Dear Vlad,
I just received my Baltimore County property tax reassessment and my home's value went down by over 20%!! What does that do to my home's value? Especially considering the fact that I was thinking of selling my home in the near future. Will my tax payments go down now?
Thanks,
Greg from Pikesville
Thank you for your questions Greg. There are thousands of homeowners in our State that I am sure are wondering the same thing. Both of your questions are somewhat "loaded" and will require some in-depth explaining on my part. Let me tackle your last question first.
Will your tax payments go down?
It depends...
The State of Maryland re-assesses the value of each home every three years and the new value determines the amount of subsequent property tax bill. That valuation will be attached to your home for the next three years unless you choose to appeal it in during that timeframe.
So if your assessment decreased, as you say by over 20 percent, you should expect your property tax bill to decrease as well. However, it does not mean that your property tax payment will go down.
Let me explain further.
Let's say that you purchased your home in 2008 when the market was still somewhat strong and at that time, the State assessed your residence at $500K. Let's also assume that you live in Baltimore County with a property tax rate of about 1.2% and you're on well and septic and are not required to pay additional water and sewer fees that are included on the property tax bill for those of us that use these public services.
In that case, your 2008-09 property tax bill would be for approximately $6,000 ($500K x 1.2%). So if this year, your value in the eye of the State is only $400K, your corresponding tax bill that will come out in early July will about $4800. If this is the situation that you find yourself in, your property tax payments will actually decrease.
Now let's assume that you bought your home in early 2005, right before the real estate boom, and at that time your home was valued by the State at $300K (please notice that we're not discussing your purchase price in any of these scenarios). That means that at that time, your tax bill was approximately $3600.
Between 2005 and 2008, you, just like the rest of the homeowners in the region, enjoyed significant appreciation of their real estate and probably when the $500K assessment came out in 2008 had no objections that your home was indeed worth that kind of money.
Did your property tax bill increase from $3600 to $6000 in 2008? It did.
Your payments, however, did not go up due to the infamous Homestead Property Tax Credit that limits the amount our property tax payments can rise for owner occupied properties and phases in the increases over a period of time. It's very likely that, although your assessment almost doubled, your actual payments went up only slightly in 2008 and in the following three years due to the Credit.
In this situation, your new assessment of $400K might not reduce your actual payments at all since you might only be paying property taxes on a lower, phased-in amount. In some cases, depending on the effect of the Credit and the valuation fluctuations, you might be paying more than you did last year.
Now let's look at your first part of the question.
What does that do to my home's value? Especially considering the fact that I was thinking of selling my home in the near future.
The value of your home, Greg, is an elusive concept. Homeowners are constantly bombarded with different "valuations" from appraisers, the State, real estate brokers, websites such as Zillow, etc. Most homeowners, furthermore, tend to overestimate the value of their own properties given their intricate knowledge of the home.
My determinant of value is simple: it is how much a buyer is willing to pay for it at any given time.
Thus, it is the buyer's opinion of your home's value that you, as a potential seller, should be concerned about and that value directly translates to an objective standard - currency.
The question is how much influence does the State's assessment of your home have on a potential buyer's opinion of value.
An astute buyer, and seller for that matter, will understand that employees of the State, when re-assessing your home, did not actually come inside the property during the process. They might have only looked at the tax records for the size of your home and compared it to other homes in your area that have sold over the past year. They might have adjusted for the square footage difference and the fact that you might have more garages than your neighbors do.
They probably did not take into consideration that you just replaced your kitchen and put in brand new stainless steel appliances or finished your basement and added a full bathroom there. In the eyes of the State, your home might be worth the same as your next door neighbors that has no updates but is identical in size.
In the eyes of the buyer, however, your home is worth more than the neighbor's. You see Greg, the buyers will go from home to home and actually pay attention to the differences between homes beyond the square footage and number of garages. They will be able to determine the true value of your home because they will have a lot more in depth knowledge about it than the State.
Furthermore, the State looks at a year of sales at once. As we saw in 2010, there could be three different markets in the same year - hot, not so hot, and really slow. Buyers tend to look back less than a year and at much more recent comparables. Also, the buyers will look at active competition whereas the State only looks at closed sales. At the end of the day, it is possible for the State to overestimate the value of your home given the downward market.
What's to prevent a buyer from using a lower State assessment in negotiations with the seller? Nothing! It can be a great tool for a buyer. You as the seller would need to point out the logic proposed above to preserve your bottom line.
I hope that I answered your questions to your satisfaction Greg. If you have any additional ones, let me know. As your Baltimore realtor, I am here to help!
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