How to Appeal Your Georgia Property Tax: Property Valuation

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Real property taxpayers (homeowners, commercial property owners) should know the basics of real estate appraisal before embarking upon the property tax appeal process. Within the appraisal field three approaches to value are used extensively for appraisal purposes. In the following paragraphs I will briefly describe these three methodologies and how they relate to your tax appeal case.

The cost approach to value is used by most, if not all, county assessors to value both residential and commercial properties. The cost approach estimates the replacement cost new of the property, or the cost to build a structure of equivalent utility (functionality) using today’s construction standards. From that an estimate of the total accrued depreciation (physical, functional, external) is deducted from the cost estimate to get a depreciated replacement cost new. To that an estimate of the site (land) value is added to get an estimate of the fair market value of the property.

There are, however, some subjective elements that the county assessors frequently insert into the cost approach. For example, most properties are assigned to a quality or construction class which tells the computer assisted mass appraisal system (CAMA) what level of replacement costs to use. When neighborhoods are new, typically the properties in them are put into the system with the same quality codes. Over time however, due to appeals or description updates, these quality ratings begin to change by property, instead of by neighborhood. Thus, you may find that your neighbor, who appealed their assessment last year, has a quality code of “B” and your house, built by the same builder in the same year, has a quality code of “A”.

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Depreciation is another important aspect of the cost approach. Usually all properties within a neighborhood are assigned to the same depreciation schedule resulting in building values depreciating at the same rate. However, the county assessor will usually assign a condition code to each property which will alter this depreciation schedule. If you think that your property is in inferior condition compared with your neighbor’s property with the same condition rating, this may be a good point to argue when appealing your tax assessment.

Most CAMA systems are cost approach driven and the sale comparison approach is used to supplement the cost approach. Basically the county assessors value everything based on cost and then they compare the sold properties’ assessments to their sale prices. This tells the assessor whether their cost approach values are too high or too low. Maybe residential is high but commercial is low, etc. The sold properties are then used to adjust the cost tables within CAMA up or down to more accurately reflect market value, as indicated by the sales.

Sales data is also used at appeal hearings, regardless of the methodology the assessor used to arrive at their values. It was probably a cost approach, maybe an income approach, but they will produce sales that support their value when needed. As a result you will need sales data for your appeal.

Residential sales data is pretty easy to come by with all of the free services on the internet. Look at trulia.com and realtor.com and others. The county assessor’s website is also a good place to look. Some assessors have great websites you can use to look for sales even by neighborhood. Find as many sales as you can (within the last year for residential, two years for commercial) that support a lower value than what the assessor has on your property.

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Identifying the lowest sales in your neighborhood is extremely important because the county assessor will be using the highest sales they can find to support their values. In contrast your research into the lowest sales will help you argue a lower value. If there are several foreclosure sales in your market area, you may be able to use them to your advantage. The county assessor may say that those aren’t valid fair market sale prices. However, you may be able to justify using them if the foreclosure market is the only market, or dominant market, in your neighborhood.

There are three main components of the income approach to value like the cost approach (cost, depreciation, land value). They are income, expenses, and capitalization rate “cap rate.” The income approach is often used for commercial properties but rarely for residential properties (except apartment buildings, which are considered commercial).

The first arguable point in the income approach is income. The county assessors should be using market rents in their income approach. Market rents means what the property would rent for now, or as of the effective date of their assessments. As we know the real estate market isn’t what it used to be. Market rents are presumably lower now than they were in 2007. If your property has long-term tenants, you might be getting rents that are above market. The county assessor will want to see your profit and loss statement. If they don’t want to help you because of your high rents, you need to show them that if your tenants were to leave now, you couldn’t get that kind of rent again.

Operating expenses may be harder to argue. The county assessor may have, for example, all warehouse properties appraised with a fifteen percent operating expense ratio (fifteen percent of effective gross income). They may be unwilling to change this ratio for individual properties. But if you have a property with a special situation that results in consistently higher than typical operating expenses then bring this to the assessor’s attention.

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Unless you are willing to spend some money capitalization rate information will not be easy to acquire. Ideally, these rates are derived from sold properties, where net operating income and sale price are known. Appraisers and research firms spend a lot of time verifying the information on commercial sales and trying to ascertain the capitalization rate. One thing to keep in mind is the higher the “cap rate” the lower the property value. The lower the cap rate, the higher the property value. So, if you can get the county assessor’s property record cards (CAMA generated property information) for your property and your competition, you can find out whether they are using different cap rates on your property and your competitor’s.

Learn more about Alabama tax appeals. Stop by D.T. Jones’ site where you’ll find a free guide to appealing your property tax assessment.

categories: property tax appeals,property tax,real estate assessments,real estate appraisal,real estate consulting

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