Tuesday, May 02, 2006

Tax Breaks With A View

by Tom Bozzo

Five years ago, there was a scandalette in My Fair City over the observation that while residential property tax assessments were rising rapidly for the city as a whole, lakefront houses' assessments had not increased at all. Since lakefront houses are luxury properties whose market prices were widely (and correctly) believed to be soaring at the time, this was a Very Curious feature of the city assessor's valuation models. The official explanation for the lack of increase had something to do with thin sales and the resulting inability to determine market valuation increases. (*)

You might ask how well the assessor has been doing since. I hadn't really thought about it since, but yesterday a State Journal article listed some properties that were to receive Madison Trust for Historic Preservation awards, including a lakefront house on Sherman Ave. whose renovation work, done by a higher-end local contractor (**), I'd noticed on trips to visit friends in Maple Bluff.

I was idly curious to see how big the house was, so I naturally turned to the assessor's website, the go-to place for anyone with an obsessive interest in Madison real estate values. The assessor says that the house in question has 3 bedrooms and 2.5 baths in 2,641 above-ground square feet, plus 500 finished square feet in the basement and a two-car detached garage. The assessor values the 14,725 square foot lot at $575,100 and the improvements at $225,200. That last number really caught my attention.

Why? Our "Victorian Georgian Regency" (sic) house in the Dudgeon-Monroe neighborhood, which has 4 (small) bedrooms and 2 baths in 1,752 square feet (plus the screen porch) and no garage, is valued by the assessor at $328,000. The upshot is that I'd pay, at the 2005 mill rate, nearly $2,100 more in property tax on my upscale but modest non-lake house than the owners of a much larger and award-winningly renovated lake house are paying. Forgive me for feeling that the fairness of the property tax system is, um, attenuated.

Of course, those people pay more tax on their lot than we do on our entire property. That is not, however, clearly out of line with market prices for lake frontage. I don't know exactly when the work on the award-winning house was completed, so I checked another lake house that I do know something about (Suzanne's former boss lives there). That house, also on Sherman, was nice when we saw it for a housewarming party and had since been extensively renovated, the over-the-top detail visible from the street being a rose window set above the garage door. That 3,270-sq. ft. house has improvements valued at $349,600 — more than us, granted, but not by more than the value of the garage.

At this point, I was seriously annoyed. So I expanded my sample a bit, with the intent of comparing assessments to market values. The sample is small, but to steal a line from Kim, this is a blog, not the AER.

I visited the site of the South Central Wisconsin MLS, and looked up the active listings for houses between 2,500 and 4,000 square feet with frontage on the Madison lakes. I found six in the city, all on Lake Mendota. I obtained assessment data from the Madison and Dane County websites. My non-lake house control group was the four current (and one former) city residences of the Madison blogging salon, as defined by Nina's "Madison innovators" blogroll section. That's two houses in Dudgeon-Monroe, one in University Heights, one in a neighborhood that I ought to keep secret, and one in Parkwood Hills, ranging from 1,560 to a little over 3,000 finished square feet. Here are some statistics:

DatumLake Houses For SaleBlogger Houses
# Observations65
Median Improvement Assessment$277,150$294,500
Mean Improvement Assessment$293,333$325,600
Fraction of Increased Improvement Assesssments17%60%
Mean Total Assessment$816,617$417,630

The lakefront properties have, as expected, much higher overall assessments. Despite their (mostly) much larger larger sizes — not to mention luxury features advertised in the real estate listings — the average value of the lake houses themselves is some 10% lower than the blogger control group. Very interestingly, the lake houses are overwhelmingly decreasing in value, according to the assessor, while the bloggers' non-lake houses are mostly appreciating. (***) Perhaps this is a "how do you think I got so rich" lesson for the rest of us.

The asking prices for the lake houses are suggestive of significant undervaluation, if the owners have hope of obtaining anything close to list price. One of the blogger houses is currently for sale, with a listing price about 20% over assessment; this isn't unusual given that the house in question hasn't been on the market for some time (****). The lake houses, in contrast, are priced far above assessments. For comparison, I looked at 7 listings outside the city with similar search parameters (6 are in Monona, 1 in Middleton):

GroupMedian List PriceMedian AssessmentMedian Price/ Median Assessment
City Listings$1,272,500$821,750155%
Non-City Listings$979,000$974,900100%

Even allowing for a substantial wish factor in the list pricing, this set of Madison lake houses appear to be undervalued by considerably more than the $239,500 average assessment. You'd get a similar result if you applied a replacement cost-type valuation to the original lake house examples. At the city's average value per square foot of our house (which is nice, but no remodeling award-winner), our original lake house example above would be worth about $495,000 plus the value of the garage. The City of Monona, in contrast, appears to have assessments more in line with market prices.

So, just maybe, there are more things to write one's alderoid about than the fate of the Whole Foods.

(Title suggested by my wonderful spouse.)


(*) The Wisconsin State Journal exposé doesn't seem to be in the madison.com archives, but is referenced here. One hundred brownie points to the first reader who can produce a link.

(**) Too high-end, indeed, even to call us back when we were considering expanding our "old" house on Nakoma Rd. instead of moving, even though we were referred by one of their regular customers. So there you have it, all mistreatment of customers (even industry-standard mistreatment) will come back at you sooner or later. Suffice it to say that TDS Custom Contruction won't be handling future renovations of the "new" house.

(***) One exception is an artifact of a sale price within $500 of the 2005 assessment. Which, of course, suggests the bloggers' houses are not greatly undervalued as a group. The other is a case in which the total 2006 assessments apparently did not change over 2005 for the assessment district.

(****) Our "old" house on Nakoma Rd. was listed by the current owners for 17% over the 2006 assessment after a much shorter tenure; the listing shows an accepted offer, so I'll have to check back in July to see what they got.
Where does/do the assessor(s) live?
A person with the same name as the chief assessor lives in a small far east side townhouse which, unlike much of the rest of the city's residential real estate, hasn't appreciated/inflated much in the three years since the recorded purchase.
The lakefront homes listed at www.fsbomadison.com are a great illustration of this. 2810 Waubesa is listed for $819,900 with an assessed value of $300,000. For 5132 Spring Ct. the numbers are $849,900 and 451,700. For 5206 Harbor Ct. it is $1,150,000 and $667,600. And at 2724 Waunona Way the listing price is $1,200,000 and the assessed value is $614,600. As someone who recently moved to Madison and whose home is currently assessed at FMV, this seems wildly unfair.
Kevin: I stayed away from Lake Waubesa properties as they're outside the city and I know less about that market. The assessment is actually misreported at fsbomadison.com for 2810 Waubesa -- the county says it's assessed at $523,300 (still considerably under the asking price).

In a couple of those cases -- houses that are obvious teardown candidates at these prices, like 5206 Harbor Ct. -- there's what looks like a "use value" assessment going on. That is, the assessment reflects someone living in the unluxurious house actually there, as opposed to the lake McMansion that presumably is to come. The catch being that as far as I know there's no legal basis (now) for failing to mark the assessment to market.

I'm sympathetic to the point that people shouldn't be pushed out of now-expensive properties because they got in before the gold rush, though I'm not going to cry people sitting on very large unrealized capital gains too much of a river.
Tom: Thanks for following up. My guess is that assessment at FMV is, to some degree, an art. It seems to me that an assessor would try to value homes close enough to market value to be fair, but not so close that they had to deal with a huge number of protests. I would expect values to be 10% below FMV, on average, with recently sold properties at 100% and those in the same hands for a generation at 75% (or less).

As a further example, our home is now assessed at our purchase price in 9/04 plus 5%. In a vacuum, that's fair. However, most of the homes in our immediate neighborhood have FMVs $100K to $300K more than ours and the assessments are only a small fraction higher. So, on an absolute basis our assessment is fair. But, on a relative basis, it's not. While it wouldn't seem very neighborly to point this out to the assessor, I really don't like paying more than our fair share of Madison taxes. Any advice?
Tom: Thanks for the response. It seems to me that the assessor's motivations (fairness and reduced conflict with those assessed) result in a decline of assessment value to fair market value, over time.

I'd suggest that Assessed Value = True Market Value * (.98)^Y, where Y= # of years since the property's last sale. I imagine on lakefront property the constant is closer to .96
Kevin: Real estate valuation certainly is an art. If the lake houses for sale were asking 10-20% over assessment, vs. 40-50%, there would be no story.

Regarding your formulas, my thinking is that the way sales information enters into the assessments tends to cause assessments to lag market prices more generally in areas with rapidly changing prices -- and probably also to overshoot market peaks. When the near east and near west neighborhoods started taking off a few years ago, you could see fairly large divergences on relatively run-of-the-mill houses that had previously sold not too long before in pre-bubble times. That gradually drags up the neighbors, but not without creating the sort of relative valuation inequities you describe.

I can't really offer much in the way of advice. Probably the only remedy would be reassessment of the district from scratch, and you'd probably not want your neighbors knowing you'd requested such a thing. Otherwise, the reassessment methods probably aren't adequate to correctly adjust comparable properties' values.
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