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The Property Tax Factor
Take a look at how real estate pros are addressing property tax concerns in three U.S. markets.
December 11, 2015
Property taxes can be complicated, confusing, and even worrisome to clients. They’ll likely have questions for their agents about tax increases, assessed values, or exemptions, and the costs could lead to objections.
Brokers can tame the stress by being prepared and educating both agents and clients about property taxes. Here’s a look at how brokers are addressing the issue in three major U.S. markets.
The Chicago City Council recently approved a tax hike for properties valued at $250,000 or more, which takes effect at the end of 2015. It could add roughly $500 a year to the property tax bill for each $250,000 in assessed value. That would raise the current rate for a home assessed at $250,000 to about $4,500 per year, assuming a standard owner-occupied home owner exemption. The tax hike is expected to raise more than $500 million to help pay for Chicago police and firefighter pensions over the next four years.
Lauren Mitrick, principal broker at Newman Realty in Chicago, says she’s getting more questions about property taxes since the increase was announced. She gives clients a link to a property tax calculator so they can get an idea of what to expect in payments. When they have more specific questions, she refers them to attorneys or tax consultants.
“What I understand is that it won’t affect my clients all that much,” says Mitrick, adding that she works with buyers who generally purchase in the $400,000 price range.
In the Chicago metro area, the median home price in the second quarter of 2015 was $230,000, just below the threshold for the tax hike. Property values in Chicago’s Cook County are assessed on a triennial system, so they can change every three years.
Mitrick routinely touches base with clients during reassessment years to field their questions and concerns. In addition, her firm holds training sessions for agents as issues arise.
Brokers can do a number of things to make sure agents are well versed in property taxes, says Brian Bernardoni, director of governmental affairs for the Illinois Association of REALTORS®. The most important thing is to be aware of the assessment process in your area. Brokers can share these five tips with agents on how to assist clients when it comes to property taxes.
- Be aware when notices are going out, Bernardoni says, and communicate deadlines to past and potential clients. This is also a good excuse to reach out to past clients.
- Educate clients on how assessed values affect property taxes so they understand how rates are determined and how they might change, Bernardoni says.
- Ensure clients are prepared financially for tax fluctuations in the area they’re looking to buy.
- Talk to clients about exemptions that can provide significant savings on tax bills. Common exemptions fall into three categories: owner-occupied properties, seniors, and low-income households. They can be found on the local government website that handles property taxes — typically the assessor’s office, treasurer, comptroller, or department of revenue — by entering the property identification number or address.
- Keep current on local government news, and let clients know when cities and school districts are considering a property tax levy.
“The idea is to be a trusted real estate adviser with clients on an ongoing basis,” Bernardoni says. “By keeping in touch and being able to answer questions, it’s an opportunity for an ongoing relationship.”
Staying on top of property tax changes and schedules is important, even after the sale of the home, says Thaddeus Wong, co-founder of @properties in Chicago. Wong says many of his company’s 1,800 agents are asking questions about Chicago’s tax hike. They have been directing clients to Turbo Appeal, a new startup in Chicago that uses big data to find evidence to decrease property taxes. Turbo Appeal has successfully reduced property taxes for 65 percent of its customers, saving an average of $1,000 per year, according to John Guidos, Turbo Appeal’s chief operating officer.
“We educate clients on best steps to reduce property taxes,” Wong says, “because increased property taxes add to the total cost of maintaining a house, so it is more costly to [own and] operate.”
Despite property tax concerns, @properties has seen record sales in recent months. And Wong says that taxes pay for city services that are key selling points: parks, public transit, and, in many neighborhoods, improved public schools. One way agents can handle property tax objections from buyers, he says, is to sell what the city has to offer.
Another selling point for buyers is that Chicago’s property taxes are lower than surrounding areas, says Wong. According to the Illinois Policy Institute, property taxes in the counties of Lake, McHenry, Kane, DuPage, Will, and Kendall are among the highest in the country — at least two-and-a-half times higher than the U.S. median.
“In reality, when you look at all the services [Chicago] provides, taxes are not astronomically high,” Wong says. “Not compared to the quality of life we get here.”
Philadelphia enacted the Actual Value Initiative in 2014 to make the city’s property tax system more simple and equitable. The old system resulted in disparate property taxes for similar properties. Now, the city assesses a home’s value and taxes it at a set rate of 1.34 percent.
A median-priced home in the city of Philadelphia, which was $158,000 in October 2015, would have $2,117 in property taxes per year if assessed at the same value using the new AVI formula.
The biggest impact of switching to the new system has been on existing home owners rather than buyers, says Mike Cirillo, associate broker at Coldwell Banker Hearthside REALTORS® in Philadelphia. There were citywide reassessments of property, and in some cases, property tax bills may have as much as tripled in the process. To help home owners whose property taxes increased, the city introduced a “gentrification relief program,” and has allowed other adjustments such as additional exemptions and appeals to help in the transition to the new system.
Cirillo says he makes sure new buyers have details on property taxes right from the start. “We disclose taxes up front,” Cirillo says. “We use worst-case scenarios to make sure clients are comfortable with the figures before we start seeing properties.”
As in Chicago, Cirillo says property taxes in Philadelphia are significantly lower than in outlying areas, so it is actually a draw for buyers. The Pew Charitable Trusts released a report that found the city’s taxes held steady compared to those in surrounding areas since 2000, which has made city property more affordable.
Cirillo also helps clients check the local department of revenue’s website to file for tax exemptions and gives referrals to real estate attorneys. “Part of my job is to put my clients in good hands with people I know will take good care of them,” Cirillo says.
Greg Braun, a real estate attorney based in Chicago, says smart brokers and agents will inform an attorney of a big increase in assessed property value or other irregularities so they can be prepared to address it with clients.
“There are some agents that put it on their follow-up list to make sure clients are getting their allowed exemptions,” says Braun. “They use it to keep in touch.”
Part of what makes real estate so costly in California is the state’s Proposition 13, which established 1975 as the “Base Year Value” for properties and effectively froze home values. Except for a small annual increase of 2 percent, with exceptions for transferring properties to family members and a one-time exception for seniors, property taxes cannot increase unless properties are sold.
“In California, we don’t have property tax increases. It’s just the opposite of Chicago,” says Patrick Barber, president of Pacific Union and current president of the San Francisco Association of REALTORS®. “It’s not an issue of when you buy a piece of property, but when you sell a piece of property.”
When a long-time resident finally sells a home, the property tax is reset at current rates. Also, if a home is sold or torn down and rebuilt on the same site, it is reassessed at current tax rates. The legislation creates a unique dynamic in the California real estate market.
Proposition 13 actually keeps people from wanting to sell their homes, Barber explains, because they can’t afford to move into a new property — and into a new tax bracket. Unless they’re older than 55 and downsizing just one time into a cheaper home, the sellers will take a financial hit when they move.
Property values quadrupled in the last 15 years, Barber notes, which means buyers need substantial amounts of extra income to purchase homes in San Francisco.
The median price of a home in the San Francisco metro area was $748,300 in the second quarter of 2015. Property taxes include the state’s maximum rate of 1 percent (of assessed value) plus the voter-authorized city taxes for school bonds and infrastructure, which for 2015–16 is 1.1826 percent, resulting in median property taxes of $8,849 per year.
“Buyers factor in the cost of those taxes, so it’s not a problem for those buying new,” Barber says. “But for those wanting to upgrade to a bigger home or going elsewhere, they can face double or triple the cost in taxes due to high increases in property values.”
About 80 percent of properties are sold for more than the asking price in multiple-bid situations, Barber says. Buyers need to make offers quickly, which takes preparation on the agents’ part.
“We need buyers who have eyes wide open when we show them a property,” Barber says.
In a highly competitive and intense market like San Francisco, potential buyers need to be educated on the total costs of home ownership – taxes included.
“We sit down with every client for up to two hours and go over every aspect of buying a home,” Barber says. “We get an actual preapproval and check all the things involved in the process. It’s intense.”
According to Barber, this is where the real estate pro makes all the difference. Brokers should make sure their agents are preparing the buyer for the market’s climate — taxes included. Agents should discuss the offer and terms thoroughly with buyers and know the nuances of how to properly present the offer to the selling agent. The goal is to educate and assist clients every step of the way.