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| 11/27/2009 7:48:00 AM | Email this article • Print this article | In Wisconsin, there is no tax relief as home values fall
Adverse economic conditions won’t likely lower assessments
Property values have declined in Wisconsin during the recession, just as they have in the rest of the nation - home values fell by almost 1 percent in 2008, while overall property values dropped by .5 percent - but most property owners haven't seen commensurate declines in their property assessments.
That has prompted hundreds across the state to ask local review boards to reconsider their assessments. Simply put, what these homeowners want to know is: Why aren't assessors lowering assessments in their townships or neighborhoods to match the reality of falling sale prices?
For the most part, the homeowners' challenges aren't being successful, though a lot of data backs up their bewilderment. For one thing, for much of this year property owners have seen real estate ads tout properties at steeply reduced prices, some as much as 50 percent less than the price tag from a year earlier.
In addition, nothing belies a deteriorating housing market more than skyrocketing foreclosure rates. Wisconsin had the 19th-highest rate in the nation in September with foreclosures up 4.8 percent from August and up 169 percent from last year, according to the Business Journal of Wisconsin.
Because banks generally sell foreclosed properties at much less than the assessed value, expanding public auctions not only lay bare a weak market but often transform the pricing context of a community - flooding the market with homes at discounted prices can depress demand and lower the sale prices on nearby nonforeclosed homes.
All that should lower assessments, the argument goes.
And yet, in many, if not most, cases, it does not. One reason, some argue - though not the only one - is assessors' use of historical sales data and mass appraisal methodology in a recession. In a mass appraisal, assessors use economic data for a certain preceding time period to devise a valuation formula to apply to individual properties.
However, by using information compiled when times are good, the assessment may not reflect current economic conditions and housing values, thereby causing a flawed and artificially inflated assessment.
For its part, the Wisconsin Department of Revenue discounts that theory and does not fault the mass appraisal process, saying a property's value is based on how individuals analyze what they would pay for a property at a specific point in time, and, as such, the outcome is dependent on the market information available to them at that moment, not on the methodology itself.
"The time period used is not the result of the mass appraisal process, it is dependent on the amount of information available," Linda Barth, the executive assistant of the DOR, told The Lakeland Times. "The greater the number of comparable sales available, the shorter the time frame necessary to draw from for useful sales in estimating values of comparable property."
To some, that's like saying an assessment is nothing more than the luck of the draw; to others, few recent comparable sales are indicative of a declining market in which one might expect a lower assessment, yet, ironically, as the number of more recent comparable sales dwindles, the time frame stretches further into the distance when values were higher.
Lawsuits increase
Whether or not the appraisal process is to blame, one thing is for certain: Property values have continued to slip in 2009, while, for the most part, assessments have not been reduced, and a number of property owners have resorted to lawsuits after being denied a lower assessment by their local boards of review.
While commercial lawsuits alleging excessive assessment are fairly common, residential and small business litigation have been on a steep incline during the economic downturn.
In Rusk County, to cite just one example, Daniel G. Dobrowolski, Lisa A. Dobrowolski, and their company, Canoe Bay Development Corporation, filed suit earlier this year against the town of Rusk, the town of Rusk Board of Review and Owen Assessing alleging excessive assessment for the year 2008.
The Dobrowolski case, which is pending, is complicated but typical. In one sense, as many such lawsuits are, it is about alleged assessor error - the failure to abide by standard and accepted assessment methods, techniques and practices as outlined in the statutorily established Wisconsin Property Assessment Manual.
Among other things, the complaint states, the Dobrowolskis claim the local assessor failed to value land and improvements separately, failed to factor in the nonconforming nature of the parcels, placed incorrect classifications on the parcels, and did not properly assess the parcels according to highest and best use criteria.
But the allegation most central to the general question of inflated assessments during the recession, the one most critical to taxpayers' pockets, is the lawsuit's contention that the assessor failed "to value the Parcels in accordance with the criteria set forth in the WPAM by not taking into account extreme adverse economic conditions."
So the question becomes, how much weight does an assessor have to give to declining market values during a time of extreme adverse economic conditions? If sellers are slashing prices, if foreclosures are climbing, if historical data is clearly not reflective of the current market - doesn't the state have to factor all those elements into an assessment?
How the state looks at it
The answer is, not necessarily, at least in the state's way of thinking and in established case law.
To the Department of Revenue, there is nothing automatically amiss because assessments don't decline when housing values do. That can happen for any number of reasons, according to a March 2009 presentation posted on the DOR website.
One reason might be perception, the presentation stated. While headlines trumpet the state's real-estate market slump, the reality is, not all market values are declining.
"While the news media portrays values as dropping, it speaks to an overall trend in some areas and doesn't take into account a specific neighborhood or specific properties," the website stated. "In actuality, some communities, and some neighborhoods, have seen values increase. Many neighborhoods are experiencing fewer sales yet values remain relatively stable, and a few neighborhoods have experienced foreclosures and short sales that have driven market values lower. It's the latter neighborhoods that capture news media attention."
A municipality might also not have had a chance to factor in diminishing conditions because it hasn't yet conducted a reassessment.
"If your municipality happens to be conducting a revaluation this year, then your assessment will reflect the most probable market value," the website informed property owners. "A revaluation sets all properties at market value as of Jan. 1 and establishes the relationships of one property to another. Those relationships remain until the next revaluation. If your community is not conducting a revaluation this year, then your assessment will likely not be adjusted if the only change occurring is the same market adjustment that the rest of the community is experiencing."
The same pattern is reflected in good times, the department said, so just as your assessment didn't go up each year when property values were rapidly increasing, your assessment will not be adjusted downward just because values are declining.
When values in general change dramatically across the board due to economic circumstances, and the relationships of value remain similar between property owners, their relative burden does not change, Barth further explained in an email.
"Typically, the budget needs of the overlying taxing jurisdictions do not change at the same rates, and possibly not in the same direction," she said. "There is no reason to assume that when market values may be decreasing, each property owner's share of the common costs would go down."
Sometimes, a decrease in property-tax responsibility will occur for a specific group of properties when its value drops compared to the majority of the municipality's properties, Barth said. One example, she said, would be in a commercial zone where a major highway had replaced a road through the municipality, negatively impacting the commercial establishments along the less traveled road.
"What is important is that those properties which change at a rate different than the average, be they faster or slower, have their assessments adjusted to ensure that each property owner pay their fair share of the tax levy," she said.
When bad revaluations happen to good people
So, in general, your property assessment won't likely be adjusted between revaluations because of a general market decline.
But what about when a revaluation occurs right after a market plunge? Isn't it likely that scheduled revaluations in the year or two following a pricing collapse would push assessments down in those communities?
Again, not necessarily, Barth said.
"Depending on when the last revaluation occurred, often a number of years ago, we find that the values rose by a larger amount than what they may have dropped in the past year or two," she said. "This past year, it was not uncommon to see revaluations show increases in assessed values, even though the equalized values may have dropped."
Then, too, the state says, bad economic conditions themselves often manipulate and distort true market value. That's one reason why the state instructs assessors to generally ignore foreclosures as a valuation factor.
"Foreclosed properties are being marketed under duress and frequently sell at discount prices," the DOR website stated. "Just as foreclosure-related sales are frequently not an indicator of market value when values are rising, they are not necessarily an indicator of value in a declining market and are not normally considered by the assessor when determining the market value of property in a community."
In fact, Barth says, the department's position was that the sales activity from the 2008 calendar year should be analyzed to determine whether there was an impact to the market as a result of foreclosure-related sales activity. The results, she said, were mixed.
"For example, in the city of Milwaukee, Assessment Commissioner Mary Reavey indicated that there were some neighborhoods where there the majority of the transactions were banks selling off the foreclosed properties and those sale prices did set the market for any other sales," she said. "She did not find that the foreclosure sales drove the market value of properties in all neighborhoods, however."
In other instances, Barth said the assessors found, though there were was a higher number of foreclosure-related sales in the community, an adequate number of non-foreclosure related sales sold at a different price range, and that became the basis for the assessments for the remaining properties.
Driving these individual assessment decisions, at least in theory, is Wisconsin law, appraisal standards, and Wisconsin courts, all of which require very specific criteria for a sale to be considered as a reliable indicator of market value. Two of the most important are whether the sale occurred under duress (such as a forced sale) and whether the property had adequate market exposure, the department asserts.
In the latter case, a property selling two weeks after being listed may have sold quickly because it was underpriced.
"This may be an indication of a duress situation, requiring closer review by the assessor," the state's website states. "In most cases, looking at non-foreclosure sales is the most reliable way to gauge what is actually happening with neighborhood values."
Understanding the process
To sum up, on the one hand, many property owners see their assessments stay put while housing prices slide all around them, while, on the other hand, the state says the assessment can be valid because that particular market isn't really declining, or hasn't over the long-term, or the municipality hasn't caught up to the market through revaluation, or the downturn itself is exploiting and distorting true market value, which a variety of factors can determine in addition to that of adverse economic conditions.
Throw in mass appraisal methodology as an added potential factor, and just where does that leave homeowners? To answer that question, the actual process by which the state conducts assessments must be understood.
As it turns out, factoring in local economic conditions, while embodied in the assessment manual's techniques, is a relatively low priority.
State statute directs assessors to value real property in the manner specified in the property assessment manual at the full value that could ordinarily be obtained through a private sale. The assessment manual - and case law - establishes a three-tier system for determining the fair market value of property.
Tier one is "a recent arm's-length sale" of the property in question - a sale in which the owner does not have to sell and is not under pressure to sell and the buyer does not have to buy and is not obligated to buy. The state considers that the best evidence of value.
If there has been no recent sale, an assessor must consider recent local sales of reasonably comparable properties, or properties with similar characteristics. That's the tier two approach.
Finally, the state's courts have ruled, absent comparable sales data, the assessor can determine value under tier three, which permits consideration of all the factors bearing collectively on the property value to determine its fair market value, including local economic conditions, cost, depreciation, replacement value, income, industrial conditions, location and occupancy, sales of like property, book value, amount of insurance carried, value asserted in a prospectus and appraisals produced by the owner.
Local economic conditions, then, are just one of many factors; furthermore, the assessor cannot use any of those factors if there has been a fair market sale of the property or of reasonably comparable property, the state Supreme Court determined in State ex rel. Markarian v. Cudahy.
"In the absence of such sales, the assessor may consider all the factors collectively which have a bearing on value of the property in order to determine its fair market value," the justices determined. "However, it is error to use this method 'when the market value is established by a fair sale of the property in question or like property.'"
The bottom line
For those hoping to have an assessment overturned because an assessor did not consider a declining local market, the outlook is bleak. This is especially so because the courts presume an assessor's valuation to be correct.
That's not to say assessment challenges always fail - quite a few succeed, in fact - but it is to say the court must find a serious error or an arbitrary and discriminatory application for a challenge to succeed.
Indeed, the complexities involved in assessing a property, from determining its highest and best use to deciding how many comparable properties must be used in an assessment, give property owners a fighting chance for a court to decide an assessment was either arbitrary or improperly executed.
There is no "bright line rule" for the number of comparable properties needed to prove that the rule of uniformity is being violated, the court ruled in 1995 in Levine v. Fox Point Board of Review. Further, the court found, discriminatory assessments or those based on arbitrary and improper considerations cannot stand.
To put it another way, using the Dobrowolski case, that challenge might well succeed if the court finds the assessor incorrectly used tier three when tiers one or two should have been used, or did place incorrect classifications on the parcels, or did not properly assess the parcels according to highest and best use criteria, while it would be more difficult to succeed on the allegation that the assessor did not consider adverse economic conditions.
Indeed, courts might give assessors even more discretion in a declining market because, it could be argued, assessors have less available market information, as Barth observed in her statements to The Lakeland Times.
What's more, in 1997, in State of Wisconsin ex rel., James G. Campbell and Holly Campbell v. Township of Delavan, the court explicitly said assessors could include dated sales of the subject property - a sale occurring in more robust times - to determine assessed value.
"If there are no reasonably comparable sales, the assessor must then analyze and collectively consider all of the information available which can be used to estimate the value of the subject," the court ruled, quoting the property assessment manual and upholding its hierarchy. "This would include like sales, a sale of the subject which may not be recent (emphasis added), the cost and income approaches to value, asking prices, options to purchase, outside appraisals of the subject, and the assessments of other comparable properties. After considering all of this information, the estimates of value from the several approaches are then correlated into one final value estimate."
What's more, the court's language in multiple cases suggests assessors may use all the factors determining a property's value, but don't have to use all the factors, or give one factor more weight than another (say, current economic conditions over a dated sale of the property), provided they are consistent and nondiscriminatory.
In a U.S. Court of Appeals decision just handed down Oct. 8, Nestle v Wisconsin Department of Revenue, the court upheld the state's assessment on various grounds but noted the discretion assessors have.
"In the absence of comparable sales data, the assessor determines the value under tier three, which permits (emphasis added) consideration of 'all the factors collectively which have a bearing on value of the property in order to determine its fair market value.'"
A number of cases bolsters that notion.
"The 'best information' is considered to be a recent arm's-length sale of the subject property," the court of appeals decided in Campbell v. Town of Delavan. "If there has been no such sale, an assessor may use a recent sale of a reasonably comparable property. In the absence of these types of sales, the assessor may (emphasis added) consider all of the factors which collectively have a bearing on the value of the property in arriving at a fair market value."
In Mitchell Aero, Inc. v. Milwaukee Board of Review, the court gave an expanded list of factors an assessor could consider - cost, depreciation, replacement value, income, industrial conditions, location and occupancy, sales of like property, book value, insurance carried, value asserted in a prospectus, and appraisals were all relevant, the judges stated - and the 2000 decision Joyce v. Town of Tainter underscored that flexibility.
"It is clear from the Assessor's Manual that assessors should consider many market factors from a variety of sources when gathering and applying comparable sales information," the court of appeals stated.
Sometimes, the appeals court has found, assessors can also ignore market factors.
"(An assessor) looked at prevailing market conditions and looked at all the variables and only after doing that did he make his determination that the market for lakefront property had grown so strong that factors other than beach length and beach quality were being ignored by the marketplace," the appeals court ruled in 2008. "This is not formulaic. . . ."
The bottom line?
Challenging an assessment in court is not impossible, but it is difficult, and it must be based more on obvious errors or significant proof of arbitrariness or discrimination.
"A challenger to a property tax assumption has an uphill battle; the assessor's valuation is presumed to be correct," the court ruled in State ex rel. Campbell v. Township of Delavan.
Reform?
So case law and state statues are quite clear about how assessments occur, and why a declining market won't necessarily mean a lower assessment, but that doesn't mean everybody is entirely happy with the system, and that includes the DOR.
Barth said the department would like to see annual full-value assessments to more perfectly match assessed property values and changing economic conditions.
"What would be easiest for property owners to understand would be that each year the changes to each individual property be accounted for in the calculation of the assessed value," she said. "That is not the case where a municipality opts to conduct a revaluation and bring relationships into line and then over the next few years only maintenance occurs where the major changes are accounted for (demolitions, new construction, remodeling etc.). Because the economic changes (up or down) are not accounted for during maintenance years and between revaluations, both the level of assessment and the equity between properties shifts annually."
In the last 30 years, the solution to the problem has been to require revaluations after the level of major classes of property varies greater than 10 percent for more than five years, she said, and that time period is too long.
"The department feels that needs to change to require full value assessments annually, providing equity and transparency," Barth said.
Others believe political battles rather than court contests will ultimately do more to keep assessed values in line with market values. Other states have engaged that fight, and some have passed laws limiting the growth rate of homeowners' assessed property values and even rolling back assessments when certain market factors are triggered.
Even if assessments do match market conditions, the prospects in Wisconsin for lower taxes due to "adverse economic conditions" are not nearly so promising as in other states, according to a recent report from the Wisconsin Department of Revenue and the La Follette School of Public Affairs at UW-Madison, The Growth of Homeowner Property Taxes: Evidence from Wisconsin.
As the report points out, one reason is because there are no restrictions on raising tax rates.
"In states that place limits on property tax rate increases, or require voter approval for rate increases, falling home values are likely to translate into property tax reductions," the report stated. "Although Wisconsin has state-imposed limits on annual increases in tax levies, local governments remain free to raise tax rates. Thus, in Wisconsin there is no reason that falling home prices will automatically translate into reductions in property tax liabilities for individual taxpayers."
Next: What other states do in a bad economy.
Richard Moore can be reached at rmmoore1@verizon.net.
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Reader Comments
Posted: Thursday, December 03, 2009
Article comment by:
Eric Ehmann
Kudos for a well-researched article. There is, however, one huge point it doesn't emphasize: uniformity is the MOST important consideration, arguably even more so than accuracy. To wit: if the assessor RAISES everyone's assessments by 50% or, conversely, LOWERS them by 50%, the result will be the same: EVERYONE WILL STILL PAY THE SAME AMOUNT OF TAXES (ceteris paribus). But - if similar properties are assessed similarly, equity will exist and everyone will still only pay their fair share of the tax burden. A burden which the assessments have NOTHING to do with!
Posted: Friday, November 27, 2009
Article comment by:
Tomas Real
Ownership is simple concept it’s like the relationship you have with your pants and shirt. The primary purpose of ownership is freedom from debt. This principle establishes the relationship between liberty and ownership. You can own your pants and shirt but no one is allowed to OWN a home. Home ownership is the greatest lie ever told.
We either rent from the state or from a landlord whom also must rent from the state. Someone forced to pay another for what belongs to them (what property tax make you into) is forced into servitude. (A complete contradiction of ownership)
Posted: Friday, November 27, 2009
Article comment by:
HJarvis
"For its part, the Wisconsin Department of Revenue discounts that theory and does not fault the mass appraisal process..."
Of course they would say this because mass appraisal is the foundation of their grand plan of county-wide assessment.
A county assessor can't be as knowledgeable on local market conditions as your local assessor. So the assessments that we will recieve from a county assessor will be junk. Kenosha county tried this in the 90's. It failed because it cost a fortune and was not fair.
Check out the WI DOR website for more information on their county assessment plan.
God help any legislator running for re-election if they vote this in!
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