A Michigan Property Tax Primer.
By Matt Bezanson
Are you willing to plug your way through a tough 15 minute lesson, if there is a chance of saving yourself some bucks? If not, stop reading now. If you're ready, grit your teeth and let's talk about (drumroll, please)... Property Taxes! For most homeowners, this is way down the list of things to think about. Your properly taxes are rolled in with your house payment, your mortgagee gets the bill, and you don't worry about it until an increase in taxes raises your house payment. Then you get irked and call your city councilman, who had nothing to do with it, or write to your state representative, who doesn't understand it any more than you do. Like a lot of other things, a basic understanding of the process can lower your stress level. And around the end of this primer, I'll tell you about a way you might, just maybe, be able to get your taxes lowered!
A property tax bill comes from a tax rate (measured in mills) multiplied by an assessment, which is related to property value. The rates are more within your control than the value; most millages are voted on. You may hear real estate people talk about the "City" (Spring) bill and the "County" (Fall) bill, and if you get the numbers for these, it will seem like your city and county are getting rich. Actually, the Spring bill is for the city tax and half the school taxes, and the Fall bill is for the county tax and the other half of the school taxes. Usually, all of it is paid to the city; cities have been charged with the job of collecting funds for school districts, in one of the State's oldest unfunded mandates. In most areas, the school tax is still the majority of each tax bill.
So where does the assessment come from? It's 50% of the "true cash value" of your property. At least, that was the theory in 1893, when the Property Tax Act was passed. Since then, the derivation of this number has been complicated by politics, but the basis of the assessment is still property value. The job of the Assessor's office in your City is to keep these numbers up to date. If you live in a rural area, this is done by the County.
The Assessor can't get values for all those homes the same way a bank appraiser does. The appraiser relies on recent sales of similar properties. There just aren't enough sales in any given year to update every value by this method. Besides, the assessor is trying to do it for about $3 per year per house, as opposed to the bank's appraiser, who probably got $250 for one house. Another method is needed.
Mass appraisal, as it's called, depends on another approach to value, called the Modified Cost Approach. It consists of 3 steps:
Step One: Assemble the properties into "groups" that will exhibit similar market behavior. This is up to the assessor's judgement. The groups may be "Recent brick colonials overlooking the Lake" and "Old frame ranches overlooking the landfill", or simply "Lowland Heights Subdivision". A city may have a dozen groups, or a hundred. However the groups are created, there must be a logic to the grouping that is justified in real market performance.
Step Two: Calculate a value for each parcel (land and building) based on the cost to reproduce it, using the same method for all the parcels in a group. Most assessors use a manual supplied by the State, which gives costs for each square foot of frame ranch, each fireplace, each square foot of enclosed porch, etc. There are hundreds of items, and correction factors for age, condition, etc. (Yes, this is the ultimate killer app for spreadsheet freaks.) The result is a "base cost" for each parcel that represents a value relative to the other parcels in the group. Working up the base cost is laborious, but only needs to be done once for each parcel. The base can then be modified when necessary, for additions, adjustments, etc.
Step Three: This is the part that confuses people. For each recently sold property, divide the actual sale price by the base cost computed in step 2. This is a mathematical way of determining how the step 2 numbers relate to the real world. The resulting number is called the "Economic Condition Factor" or ECF. Once we have an ECF that is supported by several real-world sales, we can use that factor to correct the base costs for all the rest of the parcels in that group. So if parcel A sold for 125% of base cost, and Parcel B sold for 127% of base cost, then it's logical to assume that Parcels C through Z would sell for about 126% of base cost. In other words, our ECF for that group is 1.26. Once we develop a reliable ECF for each group of properties, we have supportable predictors of market performance (value) for every parcel, even those that haven't sold in decades. We simply (!) multiply the computed base cost by the ECF for that group, and arrive at an appraised value. A great deal of the assessor's work each year is computing new ECF's for each group, based on actual recent sales.
(Warning: Sale price data must be used with care. The selling prices for a large number of homes define a market, to which the assessments must be compared. That does not mean that the sale price of an individual home must set that individual assessment. Many factors go into a sale price, including financing method, seller and buyer motivation, seller and buyer relationship, etc. I have seen beautiful homes in solid neighborhoods that sold for $1. That didn't define their value, nor did it affect the assessments of the neighborhood.)
Now we get back to the tax bill (or the change-of-assessment notice). There will be several different values shown. The first one, the "Appraised value", is the result of steps 1-3. The "Assessed Value (AV)" should be half of that, by law. The "State Equalized Value (SEV)" should be the same as the AV, if your Assessing Dept. is on the ball. If the County or State tax authorities think that your Assessor is consistently off base, they can add an "Equalization Factor" for the entire City that will make the SEV different from the AV. (Very rare.) Until a few years ago, the SEV was multiplied by the millage rate, and the result was the tax due. Then the politics got into it.
Under this system, when property values went up, taxes went up. Some people felt that this was unfair, so in the early '90's, a step was added to the process to protect people who stay in their homes from astronomically rising taxes. (After all, the rising value only benefits people who sell, not people who stay.) When proposal "A" got passed in 1994, a new field called the "Taxable Value" appeared on the tax bill. Here's how it works: When you buy your home, the TV is set equal to the SEV. The SEV continues to rise with the market, but the TV is restrained. It can only rise by the CPI inflation rate, or 5% per year, whichever is less. The tax is based on the TV as long as you stay in the home. When you sell, the TV is readjusted to equal the SEV.
The longer you live in your home, the greater difference between the value that you are paying taxes on and the actual market value. This new law has lowered the taxes for a lot of folks. It also provides nasty surprises for home buyers, who may end up paying thousands of dollars more taxes per year than the previous owners had paid. (If your are buying a home, call the City and get the millage rate and the SEV. The TV is of no use to you as a new purchaser.) Of course, this process only applies to your primary residence. Commercial, industrial, rental or recreational properties are still taxed on the SEV, as they have always been.
So, now that you know where the tax numbers come from, what can you do about them? There is one step in the process where the assessor's method is open to error. Because few assessors have the manpower to keep up with frequent changes in thousands of parcels, some assumptions have to be made about the homes. Even if the market shows the assumptions to be accurate on a broad scale, they can be way off for an individual house. If you find that the assessor's opinion of your home's condition is wrong, you can save some money.
Begin at home. Measure the outside of your home, and make a sketch with each dimension shown. Be sure to get sizes for added items such as garage, porch, deck, etc. and note which areas are over basement, crawlspace or slab. Now, head for the Assessor's office. Ask to see the record for your property, which may be in a computer, or on a "field sheet". This is the data the assessor uses in step 2. Make sure the record accurately reflects what is actually on the property. If you find a problem, make note if it and ask the staff how to go about making a correction. In many cases, if it's an error of fact, a simple letter to the assessor is all that's necessary. If it's more a matter of opinion ("He says my house is in average condition, but I think it's way below average because it's so close to the slaughterhouse."), then you may have to appeal the assessment. It's time to see the Board of Review!
On the Tuesday following the second Monday in March, every taxing jurisdiction in Michigan holds a Board of Review. This is a body of citizens who meet to hear assessment appeals. You can make an appointment through the assessor's office. Bring sketches, measurements, photos, and any other supporting materials. The Board of Review has the authority to change the assessment with or without the approval of the assessor. They can deny your petition if they feel it has no merit. There are a few things to keep in mind about the Board of Review:
If the Board approves your petition, you will be notified by mail, and your taxes for this year will be reduced. If the Board denies your petition, your next appeal is to the Tax Tribunal, which is a State-level board. The letter that notifies you of the Board's decision will contain instructions for filing with the Tribunal. If you are going to carry this beyond your local Board, make sure your case is solid and the amount in question is substantial. If you lose a day's work or two for a Tribunal hearing, and you win a $65 adjustment in your tax bill, what did you win?
So, maybe we saved you a few bucks here. Maybe not. In any case, a visit to the assessor's office can be an introduction to a valuable source of data. If you are a home buyer, seller, developer, builder, or investor, the assessor's files can be an invaluable source of information on buildings, lots, right-of-way records, etc. Some of this info is available on line, but most of it is still in paper records. If your future involves real estate in any way, get to know the people in Assessing!
Matt Bezanson holds a Level II certificate in Assessment Administration from the Michigan Dept. of Treasury.