Appealing Your Property Tax Bill

 

When you purchase a property, the Mendocino County Assessor’s Office determines the property’s assessed (or market) value for the purpose of establishing future property taxes. The initial assessment is critical because it establishes the basis for all future payments. Property taxes are calculated on the base year (first year) and cannot increase by more than two percent compounded per year.

Once this base value is established, if the property value falls below the original base year value, the assessor can lower the assessed value to reflect the current market value. But if prices take a big jump the following year, the original base value comes back into play, and the value can be increased by two percent per year from the original acquisition date and amount.

Usually, the assessor establishes the base year value at the purchase price, a reasonable approach. However, there are occasions when this approach isn’t appropriate. The assessor’s job is to equate the assessed value with the fair market value as of the closing date of the purchase. If you got a screaming hot deal, the assessor is obligated to assess the property at a value higher than the purchase price. In this case, the responsibility to justify a base value higher than the purchase price is squarely on the assessor’s shoulders.

Revenue and Tax Code 110 says, “For purposes of determining the ‘full cash value’ or ‘fair market value’ of real property, other than possessory interests, being appraised upon a purchase, ‘full cash value’ or ‘fair market value’ is the purchase price paid in the transaction unless it is established by a preponderance of the evidence that the real property would not have transferred for that purchase price in an open market transaction. It goes on to say, “This presumption may be overcome if the assessor establishes by a preponderance of the evidence that all or a portion of the value of those improvements is not reflected in that consideration.”

Clearly, the assessor has to do two things: use evidence to show that the sales price wasn’t fair market value, and then demonstrate what fair market value is. The method to determine fair market value is well established by appraisers, using comparable properties that have sold recently and making adjustments for the condition of the property in question.

Now, this can work in the opposite direction, too. Let’s say you overpaid for a property, perhaps this property was your childhood home, or maybe you want to be sure no one builds on the empty lot next door. In these cases, if you want to have the property assessed so you can pay taxes on a lower base value than the purchase price, the burden of proof is on your shoulders.

The most critical thing to remember is that the first year of assessed value will impact your taxes for as long as you own the property. Once the base year is established, doing home repairs should not impact the assessed value; however, improvements will. If you replace your roof with the same type of roof, that’s considered a repair. If you replace a flat, 1955 tar-and-gravel roof with a peaked composition shingle roof, that’s an improvement and can cause an increase in the assessed value. To the extent that the new roof is superior to the old, the assessed value can reflect that improvement.

The bottom line is this: if you honestly feel your assessed value is higher than fair market value, call the assessor’s office and explain your position; then ask them to lower the assessed value.  If they don’t agree, don’t be afraid to appeal the decision. If you convince the appeals board you’re right, it could save you a lot of money.

If you have questions about real estate or property management, please contact me at rselzer@selzerrealty.com or visit www.realtyworldselzer.com. If I use your suggestion in a column, I’ll send you a $5.00 gift card to Schat’s Bakery. If you’d like to read previous articles, visit my blog at www.richardselzer.com. Dick Selzer is a real estate broker who has been in the business for more than 40 years.

 

How to Value a Business When Buying or Selling It

Did you know that many real estate companies offer assistance with more than buying and selling property? They also help people buy or sell businesses. Before a transaction can take place, however, a value for the business must be established.

The first step in valuing a business is quantifying the value of its assets, including office furniture and equipment (e.g., desks, chairs, computers, phones, photo copiers, etc.), as well as industry-specific assets like software and hardware. Industry-specific assets are invaluable to people in the industry and fairly useless to anyone else. A manufacturing company, for example, wouldn’t have use for restaurant equipment, nor would a retail shop be interested in mechanics’ tools. However, if a real estate broker wanted to purchase a real estate company, he or she would be thrilled to discover that the existing owner invested $50,000 to develop proprietary software that streamlines the business and provides a competitive advantage.

After the assets are valued, it’s time to do the same for inventory. While service-related companies may not have much in the way of inventory, a car dealership may have millions of dollars worth of inventory. For a manufacturing company, three types of inventory exist: raw materials, work-in-progress (partially finished products), and finished goods—and all must be assigned a value.

Other assets, ones that are harder to quantify, are customer and supplier lists and relationships. What is it worth to have customers who return to this business time and again for their product or service, because the customers trust that the product or service will be of a known quality and delivered in a way consistent with their past experience? In some cases, this good will allows companies to sell their product or service for higher than the going rate. Think about it, wouldn’t you pay a little more at a restaurant for your favorite meal to be prepared perfectly without a wait every time?

If a company has no good will, the value of that company is the liquidation value of its tangible assets and inventory: the amount it would earn if it sold everything at a fire sale. Unfortunately, for most small businesses this is the maximum price for their business, which is why so many go out of business rather than sell. If the profits generated by the business minus the value of the owner’s time produce an income sufficient to convince an investor to put up hard-earned cash, then that business has good will—and many businesses do.

When considering business value, the owner must figure out the value of his or her contribution—what would it cost to replace the owner? If the company’s net profits are $30,000, but the value of the owner’s contribution is $50,000, then the value of the business probably is the liquidation value. On the other hand, if this same business nets $100,000 a year and the owner could be replaced for $50,000 a year, the sale price of the business could be in the neighborhood of $250,000.

Now comes the tough decision: To truly value a business, you have to look at the prognosis for future success. Will profits continue at existing levels? Did the profit come from one rare and wonderful transaction that probably won’t be repeated, or from thousands of transactions from customers with 10-year contracts? Is the business relying on technology that will be obsolete soon or is it a Laundromat in a low-income part of town?

A cautionary tale: ten years ago Blockbuster Video appeared unstoppable, but once Netflix hit the scene, the prognosis for Blockbuster profits declined dramatically. The person who will succeed in business is the one who can see the next Netflix.

If you have questions about real estate or property management, please contact me at rselzer@selzerrealty.com or visit www.realtyworldselzer.com. If I use your suggestion in a column, I’ll send you’re a $5.00 gift card to Schat’s Bakery. If you’d like to read previous articles, visit my blog at www.richardselzer.com. Dick Selzer is a real estate broker who has been in the business for more than 35 years.

Appraisals 101

It’s a seller’s market, but whether you’re talking about a sales transaction or a lease situation, it’s important to know the value of your property, and which home improvements will pay off. Here are some of the factors that affect a property’s value the most.

  1. Size. Square footage is the single biggest factor in determining a property’s value. Be sure you know the square footage of the home. Measuring it is not always easy and even professionals make mistakes, so estimate it yourself to check the numbers.
  2. Land. How much property does the structure sit on? A big back yard can add a lot of value. However, sometimes the difference between 10 acres and 20 acres isn’t as big when it comes to overall impact.
  3. Condition. The condition of the property (both visible and invisible) is a major factor. Obvious signs of wear and tear are unappealing, but sometimes it’s the structural issues that have a bigger impact on a property’s value.
  4. Location.  Location used to be more important than it is now. While it’s still a major component of value, our telecommuting world allows people more freedom in where to live.
  5. Décor. The style should not only be attractive, but appropriate to the home and the era. It helps to be internally consistent as well as consistent with the neighborhood.
  6. Room Count. In addition to how many bedrooms and bathrooms, the total room count matters. These days, “outdoor kitchens” almost count as another room.
  7. Other Amenities. Pools, hot tubs, and other amenities, while nice, do not increase the value by the amount it costs to install them. And, they can detract if they are poorly placed or in disrepair.
  8. View. To let you know the value of a view, I once knew an apartment building owner who said, rent was $1000 and the view was an extra $200. Yep, people paid it.
  9. Community Amenities. If a property is close to good schools, parks, shopping, and other amenities, the value increases. Now, of course, these are subjective. For a retired couple without children, clearly the schools won’t be much of a draw.
  10. Financing. If the seller is willing to carry the loan, the value of a property may go up. No fuss, no muss (simpler loan application, no fees, etc.).

When it comes to things you can change about your house, the absolute best return on your time and money is to clean and de-clutter. Haul stuff away and deep clean your house—top to bottom. Once that’s done, you can decide  on additional improvements.

People often ask, should I update the kitchen or the bathroom(s)? Well, as with most things, that depends. If you have a four-bedroom/one-bath home, add a bathroom (preferably a master bath). If your kitchen fixtures were done in a nice shade of 1970s avocado, consider renovating your kitchen.

When updating, go neutral. If you want a snazzy color, paint a wall. Paint is inexpensive to replace. Appliances and flooring are not. And, think long and hard before you convert a garage into a family room, because what you gain with one, you lose with the other. It’s almost a fair trade in overall value, so you’re getting little or no return on the money you spent to make the change.

Once your property is in tiptop shape, it’s time for an appraisal. While there are three methods appraisers use to estimate the value of the property; theoretically, they should all come up with comparable values. It costs about $400 to get a single family residence appraised, and this is another one of those times when it’s really important to have a reputable, local professional do the job. Call your local REALTOR for a referral.

In case you’re interested, the three methods of appraisal are as follows.

  1. The Market Approach – compare physical data, get data on several comparable properties, and make adjustments for size, condition, etc.
  2. The Income Approach – figure out the fair market value for renting the property, get income/rental information for comparable properties, and multiply by a ratio to get the appraised value.
  3. The Replacement Cost Approach – figure out the top value (what it would cost to replace it), assess the cost of doing so (including permits, hookup fees, insurance, taxes, etc.) and adjust for the aging of the property (physical, functional, and economic).

Lenders require appraisals, and they can be handy if you’re a For Sale By Owner type of person. If you work with a REALTOR, they can provide a market evaluation as part of their service which will help you estimate the value of your home.

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