A Little Thinking on the Future of Assessments, Please.

Posted By Cliff Tuttle | May 13, 2011

No. 616

The candidates for Allegheny County Executive all have something to say about assessments.  Rich Fitzgerald stated in a Trib article in January:

“I am going to stop the county-only assessment. If we are going to a reassessment statewide, fine, but don’t single out Allegheny County.”

That seems to be the the position of his Democratic opponent, Mark Patrick Flaherty as well. There ought to be a uniform  statewide reassessment system, he says, and (here’s the the big part) there should be a statewide moratorium on new reassessments while the legislation is drafted, studied, debated and finally passed.

Republican candidate Raja says more or less the same. His approach to all such problems is to get all the players together in a room and hash it out. His Republican primary opponent, Charles McCullough offers more of the same.  In February, he and three other Republicans on the Allegheny County Council presented a petition to Judge Wettick to place a moratorium on the 2012 reassessment while the legislature enacts a statewide uniform system.  That petition was rejected by the court, stating that it was too late and presented by the wrong persons. McCullough hopes to be elected County Executive and do it then.

The genesis of all this was that the current Allegheny County assessment system, whose principal author was County Executive Onorato, has been held unconstitutional by the state Supreme Court. It was modeled upon a practice widely employed in other counties, fixing assessments upon a base year — in Allegheny County it is 2002. The Supreme Court found this approach unconstitutional because the evidence presented at trial demonstrated that some (but not all) neighborhoods are experiencing free-fall in sales prices.  Those neighborhoods are being taxed on 2002 values that are higher than current values.

While the next County Executive must grapple with the demonstrated inequality of the current assessment scheme, none of the candidates have a clue what to do,except to observe  that it is unfair to single out Allegheny County.  Because all of the candidates lack any serious (pronounced “non-political”) thoughts on how to make reassessments better, we are guaranteed a lack of leadership on this front from whoever becomes the Allegheny County Executive.

Unless the state legislature comes up with some new ideas, the only practical outcome will be to apply the court mandated system to every county.  That might address the comparative advantage the bedroom counties adjoining Allegheny County now enjoy in attracting new development, but little else.

Truth is, any assessment system based upon past sales is an imperfect model.  It relies upon a selectively-recorded history, because it has no choice.  The current system of tallying and applying data, known as mass appraisal because it seeks to appraise properties in large quantities, is flawed. The flaws have never been as apparent as they are now. In a falling market, assessments are higher than the true fair market because the mass appraisal system relies upon prices from the past that can no longer be obtained.  In a rising market, the opposite is true.

The typical model for mass appraisal is very good at tracking and accounting for increases in sales prices.  But not so good in the other direction. Typically, when the fair market value of a property falls below the mortgage balance, most would-be sellers cannot sell.  They must simply stay off the market.  Thus, the properties that are increasing in value or holding steady are driving the sales statistics higher, but do not reflect the general state of affairs. Meanwhile, foreclosure properties, unsold in large numbers, keep other sellers on the sidelines.

In such an environment,  the sales history compiled for assessment purposes presents a distorted picture of the true state of affairs.Lowball sales from foreclosures may actually be culled out as non-arms length transactions, further distorting the aggregate value.

The real value of many properties in today’s market is best measured, not by the price of comparable sales, but by their rental value. In locations where values are declining, a house can be rented at a return that exceeds the return on the sales price. These properties are off the market, too.

Then, there is the fact that mass appraisal by its nature deals in rough numbers.  Fee appraisers, the ones who make appraisals for mortgage lending, use a more sophisticated valuation system, making mathematical adjustments to bring the value into line with the true situation, as seen by a typical buyer and seller.  For example, if work needs to be done, the true value should reflect the cost of the work.  Properties that are sold frequently undergo makeovers that result in a sale.  But “comparable” properties needing work are often valued by mass appraisal systems as though they are equal to the refurbished properties, which they definitely are not.

Such adjustments, which are peculiar to each property, make a difference. An appraisal system that ignores these factors because they are deemed too costly to record, shortchanges owners whose properties need work.

If the next group of leaders are going to make a meaningful contribution to the real-estate based taxation system, they are going to have to hire experts who can come up with technical improvements to the  court ordered system that can be supported by data.  This is not an easy task, but the alternative is to remain mired in an unfair system.  Change may require the gathering of data not previously collected which would be applied by using algorithms not yet invented. Political solutions, such as the base year bandaid, will not perform the task.

In the meantime, property owners must protect themselves.  Certain revenue-hungry school districts (and some municipalities) are appealing assessment changes after sales.  They are often taking the position that  the property should be assessed at the full price (or close to it) without regard to the fact that other properties are under a 2002-based system. Others will produce 2002 sales data that is heavily skewed on the high side.  It is important to file and pursue a timely appeal.  In order to win, you must be prepared to produce 2002 sales data that makes sense — better sense than the data produced by the opposition.  Unless you know a good deal about real estate and know how to find 2002 sales data, it is a very good idea to hire a lawyer (not a non-lawyer) who knows the system.

Why a lawyer?  Both sides can appeal and school districts frequently do so.  Non-lawyer “experts” are comfortable in the informal first round of appeal,but are not experienced under the more  formal procedures utilized by the Board of View.  While you can always represent yourself before the Board of View, you may find yourself stuck in a procedural or legal quagmire with no opportunity to fix it.

And of course, once the 2012 reassessment is enacted (even if delayed) it will be necessary for all property owners to consider whether to appeal and, if advisable, to file it promptly and be prepared when the hearing date finally occurs.

CLT

Welcome

CLIFF TUTTLE has been a Pennsylvania lawyer for over 45 years and (inter alia) is a real estate litigator and legal writer. The posts in this blog are intended to provide general information about legal topics of interest to lawyers and consumers with a Pittsburgh and Western Pennsylvania focus. However, this information does not constitute legal advice and there is no lawyer-client relationship created when you read this blog. You are encouraged to leave comments but be aware that posted comments can be read by others. If you wish to contact me in privacy, please use the Contact Form located immediately below this message. I will reply promptly and in strict confidence.

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