Over the past several years, the appraisal review boards have been raising assessed values across the state of Texas, with the major markets being hit hardest. I want to help you save some money, and be ready to protest as the window of opportunity is rapidly approaching.
My clients, friends, and associates know that, over the years, I have devoted time not only to protesting my taxes, but also teaching others how to protest their taxes. Since the protest season is right around the corner (May timeframe), let’s dive right in with an example and what to do.
Say you purchased a property that has a current county tax-assessed value of $200,000, with a tax rate of 2.67%. This would mean your annual tax amount would be $5,340. If you purchased this property for $100,000 because it needed a significant rehab, shouldn’t the tax-assessed value reflect the property in its purchased condition? Of course it should, but in most cases it will not. Why? Most property owners do not protest their property taxes, and if you bought this property off-market, the appraisal district isn’t going to know what you paid for the property, let alone the condition.
If you protested the property taxes in this example, and reduced the tax-assessed value to the purchase price of $100,000, you would now have a tax amount of only $2,670, or one half the current tax amount.
Let’s say the market rent for this house is $2,000/month. The principal and interest payments are $852/month (based on a loan amount of $150,000, interest rate of 5.5%, on a 30 year note), and insurance of $100/month ($1,200 per year). Your positive cash flow before protesting would be $603. After protesting, your cash flow increases to $825.50. This additional $222.50/month is a 37% increase!
Conversely, if you are flipping this house, and it takes you six months to get it sold, your savings on the tax credit you give the borrower would be $1,335. While that doesn’t seem like a lot of money, every dollar counts when you’re flipping a house. For a couple of hours work, you can decide if it’s worth the effort to protest.
Steps to Protesting
The first step in protesting your property taxes is to find the appraisal district website for the county where your property is located. For example, if your property is in Dallas County, go to www.dallascad.org. Once you are there, look for the menu, or search the site for tax protest guidelines. Many districts allow protest filing to be submitted online. However, each appraisal district has their own protest time window for when you can protest, along with their own procedures, and how the process works. All of it is quite simple and doesn’t consume a lot of time. Just follow the steps and you’ll be on your way to saving money.
Whether you protest online, by mail, or in person, be prepared to have the following four items ready to make your case:
1) Settlement Statement from closing. This shows the appraiser what you paid for the property. A copy is fine as they do not need your original.
2) Photos of the property that the appraiser can keep for their file. You will want to use pre-rehab photos. The uglier, the better. This illustrates why you were able to purchase at such a low price (“Mr. Appraiser, this property was a disaster when I bought it. Just look at these photos….”)
3) Estimates of work to be performed. This shows the amount of work needed to get the property in livable condition. If you have this documentation, it helps prove your case.
4) Sold Comparables (comps) in the subject’s area. You need these for a current understanding of the market in your subject’s area. The tax appraiser will certainly be looking at them online, when making a decision on your value. However, they will not be weighted as heavily as the other items if your property needed significant work. If you are not familiar with how to get effective comps, you need to get with a realtor or appraiser to help you.
After you file your protest, you will be sent a notice with a date and time for your ARB hearing. Prior to this hearing date, you will want to make an appointment for an informal review with a staff appraiser. This can be arranged by phone or going to the appraisal district in person.
At your protest appointment, your objective should be to get the tax assessed value lowered to the purchase price of the property. If the property needed significant work, the purchase price is justifiable for the new assessed value. My advice is don’t talk too much. Less is more in these situations, and the appraiser already knows why you are there. Merely stating that you want the value lowered to a specific amount due to condition, should suffice. Submitting your settlement statement, ugly photos and estimates of work to be performed, will illustrate that you are prepared and will provide appropriate data to make your case. The appraiser, in most cases, will lower the value, maybe not to the purchase price, but to some lower assessed value.
My advice is take what you can get. However, if you are not happy and feel that you were not treated fairly, you can refuse to sign the adjusted value form, and take your case to the Appraisal Review Board (ARB) at the scheduled time you received on your protest acknowledgement. This is a separate in-person hearing with ARB members, and the district website will explain the process for doing this. I’ve had success at an ARB hearing. They can be worth your time, if the savings are significant.
If you hold the property as a rental, you need to repeat these steps each year. You won’t be able to get the value down to the purchase price again though, so you will need to use your realtor or appraiser to figure out what the new comps are that year and be prepared to state the new value you are looking for instead of providing a settlement statement.
As real estate investors, we want the maximum return we can get from each property. I would highly encourage you to protest every property you purchase, including properties you are going to flip where the numbers and timeframes make sense. Even protesting just one property can make a huge difference in your returns. If you have multiple properties the savings can literally be thousands of dollars.
This advice is very timely for many of our clients who are selling property right now, and what I learned years ago the hard way. Even if you don’t have a property for sale, or are not flipping property at this time, you might hang on to this for future reference.
Making that first offer work is fundamental to maximizing your profit. Consider the following scenario. Your contractors finish remodeling your house and do an amazing job. It takes a little bit longer than you would have liked (but what deal doesn’t?) After 60 days, you finally have it on the market (you correctly decided to list it on the MLS to get maximum market exposure and not do something crazy like FSBO).
You list it on a Thursday afternoon to attract the most buyers for the coming weekend, and get 3 showings on Friday and 4 on Saturday. You realize with this amount of showings, you probably have it priced right (because showings are a key indicator of correct pricing). On Sunday, your agent informs you that you have 2 offers. One is a low-ball, investor offer that you reject and the other is a full price offer for $200,000 with no concessions! Sounds great, right?
Your agent verifies that the buyer is approved for financing and that the buyer is actually putting 20% down, with 1% earnest money and a $200 option fee for 7 days. You accept the offer and are now officially under contract. The option period starts and the inspection is taking place in a couple of days.
You finally get a copy of the inspection report and discover that the electrical panel is a Federal Pacific and the inspector flags it as a known fire hazard. The hot water heater doesn’t have a pan underneath it, and the roof has hail damage that was never discovered during your initial walk through with the contractor. In addition, there are multiple little things that were not part of the code requirements when the house was built. The buyer is very scared as this is their first home and they are requesting that everything be repaired/replaced!
I know what you are thinking (minus the expletives), because I have been there many times – “There is no way I am going to agree to this! I just spent $45,000 on this house and I’m not spending another dollar on it”. Well, I totally understand.
This is where you really need an experienced real estate agent to negotiate this for you, and keep you at a safe distance from the buyer. If your agent is a good negotiator, they can try to have some of these things removed from the buyer’s list. If you are dealing with the buyer’s agent directly, it may be difficult for you to maintain your composure. You don’t want to lose your temper, say the wrong thing, and blow up your deal thinking, “Who cares about this offer, there are more buyers out there and this is a hot market! I’m telling them NO to everything!” If this is your attitude, you are making a big mistake and here is why:
Statistically (and commonly known between brokers and agents), your first offer may be the best offer you are going to get. Now of course this isn’t always the case as there are no absolutes in anything. However, if you have given the property market exposure, and had a number of showings with 1 or more offers (especially a full price offer), it’s probably going to be your best one. In fact, if everything checks out with the buyer (approval letter, earnest money, and option fee), you more than likely have a solid offer. If you don’t get the sense that this buyer is solid, and something is telling you that this buyer is going to be difficult, by all means, don’t accept the offer and wait for the right one.
Another thing to mention here is just because this buyer wants all of these inspection items resolved, doesn’t necessarily mean they are being difficult. This is a normal part of the negotiating process. In fact, if the big items (bad electrical panels and/or a damaged roof) are not addressed, you are more than likely going to have to deal with this with the next buyer on their inspection. Solution: do a more thorough inspection before you buy the property.
Once your property is under contract, the status changes in MLS and there is a history with your property. If you don’t close, the status is going to change back to Active again, potentially raising questions to other agents as to what happened. Yes, they can see that the status changed and may question what happened to the first buyer. If this happens more than once, you can be certain there will be some questions as to whether there is something wrong with the property.
There is something else going on here as well and that is time is elapsing. Even though your days on market stops once you are under contract, time is elapsing and that is costing you money. Remember, once you close on the purchase, the clock starts ticking. It’s ticking on any interest you are paying, utilities you are paying, and pro-rated taxes that you have to credit to your buyer at closing for the time you owned the property. It may also be ticking on that ideal time of year you want to market the property.
The longer you take to sell the property (and the higher the days on market), the more pressure there is for you to adjust your price. If you don’t lower your price after a certain amount of time (each property and market is different), you will probably see an offer that comes in lower because that buyer sees you’ve had it listed for a while and it’s still active. When they see this it can prompt them to throw a lower offer out there. Also, they see that there was some activity but now it’s back on the market.
If you cannot come to terms with the buyer on what is going to be fixed and the buyer decides to terminate (remember the buyer is the only one that can legally terminate the contract and they must do so during the option period) it may be a while before you get another offer. Depending on market conditions, your property may look tainted and showings will come to a screeching halt. These are all reasons why you need to do your best to make that first offer work.
In the previous scenario, I would probably agree to replace the panel, install a new roof, and negotiate the other items off the list through my agent. This is very reasonable based on my experience. You are not giving in to everything, but you are focusing on the most important items that are going to come up again and impact the next buyer. If the buyer agrees to this, you are more than likely good through closing. If they do not, you may be forced to move on to another buyer.
The point in all of this is keep your emotions in check and focus on your main objective which is to get the property sold, make money, and moving on to the next deal. No two situations are the same and there is no way to document every scenario that you will encounter. If you are on your 1st deal or 51st deal, my advice is use an experienced realtor for all of you sale transactions. I am speaking from experience because it has worked well for me over time. If you have any questions about this, we are here to help you. Feel free to reach out to us by phone or email and best of luck on your deal!