Back Taxes And The Cost Approach

[Deleted member 130081]

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)

That appears to be the simple question I have complicated. I believe my first submission of the report was almost, but not quite, the right way to address this. I used an extraordinary assumption when the ordinary was appropriate, due to the context of transferring the entire interest instead of a partial. Duh. Now I have to figure out how to go back to the client and make it right. Thanks.

 

[timd354]

That appears to be the simple question I have complicated. I believe my first submission of the report was almost, but not quite, the right way to address this. I used an extraordinary assumption when the ordinary was appropriate, due to the context of transferring the entire interest instead of a partial. Duh. Now I have to figure out how to go back to the client and make it right. Thanks.

We all make mistakes. Perhaps a discussion with the bank's chief appraiser would be a good idea

 

[Koya]

Given the situation presented, I think I would do the fee simple values on both SCA and Cost, that way there is no discrepancy between the two approaches. This would be based on the hypothetical condition that the back taxes are paid; hypothetical because apparently you have no contractual evidence whether it will be paid or not and it is currently deficient. This is essentially a financial "subject to" opinion of value. I would also state in both the transmittal letter and the reconciliation that the encumbered value (not fee simple) "as-is" is the fee simple value opinion less the back taxes.

 

[timd354]

Given the situation presented, I think I would do the fee simple values on both SCA and Cost, that way there is no discrepancy between the two approaches. This would be based on the hypothetical condition that the back taxes are paid; hypothetical because apparently you have no contractual evidence whether it will be paid or not and it is currently deficient. This is essentially a financial "subject to" opinion of value. I would also state in both the transmittal letter and the reconciliation that the encumbered value (not fee simple) "as-is" is the fee simple value opinion less the back taxes.

There is no reason to use a hypothetical condition that the back taxes are paid...It is simply not needed as unpaid back taxes have nothing to do with the appraised value. When you appraise a property for a typical mortgage lending transaction you don't make the appraisal subject to the payoff of the existing mortgage do you...I would bet that you don't.

 

[Deleted member 130081]

Now my head hurts. We have some conflicting views here. I have dug into my copy of The Appraisal Of Real Estate and dug into the 1004 form context pages and am starting to doubt Tim and others are correct, and am leaning towards Koya being correct. Now damn it that is NOT because Koya's view is exactly what I actually did the first time around and let me get this straight, all I am really interested in here is doing the right thing!!! LOL. Hopefully this will not turn into a grudge match.

So I have two issues here and I think one of them is solved and the other is up for clarification.

The one that is solved is that I made an error the second time I submitted the report, by not including the consideration of the back taxes in the Cost Approach when I did include them in the Sales Comparison Approach. These ought to be consistent no matter what I do and that was my original question. Unless anyone thinks Denis is wrong (I don't), lets let that one go and move on.

The second is the issue of property rights, back taxes and how it ought to be dealt with in a mortgage appraisal (this is a 1004 and when I at first wrote I used an EA, I miswrote and actually used a HC). My initial idea was that it would be appropriate to use an HC for the back taxes and so I did. Then the lender wanted me to deal with the taxes without the HC and I did that too, because I didn't see an issue (if I was OK with a HC, there ought to be nothing wrong without one). Now, not all peers appear to agree here. The majority think that the taxes are to be entirely disregarded in the valuation, for various reasons cited being the definition of value, appraising the whole and not partial interest and then the vague you just don't do it that way answer (lol). From there a couple of peers in the minority don't entirely agree with that, one being a bit on the fence and the other pretty clearly on the other side of the fence altogether. My initial take was to agree with Tims logic about appraising the whole and not partial interest as this sounds pretty darn logical. Then Koya comes in and posts an opposite opinion, which happens to be exactly how I dealt with the damn thing in the first place. Now again, I have no interest in ego here and just want to do the right thing. What's the right thing to do? Figure it out for your damn self instead of asking others right? LOL.

So, I have been digging into The Appraisal Of Real Estate (referred to as the AI from here, as the Appraisal Institute authored it) and into the 1004 context pages to solve this problem and am coming up short of a definitive answer. According to the AI, we are reminded that in the United States no such thing as fee simple or fee simple absolute exists, because all real estate here is subject to the power of taxation. Therefore, we are being hypothetical when we call something fee simple. Further, the AI does not define the power of taxation as a partial property interest, rather a limitation to the fee simple interest. When listing what is and what is not a partial interest, the power of taxation is not one of them. Therefore (and this is where I scratch my head) a limit to the fee simple does not appear to be the same thing or equate to a partial interest and therefore the logic that the presence of back taxes equals an interest that is less than the whole, might not add up.

I went to the 1004 form context pages from there to see if I could find some guidance and don't see a definitive answer there either. The definition of market value does not say anything about a whole interest, only that title will be transferred. The poster who referenced market value also referenced the buyer and seller being equally motivated, but the definition does not say the buyer and seller must be equally motivated, it says they are each typically motivated and each acting in their own best interests. The part about the consummation of sale made me pause, but in this case the back taxes will not cause the title not to transfer. Now on that score, a warranty deed promises that the title is without limitations and yet, we have cases where the title transfers anyways, back taxes and all. The definition of market value only says the title will transfer, not that it must transfer via a warranty deed. Now maybe I missed something there, but I am not convinced the definition of market value is causing the taxes to be disregarded and rather, it would seem they should be regarded as a typical consideration of the best interests of the buyer.

The first assumption and limiting condition addresses the title, stating the appraiser will not responsible for legal matters concerning the title, except for information they became aware of during their research. It goes on to say directly after the appraiser assumes the title is good and marketable. How can I assume the title is good when I know it has the back taxes affecting it? Isn't that limiting statement actually saying I ought to be considering the back taxes I discovered during my research?

This is how far I have come and so far I am leaning towards what Koya is saying and what Terrel is a bit on the fence about.

 

[Deleted member 130081]

Its 7 pm on a Sat and I have done too much appraisal for the day, so I am going to come back to this after I get drunk...I mean after I get some sleep.

 

[gregb]

Its 7 pm on a Sat and I have done too much appraisal for the day, so I am going to come back to this after I get drunk...I mean after I get some sleep.

Once you have self-medicated, consider why back property taxes owed would make a difference to the appraisal assignment when it is known that future property taxes on the subject will be owed?

 

[J Grant]

To illustrate what Tmd is correct An appraisal sc approach is an impllicit consumation of sale, in ohter words, a make belief scenario that occurred as of the effective inspection date. date. Now, ask yourself did the subject really "sell" as of X days ago effective date ? Of course it didn't. So since it is an implicit sale only, per the MV definition, it takes place under MV definition terms, price not affected by concessions or special financing, and with passing of title-which would mean taxes or liens paid in order for title to be passed.


This does put the appraiser in a weird position, when the subject does have outstanding taxes.. I handle it by stating " see addendum for subject taxes". I comment on the addendum that subject has an upaid tax due of Y$, which in a an actual transaction might affect the price, however for the MV purpose of the appraisal title unpaid taxes were not a factor in the MV opinion.

If client wants to know value as impacted by unpaid taxes they would need a second alternate opinion of value taking that into account ...

I am seeing more and more delinquent taxes on owner occupied properties I look up as comps and in flip sales. The unpaid taxes get bought up by a tax certificate. I mentioned tax certificates on subject s twice in the past few months on addendum . In one of them the seller reduced price since buyer found out about the tax certificate, perhaps from the appraisal. I noted the price change client forwarded to me on the report but did not change my opinion of market value .

 

[Eli]

FC,

The most complete form of ownership is title in fee, which establishes an interest in real property known as fee simple interest.

This is also known as absolute ownership which is unencumbered by any other interest or estate, subject only to those limitations imposed by the government powers of taxation, eminent domain, police power, and escheat. These public restrictions on ownership are also known as the four powers of government.

I hope that helps you understand it a little better. Just fix it dude. Your client is not perfect either. Move on.

Read JGrant’s explanation of “hypothetical” above. In essence, you are valuing the “hypothetical” passing of “fee simple interest”.

Oh, I just thought of something. Your client will likely be happy because your opinion of value may go up! Lol. That is the only thing I would be a little concerned about. But if you explain what you did in your work file and revisions, I would hope you will be safe and you should be since you are fixing it on the front end, IMO.

 

[Mark K]

If this was a private appraisal and the property was being conveyed via Quit Claim Deed, yes, unpaid taxes would have an impact.

However, you're appraising for a lender and there's no way in the world a bank is going to loan or allow passing of title via Quit Claim Deed. So in your current circumstance, NO, you should not adjust and NO, they don't affect MV according to standard definitions. The bank (and probably the title company too) is going to require liens, judgements, mortgages, taxes, etc. to be paid at closing.