how to assess in a declining market

HOW TO ASSESS IN A DECLINING MARKET

Presented by: Rob Turner, Hillsborough County Property AppraiserTim Wilmath, MAI – Director of Valuation HCPA

Presented for: IAAO 2009 Special Topics SeminarKansas City, Missouri

Hillsborough County 1,161 square miles

Total county population – 1.1 million people

525,000 parcels, including real estate and TPP

3 Municipalities:

--City of Tampa

--Temple Terrace

--Plant City

BACKGROUND INFORMATION

GOVERNING PROCEDURES AND RULES

Florida Constitution

Florida Statutes

Florida Administrative Code

Department of Revenue

Court Cases

Local Rules

FLORIDA PROPERTY TAX FORMULA

Just Value (Market Value)less, CAP Amount =

Assessed Valueless, Exemptions =

Taxable Valuex Millage Rate =Property Taxes

Property Appraiser determines assessed value, applies exemptions and reports taxable value to taxing authorities.

Taxing Authorities calculate millage rates that will produce the desired revenue from current year’s taxable value.

FLORIDA PROPERTY TAX PROCESS

Property Appraiser mails “TRIM” notice to property owners notifying them of value and proposed taxes.

Taxpayers may appeal to the Value Adjustment Board if they disagree with value or exemption denial.

Tax Bills are prepared by the Tax Collector and mailed in November, with payment due by the following March 30th.

Tax revenue is distributed by the Tax Collector to Taxing Authorities.

Assessment increases on Non-Homestead properties Are capped at 10% per year. (new for 2009).

Assessment increases on Homestead properties are capped at 3% per year, or the annual change in CPI, whichever is less.

FLORIDA ASSESSMENT CAPS

APPEALS57

75

6152

5927

5205

3965

3673

2974

2944

2866

2527

2492

3768

3752 44

37

4205 45

05

6628

9035

1499

3

0

2000

4000

6000

8000

10000

12000

14000

16000

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

Value Adjustment Board Petitions Filedin Hillsborough County

FIRST – HOW DID WE GET HERE?

SALE COUNTS

Historically, Hillsborough County had about 25,000 qualified sales a year. Beginning in 2003, sales volume began to skyrocket.

LENDING

With lower lending standards (subprime mortgages), more people could buy homes than ever before which significantly increased demand.

MEDIAN PRICES

As sales volume increased, home prices increased at a rapid pace - over 100% from 2001 to 2007. Household income remained mostly level during the same time period.

BUILDING PERMITS

Source: Hillsborough County Planning Commission

As prices increased for single family homes, builders and developers constructed new homes at a record pace to keep up with this new demand.

ASSESSMENTS

With the run-up in property values during 2002-2006, assessors had no choice but to follow the market.

ASSESSMENTS

During the height of the market, some property owners saw assessments increase 20%, 30%, 50% even 100%.

LEGISLATION

Increases in property taxes were so dramatic, that the Florida Legislature rushed to pass legislation to limit increases, including a CAP on non-homestead properties.

POPULATION

Historically, Florida’s population grew each year, which helped absorb newly built homes and existing inventory. That has now changed.


With significant new construction, shrinking population, and rising prices, inventory swelled.

INVENTORY

Source: Hillsborough County Planning CommissionLower sales, rising inventories and falling prices resultedin Hillsborough County experiencing the first decline in market value in over 30 years.

MARKET VALUE

Source: Hillsborough County Planning CommissionBack to the Future……..Residential properties are selling for about what they sold for in 2004 – a drop of 40% since the peak in 2006.

MARKET VALUE


As inventory swelled and demand decreased, many homes fell into foreclosure. Florida consistently ranks high in the number of foreclosed homes.

FORECLOSURES


As foreclosures increased and sales volume hit record lows, many subdivisions became scenes of vacant lots, partially constructed and abandoned homes.

FORECLOSURES


Many new subdivisions had significant numbers of foreclosed homes making it almost impossible for existing homes in the same neighborhood to sell.

FORECLOSURES

What exactly is a foreclosure?

FORECLOSURES

Foreclosures take many legal forms Lis Pendens – pending lawsuit on real property (usually 1st

step in all foreclosures)

Deed in lieu of foreclosure – Bank takes back property and forgives note.

Short Sales – Lender accepts “discount” on a mortgage and allows property to be sold at less than mtg. amount.

Cerificate of Title – a legal document recorded in the public records that transfers the title of the real property to the bank.

Warranty Deed from Bank to private party – Often when banks sell to the public, they record a warranty deed.

FORECLOSURES


Hillsborough County historically averaged around 5,000 Lis Pendens filings a year…Until 2007. We are on pace to see over 30,000 filed in 2009.

FORECLOSURES

Source: Hillsborough County Planning CommissionAlthough foreclosures represent a significant segment of the market, they still sell for less than other properties. This creates a challenge when valuing the population.

FORECLOSURES

Source: RealtyTrac.com


The number of foreclosures cause all sellers to re-consider pricing.

FORECLOSURES

Trying to research the quantity and impact of foreclosures can be a daunting task.

FORECLOSURES

FORECLOSURES


There are approximately 370,000 housing units in Hillsborough County. According to RealtyTrac.com, there are 16,613 in foreclosure (4.5%).

FORECLOSURES


Source: Hillsborough County Planning CommissionHillsborough County ranks 5th statewide in the number of foreclosures per month. Above are the number of properties that received a foreclosure filing in April, 2009

FORECLOSURES

The Towers of Channelside is a 257-unit condo project built in 2006. It was completely sold out before construction was finished.

FORECLOSURES


During 2007-2008 the market began a steep decline which resulted in most of the condo units buyers walking away from their purchase contracts.

FORECLOSURES

In 2008 the owners of the project filed for bankruptcy, with hopes of weathering the storm.

FORECLOSURES

In April, 2009, the owners handed the keys back to the bank, with only half of the units sold.

FORECLOSURES


Source: Miami Sun Sentinel, 4/16/09

FORECLOSURES

What now?•Fewer sales• More forced sales, foreclosures & short sales•Inconsistent prices – even with valid sales•Difficult to track price trends

ASSESSMENT STRATEGY

Price Related Differential –Measures equality between low-value & high-value properties. (Target – 98-103)

Weighted Mean – Comparing ratios between groups & property types. (Target – 76.5%)

Coefficient of Dispersion –Are ratios clustered or dispersed?(Target - 95% – 105%)

ASSESSMENT STRATEGY

Historically, our office averaged sales from the entire year for valuing the population. In the current market, we are time-adjusting our sales to reflect the monthly downturn.

ASSESSMENT STRATEGY

“Liars, Outliers, and out and out liars” – Even in a down market not all foreclosures should be used.

ASSESSMENT STRATEGY

Even when foreclosures are used, they should be inspected to check the condition. Often, the price isn’t such a great deal when you look at the repairs needed.

ASSESSMENT STRATEGY

The PRD can be especially challenging when you have extremely different homes in the same neighborhood.

ASSESSMENT STRATEGY

Foreclosures tend to be lower priced homes, selling for “below-market” prices. This tends to skew the PRD upwards.

ASSESSMENT STRATEGY


We use SPSS to identify the median price in the county, then designate that neighborhood as “high-value” or “low value” depending on it’s median price. Neighborhood adjustments are then tweaked to reflect location AND it’s high value/low value designation.

ASSESSMENT STRATEGY

Foreclosures tend to be in poor condition as a result of vandalism, neglect, etc. Adjusting the assessment on these sales for deferred maintenance can improve your COD and PRD significantly.

ASSESSMENT STRATEGY

Another factor in reviewing short sales and foreclosures is flipping.

ASSESSMENT STRATEGY

This home was flipped in the height of the market, foreclosed and is now back on the flip train.

ASSESSMENT STRATEGY

COMMERCIAL

Source: Hillsborough County Planning CommissionThe commercial sector is feeling the effects of the real estate downturn also.

COMMERCIAL

This VW dealership sold for $7,000,000 in 2008. That price indicated a one-year upward trend of 25% for auto dealerships.

COMMERCIAL

Meanwhile – this dealership across the street has remained vacant and for sale for over a year.

COMMERCIAL

News about automobile dealerships was not encouraging…..

So why such a high price for the VW Dealership?

COMMERCIAL

Not all auto companies are suffering.

How do you assess auto dealerships when some are tanking and others are prospering?

The ability of a successful car manufacturer to “cherry pick” the best properties in terms of location, condition and design, does not accurately reflect the value for the population of dealerships.

COMMERCIAL

COMMERCIAL

This is true for other property types as well.

Office and retail properties are feeling the effects of the recession through higher vacancies and lower rents. However, prices have not necessarily revealed this trend (yet).

Which state had the highest 2008 combined State & Local taxes paid – as a percentage of income?

E: Massachusetts

D: Texas

A: Florida

B: California

C: New Jersey

Pop Quiz!

Which state had the highest 2008 combined State & Local taxes paid – as a percentage of income?

E: Massachusetts

D: Texas

A: Florida

B: California

C: New Jersey

Pop Quiz!

Source: www.TaxFoundation.org

With 1 being the highest (N.J.) and Alaska being the lowest, where does Florida rank for state & Local taxes paid as a percentage of income?

E: 30th

D: 26th

A: 11th

B: 19thth

C: 47th

Pop Quiz!

With 1 being the highest (N.J.) and Alaska being the lowest, where does Florida rank for state & Local taxes paid as a percentage of income?

E: 30th

D: 26th

A: 11th

B: 19thth

C: 47th

Pop Quiz!

Source: www.TaxFoundation.org

When will we see recovery of the real estate market?

WHEN WILL WE RECOVER?

Associated Press – 4/25/09


USA Today – 5/5/2009


Associated Press – 4/29/09


Positive signs• First time homebuyer

$8,000 tax credit

• 50-year low interest rates (30-year fixed< 5%).

• Affordability

• Property tax relief

Negative signs• Unemployment

projected to increase – maybe 10% or worse.

• More foreclosures coming (see LisPendens)

• Bloated inventory

Conclusion

Appraisers are challenged more than ever regarding accurate analysis.

Market Data – Good Appraisal research and analysis of sales data is mandatory.

Honest assessment of the marketplace – recessionary conditions, credit crisis, oversupply of existing inventory, short sales, unemployment and other relevant market factors.

Bulk Sales, Auctions and Short Sales are so prevalent in many markets as to represent market value.

Measuring External Obsolescence – discounted cash flow analysis illustrates the impact of an unplanned long term holding period. The holding/carrying cost is devastating to market value.

Thank You!

Rob Turner, Hillsborough County Property [email protected]

Tim Wilmath, [email protected]

how to assess in a declining market

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