Back Taxes And The Cost Approach

[Deleted member 130081]

Ok so this is not urgent but I am wondering what some of you think.

I have a property with years of unpaid back taxes. I made a downward adjustment for them in the SCA, but not in the Cost Approach. Right? Wrong? Not Sure?

Beat away.

 

[Mark K]

Wrong.

Unpaid taxes have no effect on market value.

Do you make an adjustment for unpaid mortgage balance?


Unpaid taxes (if very high) may have an effect on seller motivation which then translates into a distress sale, resulting in a non-market value sale, but that opens another speculative can-o-worms.

Standard MV definition says equally motivated buyer/seller.

Unpaid taxes, mortgages, liens, judgements, etc. are not our problem. Disclose them, move on.

 

[Tim The Enchanter]

I agree with Mr K.

 

[Michigan CG]

An adjustment for unpaid taxes or anything else unpaid is not correct appraisal procedure. The property is worth $X no matter the debt, taxes, liens, etc.

 

[Terrel L. Shields]

A big tax bill could discourage buyers, so probably could impact value but I've never seen such to be the case.

 

[timd354]

A big tax bill could discourage buyers, so probably could impact value but I've never seen such to be the case.

The typical residential real estate contract requires the seller to deliver marketable title, which cannot be done unless the seller pays off any back taxes, so the effect on value is zero (no different than any other existing mortgage or lien). If a contract is written in such a way that the buyer was responsible for paying off the back taxes, the amount of back taxes paid by the would just count as part of the consideration paid by the buyer, so the net effect on value is zero. Remember, the consideration paid for a property can include more than cash paid to the seller, it cam include the assumption by the buyer of the seller's debt or the buyer paying off of debts owed by the seller, conveyance of chattel or other real estate from the buyer to the seller. etc.

 

[Terrel L. Shields]

typical residential real estate contract requires the seller to deliver marketable title,

True but how many times are closings delayed to cure problems.??? I was paid a 10 year old lien recently because it was holding up the sale of the property...ha ha...bastids finally had to pay, but the delay can be months in some cases. And if aware that this puppy cannot possibly close in the next 90 days/?? wouldn't that discourage buyers anxious to get into a house? Sure it does. And cash talks...but if you cannot close, then the cash buyer walks to someone who can. Only by caveating that away will you have a "clean" fee simple.

 

[Deleted member 130081]

So, this property has roughly 12,000 on back taxes, not including the current years bill. The house is worth around $85,000, once its been fixed up and around $40,000 as-is. This particular client wants all homes to be brought to C4 before they will lend and ask any homes below C4 be made subject-to completion of repairs. I have at this point sent a first appraisal and then a second revised appraisal. The first one I sent in with the HC for the repair items and an EA that the back taxes would be paid and here's why. It is not a law here that any and all monies assessed against a property must be paid in full prior to or at closing. You can pass title with back taxes and they carry over. This does not extend to other types of liens like the mortgage or construction lien. Because of this, knowledgeable and prudent buyers do pay attention to back taxes and pay accordingly. Yes, sometimes the contract will state the seller is going to pay the taxes. Sometimes the contract says they will not. Sometimes they agree somewhere in-between. But in all cases, the amount the seller is willing to pay is not going to include those back taxes - they will not absorb those costs unless they are already getting the property at below market. This is why I used an extraordinary assumption, rather than an ordinary one, to address the years of delinquent taxes.

So, then the lender reviewer came back and asked that I adjust for the back taxes in the sales grid instead. I went ahead and did this because, I really didn't have a problem dealing with the issue either way. As I said, it is a known value issue and will affect the amount a buyer is willing to pay; I can evidence it, I can measure it. I am very open and appreciative to hear any feedback on the SCA however, I was wondering how I might then deal with the same issue in the Cost Approach! (aw hell - lol)

This particular lender also requires the cost approach on all appraisals and in this case, I did not account for the unpaid taxes. Their reviewer didn't take issue either, and they don't have monkey reviewers (not to say they are perfect either, just saying they have actual appraiser reviewers). But I started to wonder if I screwed that up (too?). This issue is a market reaction issue, a very straightforward one, but still a market and not precisely a cost issue. Or is it? Or, and maybe in addition to, this would be dealt with the same way functional depreciation might be? Damn it. My CE is coming up and I think a Cost Approach refresher is in my future.

 

[timd354]

It is not a law here that any and all monies assessed against a property must be paid in full prior to or at closing. You can pass title with back taxes and they carry over. .

The seller can pass his interest in a property subject to an existing lien (including property taxes), but the seller's interest in such a case is less than the full, fee simple title. Property taxes are a lien on the property unless that jurisdiction is unlike any other jurisdiction I have ever seen or heard of (which I highly doubt). Thus, the seller cannot pass clear, fee simple title unless all prior liens (including all due property taxes) have been paid off. What the lender asked you to and what you actually did do by making an adjustment is simply not correct, assuming that this is a typical mortgage lending appraisal reported on Fannie Mae form 104 using the GSE definition of value which includes a implicit assumption of the passing of title from seller to buyer, which does not happen in full unless all existing liens (including liens for property taxes) are paid off.

Don't be misled by a dopey reviewer...I would hate to be in a position of trying to defend making an adjustment for past due property taxes on the subject property on a typical mortgage lending appraisal since doing that is not only wrong, it is misleading and directly led to a misleading value opinion. If your only defense is that the bank reviewer told you to do it that way, then that would be a big problem for you

Ask yourself a simple question...are you opining the appraised value of the fee simple interest in the subject property or are you appraising the value of an partial/encumbered interest in the subject property? In this case, by making an adjustment for past due property taxes, you have not provided an opinion of the value of the fee simple interest in the property (whether or not you or the bank realizes that is another matter)

 

[hastalavista]

As to the cost approach question only...

The methodology of the cost approach values the property in its fee simple, as-is (physical, functional, and external influences accounted for) condition.
If there are adjustments that are not captured in that process that affect value, then those adjustments would be applied to the fee simple value indication to arrive at an as-is value for whatever rights are being appraised.
To repeat, if there is an adjustment warranted that affects the market value and is not captured in the cost approach, that adjustment would be applied to the cost approach to reflect that condition.
The standard technique is to complete the cost approach, conclude the fee simple value, and then apply the adjustment (a deduction or an addition depending on the circumstance) to that indication to conclude the as-is value.
The space and format in the 1004 Cost Approach section is not well suited for this type of analysis-presentation. While it could be "crammed" into it, I think a better method of communicating it would be to carry the discussion into the narrative. For example, where the "Indicated Value by Cost Approach" value goes, I'd write "see addendum" and continue the analysis in the narrative.