Back Taxes And The Cost Approach

[Koya]

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.

That's because it's a standard assumption that title-escrow will clear the mortgage lien before transferring title. So fee simple and market value are pretty consistent.

But if title transfers with liens or encumbrances that are atypical of the market (for example a contractual condition to pay future property taxes, i.e. past the title transfer date), then it would affect market value in that the fee simple value is not the same as market value. Consider a property with a 10-year below market lease. The fee simple value doesn't change, but a leased fee value, adjusting for the below market rent ramifications, is more pertinent to market value than the fee simple. Since the OP has stated that the back taxes may not be cleared, that would lead me to present the fee simple value as a hypothetical and the adjusted value for back taxes as the "as-is" value. That seems to me to be least misleading.

You could just report the fee simple value and note that there are back taxes outstanding which might not be paid and be technically correct, but that just seems to be leaving out the final step and potentially misleading. That would be like reporting the fee simple value for the long-term lease situation above and stating that the fee simple isn't the market value because there's a long term lease encumbering the property. That may satisfy the assignment conditions, but it doesn't actually give the client what he needs. Note that I don't get into this situation, because when a client asks for a fee simple value in such a case, I guide them toward a leased fee value as what they're actually looking for from the appraisal.

 

[timd354]

That's because it's a standard assumption that title-escrow will clear the mortgage lien before transferring title. So fee simple and market value are pretty consistent.

But if title transfers with liens or encumbrances that are atypical of the market (for example a contractual condition to pay future property taxes, i.e. past the title transfer date), then it would affect market value in that the fee simple value is not the same as market value. Consider a property with a 10-year below market lease. The fee simple value doesn't change, but a leased fee value, adjusting for the below market rent ramifications, is more pertinent to market value than the fee simple. Since the OP has stated that the back taxes may not be cleared, that would lead me to present the fee simple value as a hypothetical and the adjusted value for back taxes as the "as-is" value. That seems to me to be least misleading.

You could just report the fee simple value and note that there are back taxes outstanding which might not be paid and be technically correct, but that just seems to be leaving out the final step and potentially misleading. That would be like reporting the fee simple value for the long-term lease situation above and stating that the fee simple isn't the market value because there's a long term lease encumbering the property. That may satisfy the assignment conditions, but it doesn't actually give the client what he needs. Note that I don't get into this situation, because when a client asks for a fee simple value in such a case, I guide them toward a leased fee value as what they're actually looking for from the appraisal.

We are talking about a typical mortgage transaction here (unless the OP did not provide all of the relevant details) and the property is not encumbered by any lease. If this is a typical residential transaction (and the OP has not indicated that it is not), then there is less than a zero chance that the back taxes won't be paid off at or before closing. By the way, if the property is transferring via liens or encumbrances (i.e., property taxes or an existing mortgage) that still does not affect the fee simple value of the property but just means that the consideration paid by the buyer consists of a combination of cash paid to the seller and assumption and/or pay off of debts owed by the seller. Of course that should be disclosed in the report as a part of the contract analysis which if properly disclosed would certainly not be misleading.

 

[Michigan CG]

Back taxes have absolutely nothing to do with the market value of a property. Nothing.

 

[Eli]

I can see where they could be involved if they were in a sales contract as concessions or consideration, or the market value of some other interest besides fee simple interest in real property. I think they could be then. Or if somebody is providing an appraisal of the market value of the taxes, like tax credits. Those are a horse of a different color so to speak.

 

[djd09]

Back taxes are no different then a roof that needs repair.

 

[Eli]

Back taxes are no different then a roof that needs repair.

Well they are a little different because of the way the law reads about transferring real property. That’s why you don’t have to consider the taxes in fee simple interest is because the property cannot transfer without something being done to clear the lien. That’s not our problem. They may get the taxing authority to clear them for all we care.

 

[Eli]

Back taxes are no different then a roof that needs repair.

I tell you what it is like djd. It’s like a hidden claim on a property from an old relative that you know nothing about. That’s why people have to get title opinions and title insurance. We don’t worry about those things because our appraisal like the one being discussed is based on a “hypothetical” transfer of the fee simple interest. Note how the 1004 only asks for a specific year and annual taxes.

 

[Michigan CG]

Back taxes are no different then a roof that needs repair.

Absolutely incorrect. The physical condition of a property affects value. Back taxes do not affect the market value of a property.

 

[Eli]

When an attorney does a title opinion, probably one of the very first things they check is delinquent taxes. The buyer and seller and taxing authorities and attorneys can figure that out. There are no tax liens based on our “hypothetical” transfer other than the daily accrual, but they settle that at closing on the date of closing, which is our effective date of the hypothetical transfer. In other words, our hypothetical closing would occur on our effective date with no tax liens because it couldn’t close with tax liens.

Note the title opinion is usually ordered by the lender before the appraisal is ordered. That’s up to them though when they order the title opinion, but it is easy to see how a lender might not want an appraisal if they can’t figure out whether they can get a clear title opinion and resulting mortgage.

 

[Deleted member 130081]

Well I did not get drunk last night but I did get a good nights sleep, followed by a long day away from the computer doing physical labor outdoors, which is always good for the body, mind and soul.

I have not dug into this deeper, but I have thought about it and I have also read the additional comments since last night and thought about those too.

I think the comments made are more interesting than the problem at hand, but many of the things I might say about those topics are things that have been argued before and I really don't see the point going there. Anywhos...

I have decided that what I should have done, is in fact not considered the back taxes in the valuation and not use an HC to address them either. What I should have done, was stick to the ordinary assumption that in this case they would be paid, followed with a comment that I was making the ordinary assumption that they would in fact get paid.

I say the last part about making an additional comment in the report because I agree with Koya about how market value could be less than the fee simple value. To back up that statement, consider a cash buyer who might be stuck paying the taxes in the event there was no way the seller could (or would I suppose) cover it. While this is not typical, it can and does happen. This is a bit different than a traditional lien such as a mortgage, where the lien holder has a specific contractual relationship with the owner, whereby the lien serves as an instrument to hold the property rights against the satisfaction of the contract, so the rights can not be transferred without satisfying the lien. In the case of back taxes, while the effect can be similar to a lien, where the municipality can foreclose on the property if they so choose, it is not exactly the same thing, because the power of taxation is in relationship to the property, not the specific owner. This difference is why a property might transfer with back taxes and can not transfer with a lien.

Many of the arguments that have been made that reference the definition of market value, are in some ways opinions my friends. The definition of market value is not so absolute and is therefore open to interpretation and there have been numerous arguments over it on this forum. Thus, an interpretation of the definition of market value does not necessarily make it so. However...

And before I get to the however, I also want to point out the 1004 form allows for fee simple, leased fee and other to be selected. Maybe it is possible the "other" is for cases such as this, but I really don't know. And now for the however...

In this case I think the USPAP helps me out to agree with most of you here as it says we must perform assignments like our peers would. So, if there is a generally recognized interpretation of market value, best practice is to go along with it. Further, because this assignment is for lending, it is in fact an ordinary assumption that the lender client will clear all liens and taxes before proceeding.

That's where my head is one this one. Thank you Tim for suggesting I contact the chief appraiser to straighten this out. Thank you everyone for taking the time to put your 10 cents in.

And finally, I am not always the nicest person on the forum, so I wonder why some of you passed on the golden opportunity to beat me up? LOL. It has been noted.