County Tax Auditors - Biggest Scam In the World…seriously

Over the past two years, you would be hardpressed to find many people who have bought real estate at prices HIGHER than the local county auditors tax value.  This is probably true unless the property was purchased from an owner who had owned the property for a few decades.  For those who are not aware of how the tax value system works, basically, the local county auditor will adjust values of the properties every X # of years based on what they think the value is (the # of years is based on the state/local gov’t rules).  However, if a sale has occurred, the tax value would go to the price of the sale…or so it’s supposed to be.

At Select Investment Group and Crossroads Group, we have purchased over 500 units in the past 3 years and not a single one (that I can remember) we bought was for above the tax value at the time of acquisition.  This is not a point of bragging, it is a point to show how ridiculous tax values are with my examples below.  Read on for the largest example of blatant theft I can think of over the past few years…

Example A: Let’s say there is a house you are looking to purchase.  It’s your dream home.  The asking price is $500K and the taxes are based on a tax value of $350K.  Now, you go out and look at other comparable homes and see that the house is really worth about $450K, but you REALLY want the house.  It has to be yours or you know you will regret it for a long time.  The selling real estate agent tells your agent there is another offer in.  They can’t tell you what it is, but it’s a good offer.  You sit down with your spouse and you guys remembered the bonus you got 10 years ago that is sitting in a money market doing nothing.  (By the way, overpaying for a house by using investment dollars is NOT a wise decision and I do not condone it) You decide to offer full price.  You justify it by saying that this is the last house you will live in and you will probably be here for 40 years, and what’s $50K over 40 years really?  So you offer full price so you know you will get it…and you do! That’s great!

Next year, though, you are surprised to see that even though you and you agent know the real value is $450K, your taxes are now based on $500K.  You complain and scream and cry like a baby to the auditor’s office and they respond by saying “The market value is what someone is willing to pay for it…and you were willing to pay $500K, so the market value is $500K.” Unfortunately, you are probably going up stream without a paddle on that one.  You’re stuck with that value.  Now, a few yaers down the road, once you are further removed from the purchase, you can appeal and get an appraisal done inexpensively (couple of hundred dollars) to show your value shouldn’t go higher for a while, but you will definitely eat the extra taxes for a while.

Now, jump to 2003-2006.  The real estate markets are going crazy! Bankers have decided to give everyone who had a heartbeat and a job for over 2.5 hours making the minimum wage a loan for $100K to buy the house they can’t afford.  So houses that were normally selling for $75K to $85K are now selling for over $100K! This is great news for the auditor’s office because as you saw in my example above, they know free markets (insert sarcasm here) and they know that a house on the market and available to buyers will go for what the market bears.

2008 rolls around…guess what…no one can afford their house…they give them back in the millions.  Banks are taking massive losses and selling these foreclosed homes for record lows.  (As a side note…we bought one house in a decent cleveland suburb for $1500…it wasn’t even falling over…that’s how bad it got…we did have to put $35K into it, but what did we care?!?!) Anywho…you’re now a savvy buyer who is buying up these homes for an average of $8K to $12K per home.  Great! Now the house tax bill comes in and you say “Ahhh. No big deal. I will appeal. After all, they have to take the value down to what I paid for it. That’s the market value, right?”  WRONG!!!!  Why would you be as dumb as I was to think that!?!?

Guys and gals…we have appealed DOZENS of home and property purchases in the last 4 years and I can only name 3 that we got lowered to the price we paid and it was because we paid a little less than what the then tax value was.  The counties have decided that since banks are rather wealthy (Now, I don’t know what banks they were looking at but it must not have been the hundreds that failed each year for a few years) and they “don’t have to sell” so therefore these foreclosures are NOT really market sales. 

So they basically (and this is NO exaggeration) decided to not take into consideration the only transactions that are occurring these days  because it hurts their cash flow.  Duh! Why wouldn’t they do that?  I won’t even get into the politics of changing whatever law/rule you need to in order to get money, but it’s just outright theft. 

So that is where we stand now.  My comments to all tax review boards:  If you want the upside of a good market, go for it, it makes sense.  But then you have to take the downside. I would usually say that “that’s the way true business goes” but then I remember what we are talking about…the wannabe businesspeople at the local county auditor’s office. 

I’d love to hear some tax appeal stories. Email me or comment below with your stories…we will start a support group.  I could think of a name right now but it would probably be horribly offensive to a lot of people so I will just it slide. 

Comments

[Carl W]

Yes. The property tax system is broken. It was always a on-sided proposition. Values were always suppossed to go up, except in cases of blight. No one in the system ever expected values to plummet so far, so quickly, and on such a wide and permanent scale. So, the government must act openly according to its character. It is addicted to the revenue. It can't face the reality of losing so much revenue to the economy. Yes, private enterprise must suffer, but the government - are you kidding? (sarcasm alert) That would require the county to lay off people and discontinue services. Think of the voter impact on incumbants - perish the thought!
The losses to abandonded and defaulted, foreclosed, delinquent, etc. properties become property liens - at the higher rate and with penalties and interest (where collectible). Those liens at the very least, can be factored and sold to investors. With the discount so steep these days, they can't afford to cut values and associated revenues.
If they allowed assessment on such a masive scale, the schools would have to pass enormous levies to make up the shortfall. The cities and county would also. That won't fly in this economy. New levies will cause more voter discontent, at the very least.
No one in government - not even the courts, are going to make a decision that would affect the status quo. Some states have tax laws that allow for both gradual increases and gradual decreases. Cynically, I bet that studies would show that increases are on a steeper grade than the decreases.
Now, when properties are assessed, if someone sees an increase in their assessed value, they should scream bloody murder. If they stay the same, they might appeal. If they drop even the slightest, be grateful because that's all you're gonna get. IMHO

[Paul Gabrail]

Carl, thank you for the thorough comment. I think the thing you said in the second to last paragraph is something I woudl love to look into and would make a great blog post...looking at property tax increases versus decreases to see how they go during good times and bad times, respectively.
It is always the hardest thing...when private sector does well and prospers, the gov't wants the benefit. But when the private sector has problems, it's always the private sector's fault...this is borderline a political issue, so I will refrain from commenting further on that, but I see your point completely.