Why you’re paying too much in property taxes

AJC investigation: System hasn't followed real estate reality

In an unprecedented comparison of actual sales values vs. county tax appraisals, The Atlanta Journal-Constitution examined every residential property sale and every change in tax value in Cobb, Clayton, DeKalb, Fulton and Gwinnett counties in 2009 — about 550,000 records. The newspaper found that, for the first time, county appraisals are higher — sometimes much higher — than property is now worth, which means that tens of thousands of homeowners are being unfairly taxed on value their property no longer holds.

Tax appraisers have routinely refused to use actual sales to set tax values, ignoring a state law that requires them to tie their estimates to what houses are worth on the open market, the AJC investigation has found. In sum, the newspaper has exposed a deeply flawed property tax system that often inaccurately values property and leaves some residents undertaxed while forcing others to pay way too much.

“There’s nothing you can do,” says East Cobb homeowner David Millard, who believes his home is worth $53,010 less than the county says it is. “It’s like fighting city hall. Once the government ratchets up, the government never ratchets down. You suck it up and pay.”

Still, tax officials did take historic action in 2009. They lowered values by unprecedented amounts — $4.3 billion in tax value vanished from about 450,000 parcels in the five largest metro counties, the AJC’s analysis shows. It was a shocking experience for tax officials, who say they’d never seen tax values fall before. They had become accustomed, as had homeowners, to steady appreciation in most areas for decades.

Even so, homeowners, real estate agents, taxation experts, appraisers and lawmakers all say county tax assessors didn’t reduce appraisals nearly enough in light of the collapse of the market.

Wayne Flanagan, a real estate agent who specializes in bank-owned properties around Atlanta, said the sales numbers reflect a real estate market dominated by foreclosures, bank-owned properties and short sales (in which a homeowner sells to avoid foreclosure) — all of which depress values.

“I don’t think we’ve seen anywhere in metro Atlanta the values haven’t fallen,” Flanagan said. “There are some places values are significantly less than 50 percent [of what they were]. There are places you can buy a house for less than $5,000. That’s almost beyond belief.”

When sales values cratered, appraisals didn’t follow suit.

Tax officials don’t dispute that, but they say they were reluctant to lower values as much as sales dictated because they worried about the resulting evaporation of tax revenues. And they simply didn’t believe values so low could possibly reflect the market.

Rodney McDaniel, Clayton’s chief appraiser, said this concern was impossible for him to ignore. In Clayton the median sale fell a stunning 43 percent. The county’s median appraisal change? Five percent.

“It’s going to be extremely difficult to match sales prices,” McDaniel said. “You will be severely depleting your [tax] digest.” The digest represents the total value of real estate in a county and is used to determine how much money local governments can expect from property owners.

If tax appraisals had fallen as far as sales prices, local governments would have been forced to consider the politically dangerous course of raising taxes, perhaps considerably, to make ends meet. Property taxes are the top source of local revenue for schools, cities and counties. Before this year, officials relied on them because they were supposed to be immune to economic downturns — unlike sales taxes and service fees.

That is no longer the case. Just last week, Gwinnett County settled on a 21 percent tax increase after months of arguing over higher numbers. Clayton and Atlanta also adopted tax increases this year. Clayton raised taxes by 22 percent, Atlanta a whopping 42 percent.

Burt Manning, Fulton’s chief appraiser, conceded that his office could have lowered values much more in some areas.

“If we had gone with straight distressed sales, we would have lowered values 30 or 40 percent in some areas,” Manning said. “Based on what we did at the time [in early 2009], I think we did it correctly.”

A market in distress

The AJC began last year looking at how assessors were responding to the downturn. The newspaper reported that assessors normally didn’t even include distressed sales in setting tax values. Distressed sales — which had become rampant — include foreclosures, short sales and bank sales. The newspaper also reported that properties were flooding into the market with list prices of $20,000 or less — a fraction of their government-appraised values.

Last year, the Atlanta Neighborhood Development Partnership, a nonprofit affordable-housing group, studied 15 high-foreclosure ZIP codes to see how the housing market crash affected metro Atlanta communities with the lowest home values.

ANDP found homeowners faced paying $140 million more in property taxes than they should if assessors didn’t substantially lower values this year in those 15 ZIP codes.

By comparison, the newspaper studied more than 120 ZIP code areas.

Instead of sampling select data in a handful of areas, the AJC obtained every transaction in five counties for 2008 — all the data relevant to the 2009 tax year. The AJC grouped the data by ZIP code to create a first-ever look at not only what happened to individual properties but also to entire neighborhoods and beyond, both in tax appraisals and sales.

Homeowners fight back

When the scale of the real estate crisis became clear early this year, many homeowners began complaining that assessors weren’t lowering tax values enough, if at all.

They deluged county offices with challenges: Owners of more than 56,000 residential properties filed property tax returns arguing that their tax values were inflated. This was about seven times the usual number of returns for the five largest counties.

The numbers show homeowners, in general, had a pretty good idea what their properties were worth. Property owners claimed values much closer to actual sales prices.

Even renters are affected as landlords pass their costs on to their tenants.

R.J. Morris, a real estate investor, has been billed for about $80,000 this year for about 50 rental properties he owns. He contends sales must be the measure of value, especially for properties listed by real estate agents and sold on the open market. Counties, he said, were quick to use sales numbers to set valuations when property values were climbing.

Morris contends his bill would be closer to $25,000 if the counties’ appraisals were accurate.

“They are assessing some of these homes at $90,000, three times the average sale,” Morris said. “Sales started slipping in 2007. Why almost two years later haven’t they caught up? People are overpaying. It’s wrong.”

A dicey proposition

In 2008, the landscape for assessors shifted dramatically and fundamentally.

Foreclosure filings set records and spread like a cancer from troubled communities into some of the priciest neighborhoods. Banks began dumping properties they’d taken back. Homeowners facing foreclosure bailed. Short sales became common.

As such, distressed sales — transactions assessors normally would not even consider in setting values — took over the market. County appraisers use general market trends across numerous properties to set values. That’s a dicey proposition when housing sale prices plummet.

The more familiar type of sale — an “arm’s-length transaction,” in which an independent buyer purchases from a seller — was scarce in 2008.

“In some areas there were no arm’s-length sales,” said Steve Pruitt, Gwinnett’s chief appraiser. “Seventy-five percent of the action in the market is foreclosure-related.”

The General Assembly saw the struggle and feared counties wouldn’t lower values. So, lawmakers passed a law that required assessors to consider distressed sales in setting values.

That bill didn’t have the full impact its supporters intended, however, because it didn’t tell local governments how to factor in foreclosures. So, each county did it differently.

For example, Clayton counted the number of foreclosures in a given area and discounted tax appraisals based on the percentage of distressed sales.

Fulton made distressed sales a flat 25 percent of its calculation.

This disappointed Sen. Chip Pearson (R-Dawsonville), the law’s sponsor.

“That’s just a bunch of malarkey,” Pearson said. “They are just hoping to kick the can down the road long enough for the market to catch up. There are a lot of people out there getting squeezed, and they need help now.”

He plans to sharpen the law’s language during the legislative session that begins in January.

Tax appeals

How governments and taxpayers end the 2009 tax season will play out in government offices and superior courts as appeals move forward and final values are reached.

In those settings, assessors and county appraisers will be forced to defend the work they’ve done.

That process has already begun in most counties sorting through this year’s appeals.

Pruitt, Gwinnett’s chief appraiser, said his staff stands ready to defend its work. He agreed 2009 was the hardest year he has ever seen for setting values. Gwinnett reduced appraisals for about 72,000 residential parcels, about 28 percent. That means values for nearly three out of four residential parcels did not change.

“We did right by most taxpayers,” Pruitt said. “The problem is the values have continued to drop.”

Looking back, McDaniel, Clayton’s chief appraiser, said it is “easy to say, ‘Yes, we should have done more.’ At the time, it was not presented in the fashion it has been since. Yeah, we can say we can probably do more to come in line with some of this data. If we need to make adjustments, then that’s what we’ll do.”

John Adams, a real estate expert and investor who offers advice online, on the radio and in columns, including one for the AJC, said this year’s tax appeals hearings will be tense because the property owners will have overwhelming evidence that tax values are too high.

Still, he’s not confident that appeals will succeed unless owners are willing to go to court.

“I have found very little connection between the facts of the case and whether you get a reduction,” Adams said. “They don’t believe in major reductions.”

Tom Atkinson of Decatur has already learned that the hard way. He appealed the values on six rental houses he owns and has already had a hearing on one.

A house Atkinson owns on St. Patrick Street in unincorporated DeKalb was valued for taxes at $170,000 in 2008, and the county maintained that number for 2009, even though Atkinson bought it last year for $85,000.

At appeal, Atkinson came in armed with five sales that averaged $69,000 from the same neighborhood. Still, he got no relief based on those sales.

The county lowered his value to $153,000 this year only because appraisers had overlooked a creek that bisected the backyard.

“I felt like I was banging my head against the wall,” a frustrated Atkinson said. “You could argue I was the sap who overpaid.”

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How we got the story

This series is the result of an eight-month effort to collect, standardize and summarize real estate data from the five largest metro counties: Clayton, Cobb, DeKalb, Fulton and Gwinnett.

Our intent was to compare county tax valuation data by ZIP code with sales price data by ZIP code. (Sales data were provided by SmartNumbers, a private research firm in Marietta.) But in addition to the typical technical difficulties of combining large amounts of data from multiple sources and in a variety of formats, the newspaper discovered that most counties do not include ZIP codes in their parcel data. The AJC’s data analysis was complicated exponentially by the need to assign the correct ZIP code to each residential parcel.

Housing market changes affect a property’s appraised value, but so do several other factors, including remodeling and new construction. In such cases, appraisal changes can be relatively large. Because a few extreme numbers can easily skew averages, we decided that median values best reflected the trends in new appraisals. The median is the middle value, with half the cases above and half the cases below the median.

The AJC focused on data from the 2008 calendar year because those numbers are used to set tax values for the 2009 tax year. Tax values are supposed to reflect value as of Jan. 1 of the tax year. The newspaper also confined its examination to residential properties because most of the value loss in 2008 was focused in that area.

In addition to the data analyses, reporters also interviewed dozens of homeowners, real estate professionals, lawyers, tax consultants, academics, investors, appraisers, county chief appraisers, other local officials and legislators .

The AJC shared its results with appraisers in all five of the counties before publishing this report.

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