Reduce Your Property Taxes To Increase Your Return
by Mike Hanna of Investmark Mortgage, LLC
Whether you are new to real estate investing and haven’t purchased a property before, or are an active investor with multiple properties, the information contained in this document will save you money. In some instances, the savings will be several thousand dollars. I have personally saved tens of thousands of dollars without hiring a property tax consulting firm (which can charge up to 50% of the reduced amount), keeping all of the savings for myself. Some reductions were so significant, they effectively lowered the purchase price of the property. If this sounds like something beneficial, you may want to save this article for future reference. Before addressing the details, let me begin with an overview.
We have all heard the old saying in real estate, “You make your money when you buy” (meaning if you buy it right, it should return a profit). Those of us in the rental business know that in order to maintain an ongoing profitable return, we need to maximize rent and minimize expenses. By expenses, I am referring to any expenses related to the property itself, including, but not limited to, maintenance and repair costs (including capitalized improvements), hazard and liability insurance premiums, and county property taxes.
By improving the property to market ready condition, you should be able to demand the maximum rent the market will bear. If you rehab the property correctly (meaning don’t cut corners), and use quality, durable materials, you will generally keep your maintenance and repair costs to a minimum. By using an insurance vendor that specializes in rental properties, you can be assured of getting the best market rate for the coverage you require. Most investors that I have worked with over the years are already doing these things. What most investors are not doing is reducing their property taxes. The savings here should not be overlooked, as they can significantly increase both monthly cash flow, and overall cash on cash return, with just a couple of hours of work.
Let’s look at an example:
Say you purchased a rental property that has a current county tax assessed value of $100,000, with a county tax rate of 2.67% (about the average tax rate in the DFW metroplex).1 This gives you a tax amount of about $2,670/yr. If you purchased this property for $50,000 because it needed $20,000 in repairs, shouldn’t the tax 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.
If you protested the property taxes in the prior example and reduced the tax assessed value to the purchase price, that would lower the tax assessed value to $50,000, and you would have a tax amount of $1,335, or one half of the current tax amount. Let’s say the market rent for this house is $1,000/mo, principal and interest payments are $426/mo (based on a loan amount of $75,000, interest rate of 5.5%, on a 30 year note), and insurance of $50/mo ($600 per year). Your positive cash flow before protesting would be $301.50. After protesting, it increases to $412.75. Your monthly cash flow has now increased by $111.25/mo! If you brought $15,000 as your down payment, your cash on cash return goes from 24% to 33%! For those of you who are new to protesting property taxes, let me start with the property tax timeline.
The Tax Season
Each April, in Texas, the county appraisal districts send the Notice of Appraised Value for the current year in a statement to each property owner. These are usually received no later than May 1st.2 If you own property, you have probably received one of these notices in the past. Between May 1st and May 31st,
1 You can find the tax assessed value of a property on that property’s respective appraisal district web site (i.e., www.dallascad.org for Dallas County).
2 According to Resolute Property Tax Soutions, Dallas County will not be sending notices if the tax assessed value of your property has not increased.
property owners can set an appointment with the appraisal district (or go directly to the appraisal district) to protest the value of their property. Just a note here – the line gets really long the closer you get to the May 31st deadline….so don’t wait until the last minute to protest.
If you purchased a property between January 1st and June 1st of the current year (or already own a property from a prior year), you can protest your property taxes during May. If you happen to close on a property at the end of May you can still go to the appraisal district and file that day (you will get a hearing in the June/July timeframe, if no one is available to see you immediately).
Effective Tax Protesting for Purchases Between January 1st and June 1st
Upon closing and funding, call your county appraisal district (or go online) and see what their process is for protesting. If you closed in January or February, you will probably receive your Notice of Appraised Value in the mail, as this should be enough time for them to process your transaction. The procedures for protesting are listed on the notice. Most appraisal districts will have you make an appointment to see an appraiser in person, to protest the value sometime during May. You can make this appointment over the phone or in person the same day, at the appraisal district. Some appraisal districts now allow you to protest your property on their web site. Visit your district’s web site for details as to how to do this if you elect to protest online. Prior to meeting with an appraiser, you need to have the following 4 items ready to make your case:
1) Settlement statement (HUD-1) from the 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 will 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 comparables, you need to get with a realtor or appraiser to help you. Remember, you need sold comparables, not active, pending, cancelled, etc.
At your protest appointment, your objective should be to get the tax assessed value lowered to the purchase price of the property (you cannot go lower than the purchase price in most cases). 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 knows why you are there. Merely stating that you want the value lowered to a specific amount due to condition, should suffice. Submitting your HUD-1, ugly photos and/or estimates of work to be performed to the appraiser, will illustrate that you are prepared and will provide appropriate data to make your case. The appraiser (in most appraisal districts, and most situations)3 will lower the value, maybe not to the purchase price, but to some lower assessed value.
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). This is a separate hearing that has 3 members of the community and 1 to 2 appraisers. These hearings are by appointment only and can be very effective if you have the time and a case worth appealing. I have had success before the ARB in Dallas County and was able to recover $1,700 in property taxes (it took 2 1/2 hours out of my day, 15 minutes of which was the hearing itself). If this hearing does not go well, you
3 Some appraisal districts can be extremely difficult and may not lower the value at all. There are issues here that are beyond the scope of this article.
can hire an attorney and sue the board. I know people who have done this and were successful (they were protesting several properties and could justify the legal expense). The point here is to illustrate that there are options beyond your protest appointment.
Effective Tax Protesting for Property Acquired in a Previous Year
In discussing “previous year”, I mean any acquisition date where a tax protest deadline has passed. If this scenario applies to you, your settlement statement may not have much significance, as it did in the previous section. If the subject property is in good condition, there is no need for photos or estimates of work to be performed. Sold comps will be the primary tool for building your case to protest the value.
When using sold comps it is important that you are comparing your property to other properties in similar condition, in the same area. Most likely this will mean removing foreclosures and other properties that need significant work. Use comps that sold for a lower value in the same condition. If your property has been overvalued, the tax appraiser will, in most cases, lower it to something more reasonable.
One thing to note is the appraisal district is required to provide you with the data they are using to assess your property. If you feel you need it, you should go through their process to get it. Most Dallas-Fort Worth districts (Dallas, Tarrant, Denton, and Collin) have this information available online. Read their respective sites to find where it is located. In Dallas County for example, it will be on your Notice of Appraised Value sent by the appraisal district. There will be a PIN on the Notice that you can enter online to see the comps the district is using, which you can use for your pre-protest research. Also, keep in mind that “areas” can differ in the appraisal district world, to areas in the real world. This may sound strange, but it is a fact. You can have homes built 30 years apart, with different materials, in a completely different subdivision, yet the appraisal district is comparing your older property to a newer one (still common in certain areas of Dallas County). When this is the case, you can more easily make the argument, as you have their data to use against them.
Protesting Property Taxes After the Deadline
Many years ago, I learned something that saved me thousands of dollars. I had several rental properties that I had purchased during the summer, well after the May 31st protest deadline. What I discovered, was that I could still protest my taxes for the entire year under a certain section of the Texas Tax Code, as long as certain criteria was met. For any purchase after May 31st and before the end of the year, you can file your protest under the Texas Tax Code – Section 25.25(d)4 if it meets the following criteria:
1) Property was purchased after the May 31st protest deadline
2) The tax assessed value is overvalued by a minimum of 33% of the corrected value5
3) The protest is filed on or before January 31st of the next calendar year
If your property meets these criteria, you need to contact the appropriate appraisal district (or go online) and determine what their process is for protesting under 25.25(d). In Dallas County, you can write a short letter addressed to the chairman of the ARB, stating that you wish to protest under 25.25(d), as the tax assessed value of the property is > X% of your purchase price. Be sure to include your settlement statement (HUD-1) to show proof of purchase price. You can also send photos and estimates of work to be performed. You will be
4 Section 25.25 of the Texas Tax Code is the Correction of Appraisal Roll and includes other sub-sections. For purposes of this article, I am only focusing on sub- section “d”.
5 If you have a tax assessed value of $100,000, and the corrected value is $70,000, take $70,000 X 33% ($23,100) and add this back to the $70,000. If the purchase price was $70,000, as long as the CAD has it on for $93,100 or more it qualifies (so it was 1/3 overvalued meaning 1/3 of purchase price + purchase price= qualifies)
An easier way to look at it is: take 25% off of what the CAD has it valued at and it if it less than that it qualifies. So CAD has $100,000, take 25% off which is $75,000 and anything less than that qualifies.
sent a hearing notification with a date and time to appear. Everything else in the process is the same.
If you are successful, your taxes will be lowered and there will be a 10% penalty assessed since it is after the May 31st deadline. So, in our example, your penalty will be $133.50. Still worth the effort.
Over the years, I have had tremendous success getting values lowered to the purchase price, both during the protest window, through the 25.25(d) process, and before the Appraisal Review Board. Recently, I have had tax appraisers call me (from DCAD) following a protest letter sent, where they lowered the tax assessed value over the phone. In these cases, I sent a letter, HUD-1, photos and contractor estimates/invoices of repairs. It appears they are now looking to save everyone time in the process. If you give them enough information, you will probably receive a similar experience.
As real estate investors, we all want the maximum return we can get from each property. I would highly encourage you to protest every property you purchase. Even protesting just one property can make a huge difference in your cash flow. If you have multiple properties the savings can literally be thousands of dollars.
I look forward to hearing about your experiences. If you have any questions, feel free to give me a call. I look forward to assisting real estate investors in any way I can.
Mike Hanna is the managing partner of Investmark Mortgage, LLC. Investmark Mortgage delivers speed, certainty and clarity to every client utilizing our 4 Keys to Success. Visit our website or contact us with any questions.
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