April 2021

• There are generally three different methods an appraisal district will use to assess the market value of your property.
• For income producing properties, the most common is the income method.
• The appraisal districts will likely artificially inflate the value of your property by not fully recognizing your lost income. Its important to be prepared to fight back.

We are getting close to the protest deadline for property taxes here in Texas, with just a couple of weeks until the deadline to file the protest. This year, because May 15 is on a Saturday, the deadline to file a protest is May 17.

There is nothing more frustrating than getting that assessed value in the mail and seeing it went up 25, 50, 75%. Nothing can kill an investment as quickly as an out of control appraisal district can. As a result, we are going to continue to talk about different aspects of the appraisal process. Specifically, this week I am writing about how the heck the appraisal district even came up with that number. And how you can be prepared to fight back.

Methods for Assessing Property Values

I’ve talked about this before in this blog, but in Texas there are two main ways in which we protest the assessed value of a property –

• Market Value
• Equal and Uniform

We talked about equal and uniform in this blog two weeks ago. Today then, we are going to focus on the market value here.

Market value means the price at which a property would transfer in an open, arm’s length transaction. This is usually determined through three different methods:

• Sales method – comparing the property to recent sales in the market;
• Income method – for income producing properties, multiplying the net operating income by a cap rate to reach the market value; and
• Cost method – calculating the cost of construction to determine market value.

As stated, for income producing properties, the income method makes the most sense. But what about this year? The pandemic drastically reduced income for many property owners. How will the appraisal districts calculate your assessed value?

Getting the Full Effect of the COVID Devastation

That question – how will the appraisal districts address COVID – has been on the mind of a lot of Texas property owners this year. We have not seen the appraisal district analysis yet so its hard to give a definitive answer to the question. But, based on dealing with appraisal districts in the past, I can make a good guess.

I suspect that the appraisal districts will not fully appreciate the dramatic decrease in the value of income producing properties. To artificially prop up the value, instead of using actual income numbers, they will likely boost the income to some fictional average market level. They will then divide that number by the cap rate to get an artificially inflated market value. From that number, they may give you a nominal reduction based on the lost income. Using this method, the appraisal districts will keep your market value artificially inflated.

Its very important to be able to combat this with a more accurate method. We think that the reduction for lost income should be recognized in the NOI calculation – thus getting the benefit of the cap rate multiplier. This will provide a more accurate picture of the devastation that COVID has wrecked on income producing properties.

Its important, therefore, to have a clear plan when you go in to protest your assessed values. Please give us a call at 512-614-0335 to discuss your protest so we know you are fully prepared.

• Appraisal Districts have a lot more information about your property than they did even five years ago.

• As a result, to get a reduction of your appraised value, you need to be prepared for your hearings.

• There are many arguments you can make to the panel, but they will only be successful if you have data to support those arguments.

Appraisal Districts have Extensive Information

We’ve talked about this previously, but if you want to get a reduction in the appraised value at your property, you have got to be prepared. That’s primarily because in the last 5-10 years, the appraisal districts have gotten a lot more purchase and debt information about private properties.

While Texas is a non-disclosure state, the appraisal districts have a lot of people working on researching property information. That includes reviewing property records for deeds and deeds of trust, conducting in person appraisals, and scouring private online portals like CoStar. They often misinterpret this data but they use it to much more aggressively set high appraised values. As a property owner, you need to be just as aggressive and prepared for your hearings.

What You Need to do to Be Prepared

This is likely to be a rough year for property owners in Texas. The market may be rising and, as explained above, the appraisal districts have a lot more information. We expect, therefore, that the appraisal districts are going to significantly increase the appraised values of most properties. It is possible to get these values lowered – but you have to come to the hearings prepared.

Its vital, therefore, that you are ready with analysis when you go to your informal or formal hearings. You should start preparing for your hearing as soon as possible. Your preparation should include the following:

• Protest Market Value – You must make sure that you protest the market value of your property. One of your arguments to the board will be that the appraisal district has improperly appraised the market value, so when filing your protest, make sure you check the box to protest market value.

• Protest Equal and Uniform – In addition to market value, you must also protest that your property was not assessed on an equal and uniform basis to similarly situated properties. The Texas constitution requires equal and uniform taxation of similar properties. If the appraisal districts do not adhere to this requirement, you may be able to get your values lowered.

• Have data – The only way to get your assessed value lowered at a hearing is to show the panel supporting analysis that is backed by data. For income producing properties, that includes financials, rent rolls, etc. For partially completed properties, that may include cost of construction.

• Other supporting data – Besides the financial data, you can also get your appraised value lowered by showing that there is significant damage or restrictions on the property. For example, if you have large easements or heritage trees, that can limit what you can do with the property and thus reduce its value. To convince the Board, you should start gathering pictures, invoices, surveys, recorded docs, etc.

• COVID damage – Many income producing properties were severely affected by COVID. Like with other areas of your analysis, you can get a reduction in your appraised value due to the decrease in income. But you need to bring data to support the reduction.

• Support for Exemption – Finally Last week we talked about getting a potential exemption from property taxes as a result of damage from the winter storm. To be successful, you will need to provide specific evidence to the board explaining what the damage is and how it reduced the value of your property.

Any Texas property owner knows that high property taxes can ruin an investment. Protesting these high values, therefore, is critical. To be successful in your protest, you need to be prepared and bring data.

If you have any questions on how to effectively fight the appraisal district, please give Bukowski Law Firm a call at 512-614-0335.