Appraisal District as an Employment Opportunity

Working for the county assessor can be a good way to get to know an area and property value in the county. Although sometime the pay is not competitive with some other areas in the real estate industry, the work is steady because property taxes are collected in good an bad economic times. Also, the job might also include employer-sponsored benefits like medical insurance and retirement plans.

Many students have started out their real estate careers in the assessment offices. Some have stayed to make tax assessing their career, others have moved into other areas such as development, appraisal, investing, or lending.

Concept review: property tax calculation

A property has an ad valorem value of $475,0000 in a state that requires a 50% assessment ratio (Texas's assessment ratio is 100% but let's use 50% to make it interesting).  The property owner qualifies for two exemptions.  First, the owner qualifies for a homestead exemption of $25,000.  Second, the owner also qualifies for an additional $12,000 exemption because she is over the age of 60.  The property tax rates for the jurisdiction are as follows:

County tax            4 mills

School district      11 mills

Hospital                2 mills

Fire department     1 mill

Total tax rate        18 mills or .018 (18/1000)

STEP 1: Calculate the assessed value.

      Ad valorem value  x  assessment ratio = assessed value

          $475,000         x         .50              = $237,500

STEP 2: Calculate the taxable value.

      Assessed value  -  exemptions   =  taxable value

          $237,500      -   ($25,000 + $12,000)  =  $200,500

STEP 3: Calculate the property tax due.

     Taxable value  x  millage rate  =  property tax due

       $200,500      x  .018  =  $3,609.00

In addition the property tax due, it would also be useful to know the tax savings from the exemptions and also the effective tax rate.

STEP 4: Calculate the tax savings from exemptions.

     Exemptions  x  millage rate  =  tax savings from exemptions

       $37,000    x  .018  =  $666.00

STEP 5: Calculate the effective tax rate.  The effective tax rate is the ratio of the property tax to the ad valorem value.

                                     Property tax due          $3,609.00

Effective tax rate =   Ad valorem value  =    $475,000  =  0.0076 or .76%

Concept review: tax rate calculation and mills

With a budget and the tax digest calculated, the tax rate is calculated based on the ratio of the fiscal budget less anticipated fee collection, and the tax digest less exemption.

               Budget amount for fiscal year less anticipated fee collection

Tax rate =                         Tax digest less total exemptions

For example, a county has a funding need of $5,000,000 for the up coming year and 20% of this amount is expected to be met with fees.  The tax digest in the county is $250,000,000 with a total amount of exemptions of $50,000,000.  What is the tax rate?

                             $5,000,000 - $1,000,000

Tax rate =     $250,000,000 - $50,000,0000  = 0.020

The tax rate for the county in the example above is .02 or 2.0%.  However, property tax rates are commonly quoted in mills rather than as a percent.  A millage rate or mill means 1 per 1,000 or 1/1000.  Don’t let this confuse you.  A millage rate is very similar to a percent meaning 1 per 100 or 1/100.  A mill just has an extra decimal place (.001 versus .01 with percentages). 

To convert a decimal format to a percent, move the decimal place over two spaces to the right and add a % sign at the end.  Above, .02 was written as 2.0% and this did not upset you. 

How would a tax rate of .02 be expressed in mills? 

Move the decimal place over three spaces to the right and add ‘mills.’  The answer is 20 mills!  20 mills are synonymous with 2% and .02. 

Although we might prefer percentages, many tax assessors prefer to use mills.  Since we need to know the language of tax assessors, we need to understand the millage rate system.

Concept Review: property tax exemptions

Taxing jurisdiction can allow some exemptions that will reduce a property’s assessed value by a specified amount and lower the subsequent property tax bill.  The property’s taxable value is the assessed value less all applicable exemptions. 

Please note that the property tax bill is not reduced by the exemption amount.  The exemption reduces the assessed value that results in a tax saving based on the exemption amount times the tax rate.

Property tax savings from exemption = exemption amount x tax rate

For example, a county has an exemption of $15,000 for qualifying property owners.  The total tax rate in the county is 1.5%.  What is the tax savings for property owners qualifying for this exemption?

Property tax saving from exemption = $15,000 x .015 = $225

All property owners qualifying for an exemption in the example above will receive a tax savings for $225.  Note that the tax savings is not $15,000!

Exemptions can be granted for a variety of reasons, sometime for political purposes.  Examples of exemptions include assessed value reductions for blind, disabled, military veterans, and older property owners. 

A common exemption is the homestead exemption.  The homestead exemption may be available to state residents who use their property as their primary residence or homestead.  This exemption is used to give homeowners, a large group of people who often vote in local elections, a property tax break and to encourage homeownership (or, looking at it from another perspective, to place a greater tax burden on investors, business property, and second home owners). 

In addition to exemptions, some properties are granted tax-exempt status.  Tax-exempt property owners are not responsible for paying any property taxes and tax-exempt properties do not add any value to the tax digest.  Examples of typical tax-exempt properties include government owned building, churches, and some properties owned by non-profit organizations.

Property tax administration

Property tax administration starts with a general budget for the upcoming fiscal year.  All departments and services using property tax revenue submit a budget to determine the total funding to run the local governments.  However, fees collected for certain services may offset this total budget amount.  Trends by many local governments have been to raise revenue through fees to manage the general budget and lessen property tax burdens.  Direct fees maybe charged for services such as garbage collection, water and sewer, fire and ambulance calls, certain police actions, and many other services.

With a projected budget less anticipated fee collections estimated the next step, in determining the tax rate, is to establish the tax digest.  The tax digest is the total amount of taxable assessment value of all the real estate within the county.  The county tax assessment office or tax appraisal district is staffed with tax assessors who are responsible for calculating and maintaining the tax digest.  This is not an easy undertaking because it requires an individual ad valorem estimate by the assessment office for each property in the county.  To value every property, the assessment office must keep an accurate inventory of all property.

The assessment office identifies every parcel of land with a numbering system giving each parcel a unique identification number, called the assessor’s parcel number.  In addition, the assessment office maintains a file and records for every parcel of land, improvements to the parcel, property ownership history, and historic assessed values.

With information on each property, the assessment office now makes ad valorem estimates.  We will discuss property valuation in a future chapter.  However, assessors use a variety of techniques and different techniques for different property types.  Let’s not get bogged down in assessment valuation techniques at this point, but it is important to remember that an assessor cannot spend too much time on any one-property valuation because they office have to make and keep current thousands of ad valorem values.  Assessors rarely have the time or resources to do valuations utilizing all three traditional approaches to value that will be covered.

Therefore, assessment offices often use mass valuation techniques.  One example of a mass valuation technique is a statistical model estimated from comparable sales data.  Such a model can be used to value a large number of properties very quickly once a model is developed.

Because of the nature of the assessor’s task, ad valorem estimate are not necessarily very accurate estimates of current market values.  Sometimes the assessor is too high, sometimes too low, and sometimes just about right. 

Usually, when property owners think that their ad valorem estimate is too low, resulting is a low property tax bill, or just right there is no incentive to take the time and effort to ask the assessor for a change.  However, if a property owner thinks that their ad valorem estimate is too high, assessment offices offer times during the year in which the property owner can an assessment appeal. 

With an assessment appeal, the property owner needs to build a case for an adjustment in the ad valorem value for his or her property and present this case before an assessor or an assessment board of appeals.  An assessment board of appeals is a group of officials given the authority to change ad valorem values if convinced that an adjustment is warranted.  The property owner’s basis of the ad valorem assessment appeal might be accomplished by hiring an appraiser, providing comparable sales data, presenting a recent sale contract, showing ad valorem values on similar properties, reviewing economic data in the area, or providing pictures of the property.

The assessor now takes the ad valorem estimate for each property and multiplies by an assessment ratio yielding the assessed values.  Assessment ratios generally range from 40% to 100% of the ad valorem estimate and are set by the taxing jurisdiction. For simplicity, some states, like Texas, just use 100% of the ad valorem estimate as the assessed value.  This makes sense to me!

Does assessed value influence valuation judgments?

This was the research question and title of a paper by Mathew L. Cypher and J. Andrew Hansz that was published in the Journal of Property Research (Volume 20 Issue 4, December 2003, pp. 305-318).  In a prior post, we discussed the anchoring and adjustment heuristic and we learned that certain reference points influence human judgment.

This study was setup to observe if an assessor’s ad valorem value estimate influenced the market value opinions of others, both novices and expert real estate decision makers.  Novices were defined as undergraduate students taking an introductory real estate course.  Experts were operationalized as experienced real estate appraisers.  The 53 novices volunteering were randomly assigned to a control (or no assessed value), a low assessed value treatment group, and a high-assessed value treatment group.  The 44 experts volunteering were also randomly assigned to three groups: control, low treatment, and high treatment.

A valuation problem, based on an actual property and market, was designed and provided to all study participants, in the form of a written case, all the information necessary to make a valuation judgment: subject property information, neighborhood and area descriptions, maps, comparable sale information, and photographs of the subject property and comparable sales.  The subject property was a vacant piece of land, which is typically valued based on comparable sales data exclusively.

The novice and expert control groups received the valuation case exclusively and were asked to make individual judgments of market value.  The four treatment groups received the exact same valuation case as the control groups with one additional piece of information, the property’s current ad valorem and assessed values.  The assessed value was configured at two levels in relation to the comparable sale data: ‘high’ and ‘low.’

Would the assessed value reference points influence the treatment groups?  In other words, would the average property value estimates for control and treatment groups be approximately the same or would the ‘high’ and/or ‘low’ assessed value information cause different results among the groups? 

Because the participants were randomly assigned to groups, we should not expect any large differences between control and treatment groups if the assessed value information had no influence on valuation judgments.  However, if assessed value treatment did influence valuation judgment then differences in the groups would be observed.  What do you think was found?  Would the assessed value of a property effect your valuation judgment?  Prospective buyers often check the property’s assessed value.

Below is a summary of the study results.  Each cell is the average appraised value per acre.

	‘low’ assessed	Control	‘high’ assessed
novice groups	$82,242  (a)	$85,338  (b)	$93,261  (c )
expert groups	$91,054  (d)	$90,464  (e)	$89,753  (f)

Now, there are different average values in all cells, however, the only statistical (or significant) differences between these group means was between cells labeled a and c ($11,019) and b and c ($7,923).  Note that the significant differences are only in the novice groups.  Statistically speaking, there were no significant differences among the three expert groups.

These results appear to indicate that assessed value influence novice judgment and not expert judgment.  Novices (students), probably not very confident in their valuation abilities, look toward assessed value as a valid indicator of a property’s worth.  Using assessed value as an initial reference point (anchor), the assessment value did appear to influence their judgments.

Experts (experience appraisers) know about the limited content validity of assessed values and could very well be a flawed market value indicator.  Experts appeared to disregard this unsanctioned reference point and rely more on the comparable sales data.

Although we often use assessed value as indications of market values we should be careful in doing this.  As you can see, experts who make a living selling their own valuation opinions give very little credence in assessed values as an indication of market values.  Should you?

COBA Scholarship Deadline: July 28, 2008

Here is a review of the scholarships available to COBA students:

The Albert S Jr. and Allee H. Lewis Scholarship - $2000.00. Awarded on academic achievement and financial need.

The John Edward Thurman III Memorial Scholarship - $2000.00. Awarded on academic achievement and financial need.

CJ and Clara Earle Scholarship - $4000.00. Awarded on financial need and must be a US citizen or permanent resident.

UTA Asia Scholarship - $1000.00. Awarded on a GPA of 3.25 or higher. Must be an Asian student or have received primary education in Asia. Need two letters of recommendation.

Deadline for application is 28 July 2008. Applications can be found on the Graduate Business School website.

Assessment Records and Real Estate Research

The tax assessment or tax appraisal district offices can be a valuable source of property information for real estate investors, developers, appraisers, and lenders.  Typical assessment records include information about the site, improvements, and ownership history.  Some assessment offices even include a footprint of the improvements and photographs.  Assessors also keep detailed maps that can be very help in researching areas.

Obtaining this information require a trip to the county assessment office in the past.  Today, assessment records often available on-line and Internet accessible.  Some progressive tax districts even provide the complete tax records in a downloadable file and ready for analysis in a Geographic Information System (GIS).  The Tarrant County Appraisal District website is www.tad.org and the Dallas County Appraisal District is www.dcad.org. 

When using assessment records, please remember that assessment offices/tax appraisal districts are required to keep track of all properties and usually with very limited resources.  Therefore, assessment records should be used with care and caution.  Assessment records may not be up-to-date and they are not always reliable.  For example, do not rely on assessment records for a precise measure of a site’s size.  In stead, go directly to the property’s legal description (this is what a judge will do in mediating any dispute!).

Google Assignment: 

STEP 1 Find your own County assessment office or tax appraisal district on the Internet.   In a Google search line, type your county name they either ‘assessment office’ or ‘tax appraisal district.’ 

STEP2 Once you find your assessment office, explore the site to figure out how to download or view individual property assessment records.  Most, but not all, assessment offices have posted assessment records on-line.  These records are usually searchable by property address, owners name, and parcel identification number.

STEP 3 Using a property address or other search, find an assessment record for a property that you are familiar with (your own or property of other family or friend). 

STEP 4 Check the accuracy of the assessment record.  Does the information appear to be accurate?  Check the number of bathrooms, site size, building size, owner’s name, etc.

STEP 5 Check the assessment value history.  What is the trend in the assessed value for this property?  What percentage of the total assessed value is land value?  Most assessment offices divide the total assessed value into land and building (improvement) value.

STEP 6 Find an assessment record for someone famous in your area.  A local sports star or politician for example.  Check out their crib.

Which city has the highest property tax on a $250,000 house?

To answer this question, real estate appraiser M. Lance Coyle, MAI of the North Texas Chapter of the Appraisal Institute conducted an interesting study. He obtained the total property tax rates and assessment ratios from 11 major metropolitan areas and calculated the property for each city based on a $250,000 ad valorem value.

The results might surprise you. Please see the table below. The effective tax rate is the annual tax divided by $250,000.

City Annual Tax Effective Tax Rate

Atlanta, Georgia $944.00 0.38%

Denver, Colorado $1332.27 0.53%

New York City, New York $2417.70 0.97%

Chicago, Illinois $2681.60 1.07%

Oklahoma City, Oklahoma $2750.00 1.10%

Little Rock, Arkansas $3165.00 1.27%

Albuquerque, New Mexico $3240.00 1.30%

St. Louis, Missouri $3320.39 1.33%

Miami, Florida $3699.66 1.48%

Los Angeles, California $3776.55 1.51%

Dallas, Texas $6139.44 2.46%

(Source: The Professional Appraiser published by the North Texas Chapter of the Appraisal Institute, volume XXIV, number 1, January 2008, pages 3-4.)

Interesting findings. An Atlanta homeowner pays only .38% per year property tax on a $250,000 house value and Dallas homeowner pays a hefty 2.46% on the same value.

But don’t cities like Atlanta, Denver, New York City, and Chicago have reputations for a higher than average costs of living and taxes burdens. Conversely, Dallas, Texas is generally known for a low cost of living (especially concerning housing) and low taxes. This table appears to demonstrate the opposite of most expectations.

Here is the deal. If we look at the total tax burden, Texas residents do have a relatively low tax burden, because Texas does not have a state income tax. The Texas tax burden is concentrated on sale taxes and perhaps the highest property taxes in the country.

Also, consider what you can purchase for $250,000 in New York City or Chicago versus Dallas. In New York, $250,000 might get you two bedrooms in a rough neighborhood. In contrast, $250,000 in Dallas will buy 4 or 5 bedrooms in a nice part of town.

An alternative approach to this study would be to calculate the effective tax rate on a similar type (in terms of physical features and location attributes) of property in the eleven cities. This approach would theoretically provide an apples-to-apples comparison, but the difficulty would be in finding ‘similar’ properties in each city. We know all properties are different in terms of location, location, location as well as dozens of other aspects.

This study leads to another question. Are property values in Dallas relatively inexpensive because of the high property tax or does the high property tax force housing cost to be relatively inexpensive?

Not expecting a clear answer to this question. After all, we never figured out that chicken and egg deal either.