasbro Interactive has managed to make an old-time favorite even better. This version of Monopoly includes the features we have loved for years–Boardwalk, Community Chest, Go Directly to Jail cards–but enhances enjoyment with some new features. Players can completely redesign the game board by importing their own images or using the included clip art. The 3-D graphics have never been this detailed–you can take game play down to street level and actually see your tokens dance around the board as they pass through the extravagant neighborhoods surrounding Park Place or the down-and-out areas along Mediterranean Avenue.
Customer Review: Loaded Dice?
I’m not sure what’s wrong with the dice generator on this game or how the odds are stacked. However, I bought this game to have a little fun with a computer opponent(one). Everyone knows that if you play again one opponent the game will go faster. So I like to just spend a short time(an hour or less playing). However I find that when I play against one computer opponent I will usually lose. For example the computer will usually get first roll and will usually get all properties of one color first. If you don’t mind losing time and time again (you’re a little masochistic) then this is fun. I have looked for updates or patches to this program but have never seen any that will balance the lopsided ‘luck’ that the computer usually has. I must say then that the computer has ‘loaded dice.’ Has anyone else had the same experience? Is this problem corrected in newer versions? I’ll give it two stars for the ability to play online against a human opponent but the computer opponent’s ‘luck’ knocks off 4 stars