Monday, February 4, 2008

Property Values and Taxes in Kings Forest

Kevin Morley drafted this response to a comment posted at Year End Data is in for Kings Forest, which because of its length, we'll publish here.

Dear Curious,

Thanks for posting your thoughts; this is the perfect opportunity to address misconceptions about appraised values.

We’re actually talking about two things: (1) the relationship between the appearance of the neighborhood (and individual homes) and appraised values, and (2) higher home values vs. higher taxes.

Let’s address the appearance issue first, starting with individual homes and moving to the community as a whole.

There is a mistaken belief that having a well-maintained house will drive up the Harris County Appraisal District (HCAD) value. This belief comes from a section on the HCAD data sheets that lists the “QUALITY” of the house. This quality rating has nothing to do with the appearance of your house from the street, or the quality of the upgrades inside your house. Nice landscaping, a new paint job or good maintenance won’t change the HCAD valuation of your individual home – they don’t value the house on its appearance. So, if your four-bedroom 2-story house is hidden behind overgrown vegetation and hasn’t been painted for ten years, it’s still a four-bedroom 2-story house, and will be valued accordingly. If you’ve ever had occasion to personally protest the assessment on your home, you can confirm this for yourself.

If a significant number of our residents don’t maintain and update their properties, it certainly can affect the overall appraised value of homes in Kings Forest, as this is driven by what we collectively, over time, obtain for our houses at sale.

Fortunately, most of our residences are well maintained, and many have been significantly upgraded. When their owners sell, they should be able to command dollars-per-square-foot that reflect their care and investment - if they are not compromised by overall home values for the neighborhood.

And that’s where the general appearance of the neighborhood comes in.

Improving our common spaces can favorably affect the resale value of each individual home – or hinder it. Potential buyers who are impressed when they drive into Kings Forest by attractive common spaces and well-maintained homes may be motivated to buy in Kings Forest rather than other villages. So the benefits can include higher dollars-per-square-foot and shorter time on the market. Admittedly, this will eventually drive up HCAD valuations.

None of us wants to pay more taxes, but as with any investment, we want to ensure the money we invest now will deliver the highest possible return tomorrow.

For most of us, our home is our single largest financial asset. Those who don’t plan to retire in Kings Forest count on their home to provide a springboard to the next home (either providing more equity for a bigger home or allowing for a smaller mortgage on an equal or lesser home). In an older demographic like Kings Forest, many count on it to provide a financial cushion for retirement and/or a healthier estate to leave to our heirs. Like any financial investment -- whether it's stocks or real estate -- nobody likes to lose money.

Let’s evaluate the trade-off between higher values and property taxes. We’ll take a house valued at $300,000, with property taxes of approximately $7,000 per year. Assuming improvements in the neighborhood drive up the value of that house by 10%, or $30,000 (an extreme assumption), the taxes will go up $700 before federal income tax, or $560 after tax (assuming a 20% marginal rate). So, for a $560 cost, you get a $30,000 benefit – pretty good investing by anybody’s standards.

Remember the law of unintended consequences. As home values decline -- whether in absolute terms or relative to other neighborhoods -- bad things start to happen. Sellers see their homes sit on the market, or fail to sell at the desired price, and decide to rent. They begin to ‘milk’ the house for cash, foregoing maintenance. When houses finally do sell, they sell at increasingly lower dollars per square foot. Socio-economic demographics start to change as homes are not updated or maintained. These factors combine to drive a downward spiral in housing values that becomes difficult to reverse. So when it comes to keeping down taxes by allowing a decline in the community’s appearance, be careful what you ask for -- you might get more than you bargained for.