Foreclosures and Property Taxes

The impact of including or excluding foreclosures in property tax assessments was addressed in a Live at the Forum presentation by Susan Adams of the Atlanta Neighborhood Development Partnership back in 2009. While I have not been following the issue in the past year, I did want to point out an article in today's Chicago Tribune that described proposed Illinois legislation that would require appraisers to exclude the sales prices of foreclosed homes when preparing a home appraisal. The article describes some of the pros and cons of this approach and may be worth a read for those with an interest in this issue.

Replies to This Discussion

Permalink Reply by Rick Rybeck on April 8, 2011 at 9:49pm

The article raises several interesting questions. First might be, "How do we know what a property is worth?" Second might be "Can we rely on arms-length sales to tell us what a property is worth?"

Appraisers and assessors are responsible for reporting the value of property. That is typically defined as the price that a willing seller and buyer would agree upon in an arms-length transaction. Comparable sales, cost and income are three different approaches for determining value. Legislatively precluding professional appraisers or assessors from considering relevant factors would seem to impair the integrity of the valuation process.

Regarding the relationship between sales and value, the recent collapse of real estate prices reveals that "sales" alone do not necessarily yield accurate information about real estate value. As the speculative bubble grew, there were numerous "arms-length" sales that clearly over-valued the real estate assets that were being bought and sold.

Two conclusions: First, assuming that accurate appraisals or assessments are important, it is not helpful to prohibit the consideration of information that could be relevant to an objective determination of value. Thus, legislation to prohibit the consideration of distressed sales is as unwise as Proposition 13 and similar laws that artificially freeze or distort property assessments.

Second, when markets evolve so that speculatiors routinely outbid potential users for property, then market prices are no longer a reliable source of information about asset value. Governments should give strong consideration to tax reforms that remove the profit from real estate speculation. By reducing speculative demand for real estate, prices will become a more reliable indicator of value. One approach would be to reform the mortgage interest and property tax deductions that primarily subsidize the affluent and inflate home values. Another approach would be to shift the property tax off of building values and onto land values. For more information on this approach, see http://www.justeconomicsllc.com