According to some research by Samantha Masone for The Hook, Charlottesville is cherry-picking the data on which they base real estate assessment values. The city recently reported that taxable property assessments are down by just 1.22% for the year (PDF). In calculating that number, city assessor Roosevelt Barbour, Jr. rightly excludes all “invalid” transactions—that is, all transfers of property that are not based on market forces, such as a parent selling a house to a child. Also excluded? Foreclosures and short sales. By Jim Duncan’s math, such sales make up 20% of those in the area and, perhaps not coincidentally, those distressed properties almost inherently go for very low rates. Masone took a random sample of houses to see whether they made the cut for calculating the city’s 1.22% decline, and found that twice as many transactions represented a decrease in value as the inverse, but only a quarter of those at-a-loss transactions were counted as valid by Barbour’s office. This might help to explain the gap between the claimed 1.22% decline and the decline of 32.1% measured by Nest, the local real estate agency.
Whether this is a common practice (and whether it is legal or ethical) is a question that is not explored by Masone, and is worth considering. I’m unclear on whether this has any immediate effect on individuals’ real estate taxes. While assessments of individual properties don’t appear to be impacted by this practice, the information that is presented to City Council to determine whether the tax rate should be adjusted is quite a bit rosier than reality—a difference of 31 percentage points could well be the difference between a rate cut and holding the current rate steady. And that, of course, affects all city property owners.
29 thoughts on “City’s Assessment Numbers are Fudged”
Geez, it’s amazing how quickly misinformation gets pass through the internets. Excluding foreclosures is required practice for assessments in all localities in the Commonwealth of Virginia. They are not considered “fair market” transactions, and thus are not included as part of the market sample used to determine values.
Based on my own experience, Duncan is much closer to reality than the cooked city numbers.
My argument hasn’t been whether they should or should not use them (I think they should), but that by excluding them for the assessments, they make the assessments irrelevant when analyzing the actual market.
I’m trying to find the section of the Virginia Code that states that assessments have to be 100 per cent of fair market value; I think that based on New Reality’s link in the HooK discussion the State’s code may differ from the Tax Code which may differ from the localities’ codes. (I’m not an expert on any of these, so I’m still trying to educate myself).
All that being said, by excluding short sales and foreclosures from the assessments, they aren’t providing a true picture of the market. This might not have been the case twenty years ago (or whenever the respective codes were written/approved) when there were much fewer short sales and foreclosures, but today’s market is one where I *have* to include them in my real estate analysis.
Assessments are for localities to tax, market value is one that buyers and sellers place on a property and appraised values are those determined by appraisers, most often for banks.
That’s precisely why I wrote this:
Whether this is a common practice (and whether it is legal or ethical) is a question that is not explored by Masone, and is worth considering.
The Virginia Constitution requires that real estate be assessed at fair market value. Refer to Article X
Fair market value is defined as a price agreed between a willing seller and buyer, neither party related to the other, neither party under duress to sell or buy, adequate exposure of the property to the market, and financing terms typical for the current market.
Foreclosures and short sales have always failed the test of “neither party under duress.”
Anyone is free to challenge this, of course. Be prepared to carry it to the Va Supremes.
My assessment last year was around a 20% premium to what we paid for the property. I was able to get it down to a somewhat sane value after an appeal (mainly since it was also much higher than other houses on the street), but the City’s initial stance was that my purchase didn’t reflect fair market value since the seller didn’t use an agent. That seemed far fetched to me, they were not family (I had only met them once) and they had absolutely zero incentive to give me a “deal”. We probably even overpaid.
Market price is what a willing buyer pays a willing seller, end of story.
First, I’ll admit I’m even less of an expert than Jim Duncan. This is something which we could all do to “educate” ourselves upon just even slightly more about.
Next, [Evan Churly] “foreclosures and short sales have always failed the test of ‘neither party under duress.’ ” Well, that does appear to be determinedly so. As for anything with it being “fair,” I don’t believe we’d be having the sweet and friendly discourse here if such were completely so.
Now to get back to “market value.” For who and what purpose, does excluding short sales and foreclosures level this playing field? Should whether to include or disregard such factors be potentially considered AS THE FIELD? What’s wrong with discouraging these not to be considered adjustable sliding scale factors? Are these the field or the players on it?
For analysis purposes, whether or not to exclude foreclosures and short sales from your sample should depend on the question being asked. If you are a seller (not under foreclosure) and you want some benchmark for pricing, you should exclude foreclosures from your sample. These are not “peer” transactions, and including them will lower your expectations for what to expect in a fair and open market. Same thing for buyers looking at properties (other than foreclosures). The extent to which foreclosures are driving the whole market down will be reflected in other fair market sales.
If you want a picture of the entire housing market, assessments are not a good tool for this. Waldo rightly notes that they paint an overly rosy picture. However, I don’t follow how this would negatively impact setting the tax rate, as long as the same methodology is applied consistently – which it is, as far as I can tell.
There are certainly errors and misapplications in any assessments, which is why there is an appeals process. The Hook alleged that there was systematic distortion, and Waldo implies it was deliberate (“fudged”). I don’t see any evidence for this.
Question for the group: Why is it that foreclosures and short sales have always failed the test of “neither party under duress”? The word “duress” is defined as “compulsion by threat or force” (it gives the impression of some type of illegality). Does the threat of a legal eviction rise to the level of “duress”?
I’m honestly looking for some feedback here; but my initial impression is that while foreclosures and short sales are many things, they do no seem to rise to the level of “duress”. Any thoughts?
Foreclosure & short sale meet every defintion of “duress” as far as I’m concerned. There are sheriffs on the other side of that notice to vacate. I can’t imagine having to leave my home with no idea of where/how I’ll shelter my family next.
For the sake of discussion, and as evidence that these codes were probably written at a time before short sales’ and foreclosures’ respective prevalence:
What about strategic defaults?
@New Reality –
Seriously? When seeking market value (not assessments) if one doesn’t include foreclosures and short sales in my analyses, one’s not analyzing the true market candidly. Just because we don’t want to include them doesn’t mean they don’t count. There are neighborhoods in this MSA where nearly 50% of the comparables are distressed; should we ignore those?
I sure do. Their press release says this:
One of these facts is not true. Are there 13,031 taxable residential parcels, or only “valid” taxable residential parcels? Will 39% have a decline in value, or only 39% of “valid” parcels? I don’t see anything in the city’s press release that acknowledges this practice.
Again, to be perfectly clear, I have no idea how common this practice is, or what ethical or legal considerations back it. I don’t care if it’s a universally accepted practice. When the city issues a statement reporting that there are 13,031 taxable residential parcels, 39% showing a decline in value, an average decline of 1.22%, then there had damned well better be 13,031 taxable residential parcels, 39% showing a decline in value, an average decline of 1.22%.
I don’t think any of those statements are false, are they? The issue here is not that the assessors are omitting parcels that were foreclosed. The issue is that they are not including foreclosure transactions in their sample that they use to determine values. Transactions are either valid or not, not properties. I haven’t actually looked at the numbers, but I don’t know why these would be wrong.
Jim, here’s what I getting at. If I want to know what my house will sell for, the best indicator of market price is to find sales of houses as like mine as possible to compare it to. If I compare my house to a foreclosure, that will throw off my estimate, because I am a willing seller able to negotiate a higher price than a bank would. It would be similar to comparing my house to one with less square footage or a major renovation need. Because assessments are meant to be the picture of a single property’s fair market value, this method makes sense. Once you start looking at the aggregate, it tells a misleading story. Maybe the assessors should use a big disclaimer any time they talk about totals.
How could anyone argue that the supply of foreclosed homes does not affect the demand for comparable house that haven’t been foreclosed on? If I found a willing seller who thought he was in a position to negotiate for a higher price than a bank might, I’d tell him to screw himself and go talk to the bank about their house.
The edit function isn’t working or I would have added an “s” to “house” in the second line.
No doubt the supply of foreclosed homes affects the whole market, but this effect will be evident in the fair market sales price of other homes in the market area.
Really, the more sophisticated method would be to include foreclosures in the sample but cost-weight them according to some formula. I’m sure there’s abundant research out there into how much, on average, the process of foreclosure itself dampens prices. Jim’s right that, in some neighborhoods with a preponderance of foreclosures, there may simply not be enough of a sample of fair market transactions to form a good estimate. Including these sales with adjustments would get around that problem.
Maybe tax assessments should be measured in bananas.
The real estate tax was designed as a tool to fund local governments in a somewhat equitable way. To do this, they needed a mechanism, and the the real estate assessment was born, which sought to capture “market” signals to assign tax burdens. The tax assessment should be worthless on its own, ultimately it is just a means to an end to capture funds for local governments. The problem is that we’ve started to look to the assessment as a market sign, and we’ve put value into something that wasn’t designed for that purpose.
As other posters have said, it is more important that the tax assessment be consistent than it be a perfect capture of what a house is worth. Local governments will still need a roughly level amount of funding (a separate debate), so if the assessments shift more rapidly, the rate will have shift as well.
Sure, the assessments might be more valuable to the those interested in real estate transactions if they were perfect measure of home value. But it is the market that should declare values, not local governments.
So, therefore, by switching to bananas, the local government can still get the $.95 cents per banana to fund themselves and the rest of us will rely on the real estate market to declare the worth of our property.
Andrew, I think pinning assessments to estimated fair market value is an important principle to hold on to. It’s how we maintain a progressive tax structure, asking residents to pay taxes in proportion to the value of their property. Of course, any assessment or appraisal, whether conducted by the private sector or public sector, is only an educated guess. Markets are dynamic and can be really hard to predict. But the uncertainty shouldn’t preclude local governments from doing the best they can with the resources available.
But if real estate is valued in bananas, I think I should have the ability to pay in bananas.
Asking residents to pay taxes in proportion to the value of their property doesn’t necessarily guarantee a progressive tax structure. In many places it’s how gentrification displaces people from homes they have lived in for years.
This is the most banal dinner party ever. Im gonna go fold my PBS tote bags.
I’m interested in this topic for several reasons, all bananas aside. I actually have spent not quite an hour reading the virginia code on property tax. It’s found here:
I warn you: one of the foibles of hytertext is its likelihood of sending you in circles.
Nowhere in the code have I explictly found information on how “fair market value” is to be determined. The only explicit reference I’ve found is here:
on page 35.
What’s troubling is that I’m reasonably intelligent and (finally) own a home and several hours of digging is insufficient to understand how the property taxes I pay on that home are determined. I can’t tell if there’s a state department that has been empowered to set up rules that then have to be followed or if the state has actually said anything more explicit than “fair market value”.
Whether the state has directly made the rules or whether a state department is making the rules is merely another level of the byzantine quality of the rules. I object to it being this complicated. I object to this much bureaucracy.
I never really forget that we managed to establish an entire nation with one piece of paper, a bottle of ink, and a feather. At core I will never understand why understanding the terms of my cable service should be harder than understanding the founding of my nation.
I’m going to fold some tote bags now, too.
Well, if you don’t like the appraisal of your home the simplest way to ascertain its relevance is to put it on the market at assessed value. If it does not sell, take it to the government, If you get quick offers, well…counter.
As to Myers… did you really think the solution would be found ending in .gov?
And remember to keep your escrow relevant to your assessment!
Barbara is right that there could be much, much more transparency about this. Even if the process does have to be somewhat complex, I don’t know why the Virginia Department of Taxation doesn’t publish a publicly-accessible guide to understanding what goes into a property tax assessment. Arlington County does a pretty good job explaining their process. From their website:
“The definition of market value as defined by the International Association of Assessing Officers is: The most probable sale price of a property in terms of money in a competitive and open market, assuming that the buyer and seller are acting prudently and knowledgeably, allowing sufficient time for the sale, and assuming that the transaction is not affected by undue pressures.”
There’s nothing inherently untrustworthy about government data. Census data and BLS data are very high quality. I think more transparency would improve the quality of assessments.
For once I agree with Barbara Meyer 100% (post of 6:405pm today). Wow!
Logically, one of them has to be. They said that “the value of taxable property…decreased by 1.22%,” and that Charlottesville “has 13,031 taxable residential parcels.” Nowhere in that statement is there any qualifier that the 1.22% is comprised of a subset of those 13,031 parcels, but instead only the direct statement the decline is a measure of the total value of taxable property. It is not the total value.
Barbara, in a happy coincidence, I happen to have taken the entire state code, spent several months of my life loading it into a database and performing complex analyses on it (for fun, because that’s how I roll). And, as of last week, doing that is my full-time job, courtesy of a grant from the John S. and James L. Knight Foundation. So I can tell you that, without question, the term “fair market value” is never defined in the Code of Virginia in any way that is applicable to Title 58.1 (“Taxation”), Chapter 32 (“Real Property Tax”). It is defined in two other chapters of the code, but those don’t apply to real estate.
Frequently, when such terms are not defined explicitly, it’s either because there is a long-standing, broadly accepted definition that’s a part of the legal canon, or because it’s been established in case law. In this case, I think it’s the latter. The definition of the term appears to have been formalized in the 1971 Supreme Court decision, U.S. v. Cartwright:
As best as I can tell, that portion of the decision is actually quoting from U.S. Treasury regulations, but by incorporating it into the decision, presumably that established the standard on a wider basis.
I hope that answers your question!
Having just spent four months working for the White House on a very large government data project, I can assure you that the requirements of the Information Quality Act mean that federal government data is of the highest accuracy. I’ve spent a great deal of time in the past fifteen years assembling large public-interest datasets, but I have never done so to standards as exacting as I did for this project. (The fruits of which should be announced publicly before real long, incidentally.)
Totally forgot to read legal decisions! Silly me.
Ironically, it now seems time to pass legislation declaring English our official language — and then require our laws to be translated into it.
The background on fair market value is very helpful, Waldo. Thanks.
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