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Do new home owners get a tax break in St. Louis County?

Do new home owners get a tax break in St. Louis County?

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There’s an unexpected benefit to buying a house in St. Louis County: Eight out of 10 buyers get a property tax break. Their homes are appraised for taxes at less than they paid for them.

Whether that ought to be true — and whether it’s fair to other taxpayers — is a matter of some dispute.

The Post-Dispatch analyzed records for the 2015 assessment, the latest one. Of 10,171 homes that sold in 2014, 8,137 were appraised for taxes at less than what they sold for. Of those, 3,305 were valued at 90 percent or less of the sale price.

Of the rest, 1,562 were appraised for more than the sale amount, and 447 were appraised at the sale amount.

That might be surprising, because tax appraisals are supposed to reflect the market value of the home, and home prices in St. Louis were rising in 2014. The Federal Housing Finance Agency put that year’s rise at 4.4 percent in the metro area.

Among the more unusual cases is a five-bedroom mansion in Clayton sold for $1.24 million in June 2014, and appraised for taxes at $991,000 as of January 2015. There were some large discrepancies on smaller homes, such as a three-bedroom home in Creve Coeur, sold for $399,000 in July 2014 and appraised at $192,000 five months later.

The result disturbs Edward Lawrence, a professor of finance at the University of Missouri-St. Louis. He ran across the phenomenon when appealing the assessment on his own house in Creve Coeur.

He noticed that houses that had sold recently were appraised at less than the sale price, but the actual sale prices were used as “comps” — comparable properties — to set the assessments for neighboring homes.

“It’s unfair,” said Lawrence, who teaches home appraisal techniques as part of classes on real estate. The buyer is getting a tax break, but people blocks away can feel the brunt of the sale price in their own tax bills.

“People should be cringing when a house down the street is sold, because their taxes are going to go up,” Lawrence said.

That can be doubly unfair, he said, because the purchased house probably was fixed up for sale — painted, repaired, flowers planted. The price of that house is then used to assess homes that haven’t had a spruce-up.

County assessor Jake Zimmerman calls Lawrence a “disgruntled taxpayer who sued us” and says the professor is wrong about valuing houses. Lawrence appealed his assessment to the Missouri State Tax Commission, and lost.

Zimmerman, who is in charge of tax appraisals, says he uses the same system for valuing newly sold houses and houses that haven’t sold in decades, so all get the same treatment. When in doubt, he says, he errs on the low side.

He says the Post-Dispatch analysis actually shows that he’s doing a good job.

“I’m very happy to see those numbers. I see a tight cluster around market value,” he said.

Lawrence, however, sees a “huge deviation” from true value with nearly a third of newly sold homes being valued at discounts of 10 percent or more.

The Post-Dispatch analysis couldn’t account for things that can take place between the sale and the tax appraisal, such as a tear-down or a major fix-up of a home.

Unequal assessments mean that some taxpayers are paying more than their share for government, while others pay less, Lawrence notes. Underpayments by one group of taxpayers can mean leaner schools and public services, and increase pressure for tax increases.

Valuing property

Assessors are supposed to set property values by estimating what the property would bring if sold on the assessment date, in this case January 2015. The Missouri State Tax Commission describes a proper appraisal as “the price the property would bring when offered for sale by a person who is willing but not obligated to sell it, and is bought by a person who is willing to purchase it but who is not forced to do so.”

Assessors generally agree that the best evidence for a particular house is the price it sold for recently. But that’s not the only factor used.

With tens of thousands of properties to value, St. Louis County uses a computer system. The system looks at the actual sale price. But it also searches for other sales of similar homes in the surrounding area in the past two years.

As described by the assessor’s office, the system then adjusts for differences in square footage, number of bedrooms and baths, garages and the like. Houses most like the home being assessed get the greatest weight in the mix. Out comes a number that’s usually lower than what a particular house actually sold for recently.

In the case of the mansion on Hillcrest Avenue in Clayton, the assessor used the sale $1.24 million price plus five comparables, most in the $900,000 range. That resulted in the $991,000 tax value.

Sometimes the computer can’t find any similar properties nearby. The assessor then uses a formula estimating the value of the land and what it would cost to build a similar house, minus a factor for aging. That’s how a home on Rocky Drive in Creve Coeur ended up assessed at $192,400 after being sold for $399,500 five months earlier.

Why not just use the recent sale price as the tax appraisal? That would be “sales chasing” and a “very, very bad practice,” Zimmerman said.

If he simply grabbed the recent sale price, he’d be treating recent purchasers differently than other homeowners, and the newcomers would probably be taxed higher than neighbors, Zimmerman said. So, he uses the same appraisal system for both.

Some buyers do overpay, he noted. Bidding wars sometimes drive prices above what a homeowner is asking, and a buyer in a big hurry might pay up to get into a house quickly.

That gets back to Lawrence’s point. The actual sale price is used to assess other houses, although the assessor’s own system would indicate that the sale price is too high. That sale price shows up on the comp sheet other homeowners see with their assessment notice.

“If you assume that the sale price does not reflect market value, it should not be used as a comp,” said Larry Clark, director of strategic initiatives at the International Association of Assessing Officers.

Zimmerman said it all balanced out because the same system was used for all houses.

Automatic discount?

Steve Weber, a certified appraiser, used to work in an assessor’s office before switching to the opposition. Now he is is with Property Assessment Review, one of the largest firms representing owners in assessment appeals.

After years of such work, he’s convinced that the assessor applies an automatic 5 percent discount to sales prices for newly sold houses. The theory is that the sales price was inflated by a pre-sale spruce-up.

Zimmerman denies there’s an automatic discount. But a “fix-up factor” does get considered, as the value of a paint job and flowers can fade.

He compared it to the way a new car loses value as it is driven from the dealer’s lot. “Real estate is a little bit the same way.”

Assessing is always prone to error, said Clark, whose organization represents assessors and property tax administrators. Assessors are using past sales to estimate present prices, and that’s hard to do when markets are changing. An assessor doing a good job on average is still going to value many homes too high or too low.

Zimmerman says he leans low. “It’s also my job to see that no one is stuck with an overly high tax bill,” he said. “My default is that, if I’m going to miss, I always try to miss a little low rather than a little high.”

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