Dare to Compare

It seems perfectly reasonable to assume that with repossessed homes being sold at low prices in markets across the country, homeowners living near those properties should see reductions in their property tax bills.

Most counties calculate property taxes on a given home based on the “comps” – the value of comparable homes sold in the neighborhood. If you live on a block on which three homes were recently sold by the lenders that repossessed them, then your tax bill should go be readjusted accordingly. Right?

Not necessarily. As homeowners in Riverside County, Calif., are discovering, county tax assessors aren’t always inclined to count the full value of a foreclosure sale as a comp. When determining the decline in property values in residential areas, the Riverside County Assessor’s Office generally discounts any lender-owned homes when reassessing taxes. County officials feel that to include the full value of foreclosure sales would be unfair, since they’re usually sold for tens of thousands of dollars less than non-foreclosure sales.

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This also seems perfectly reasonable. To throw in bank-owned homes sold at fire-sale prices into the mix of homes sold according to market prices would be like mixing apples and oranges. But it all gets much more complicated when you consider that Riverside County has one of the highest foreclosure rates in the nation: It’s a county where two-thirds of previously owned homes sold in August were in foreclosure. In other words, foreclosure sales are the market in Riverside County.

Consider that the city of Riverside had a median home price of about $400,000 in 2005. Today, the average Riverside home sells – when it does sell – for about $200,000. Despite this 50-percent decrease, property taxes have remained the same or slightly higher since 2005.

Which raises the question: With foreclosure rates abysmally high throughout the nation, how many other areas of the country follow Riverside County’s practice of looking askance at foreclosure sales when considering tax assessments?

According to the National Association of Realtors, that’s a difficult question to answer, given the variance among counties and parishes in calculating comparative home values and the extent of the foreclosure problem.

“Different locales have different methodologies in measuring what’s going on with their markets,” says Walter Molony, senior public affairs specialist with the association. “They all have their strengths and weaknesses. There is a belief, though, that given the downward skewing by including homes sold at fire-sale prices, you tend to undervalue properties by including them. About 40 percent of homes in the markets we measure are showing below their construction replacement costs as a result of the impact of sub-prime foreclosures moving through the markets.”

Cynthia Kroll, a senior regional economist at the University of California at Berkeley’s Fisher Center Real Estate and Urban Economics, points to Contra Costa County as a good indicator of how counties hard-hit by foreclosures are coping with the sticky question of tax assessments. A suburban region in the San Francisco Bay area, Contra Costa profited hugely during the housing bubble, but has since seen so many mortgage defaults that its congressman, Rep. George Miller, issued a warning last year to predatory lenders to back off or face lawsuits.

According to the Contra Costa tax assessor’s office, only a portion of the value of a foreclosure sale is counted against property tax assessments.

“Some counties are just doing the standard annual increase in tax assessments, which in California is about 2 percent,” Kroll says. “But there’s an issue where foreclosures represent much of the sales; they don’t really represent the fair-market value. But it’s quite likely if you have four home sales that weren’t foreclosure sales, they’re still going to be sold for a lot less because they’re affected by foreclosure rates. It’s very tricky in places like California.”

Kroll says that the question of foreclosure comps could find itself being hashed out through the legal system.

“I don’t know if any of these cases will wind up in the courts – people may object to their assessments and sue to try to get their properties assessed lower,” she says. “(But) once these foreclosure sales weren’t happening anymore, these same people would find their homes assessed upward. They’re probably looking at one year of slightly more tax relief than they otherwise would get.”

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