Tuesday, January 26, 2010

Property Tax Appeal Saves $49,000 on 17 acres

Tax Appeal saves $49,000 in property taxes on 17 acres

The 17 acres are two mostly developed outlots for additional phases of a
single family subdivision. Its a lovely development - the nicest of the five
developments being appealed for this builder. This subdivision has a park
and homes selling in the low $300s in this 3rd ring suburb.

Its getting to the pretty development that's the problem. You have to drive
through an older subdivision of split levels homes that has not aged well.
If Massachusetts Senator Scott Brown parked his pick up truck on the front
lawn it wouldn't look out of place.

There have been sales activity in the community and I chose not to protest
the valuation of the lots at $78,000 for the Pay 2009 property taxes. If
your finished lots are worth $78,000 the land for future phases is not worth
$175,000 an acre! The assessor agreed with my analysis.

This property tax appeal resulted in a settlement of 66% reduction for Pay
2009 and and 64% reduction for Pay 2010. Which means an actual reduction in
taxes over the 2 years of nearly $49,000 for these 17 acres of residential

Monday, January 18, 2010

Selling Townhomes at Target

Selling Townhomes at Target

Say you're a toy buyer at Target and its last spring and you're buying for
Christmas 2009. Tiger Woods, recovered from his knee injury, is back on the
PGA Tour and doing well. So you order Tiger Woods action dolls. Lots of
Tiger Woods action dolls. After all, everyone loves Tiger Woods. But you
didn't anticipate, could not have anticipated, that some women loved Tiger
too much. And then loved the opportunity for their own fame more than they
loved Tiger.

So the Christmas shoppers come and you just kick yourself for buying
millions of those Tiger Woods dolls and passing up the Sarah Palin action
figures-like the one featured in the Doonesbury comic strip. Having to plan
so far ahead but commit your money now-you didn't see Sarah Palin's
popularity after she lost the election.

So Target is stuck with all these Tiger Woods dolls taking up shelf space
that you could have used for the Sarah Palin dolls. So your only choice is
to lower the price of the Tiger Woods dolls below your cost and lose money
on every Tiger doll. Aggravating the situation is the moms who bought the
Tiger dolls before the scandal hit. Not wanting Johnny and Janey to play
with Tiger now, the moms donate the nearly new or even unopened Tiger Woods
dolls to Goodwill or sell them on Craig's list. So not only does Target have
the price pressure of having way too many Tiger dolls that are no longer
popular, they face further price pressure from the resale market of new or
nearly new dolls.

While the Target toy buyer sees the Tiger Woods doll as a commodity, to
little Johnny his Tiger Woods doll represents play and and a world of
possibilities for when Johnny grows up. To Janey the Tiger Woods doll is a
boyfriend to Barbie (but don't tell Ken). These children form emotional
attachments to the Tiger Woods dolls. The same can be said of those who
purchase and live in townhomes. Home ownership has many many benefits to
both individuals and our communities. And declining prices opens up these
opportunities to more people. But remove the homeowners shoes and put on the
townhome builders and the whole perspective changes.

Multi-story townhomes are a commodity like the Tiger Woods doll. There are
only typically 1 to 3 floor plans offered in a neighborhood. And competing
neighborhoods in the same city have the similar floor plans . And competing
neighborhoods in different cities often have the same exact floor plan and
you're competing only on location.

You can't just swap the clothes and change the Tiger Woods doll into Sarah
Palin. The combination of city approvals and the physical configuration of
the finished townhome building pads lock the builder into a particular unit
with little flexibility to respond to market changes. And you must compete
with the townhome foreclosures, sometimes on new or nearly new units that
may be identical to yours and may even be in the same neighborhood you're
building in.

This uniformity of townhomes makes them even more sensitive to price
competition because its difficult to distinguish themselves other ways.

While some townhome buyers are making a choice for a maintenance free
lifestyle, many buyers of non-rambler townhomes are buying on price. Its
what they can afford today until they can move up to a single family home.

To sell townhomes you have to have a significant difference in price between
the townhomes and single family homes in the same market. Which is why
townhomes did well at the peak of the single family home prices. But that
was then.

I recently spoke to a builder that is buying single family lots in Otsego
for $35,000 and then selling new single family homes for $160,000. While its
healthy for Otsego to see the inventory absorption of the single family
lots-how does this impact the existing townhomes and town home lots? And
townhome land?

While townhomes are moving in some communities most builders will tell you
they're not making a profit. Just clearing their inventory like Target
dumping the Tiger Woods dolls. And if builders are buying lots or land its
likely for single family-like the builder in Otsego.

Everything is related. The lower price of the single family homes puts
downward pressure on the townhome values. The lowered townhome values puts
downward pressure on the townhome lots. What few finished townhome pads are
selling, primarily foreclosures or bankruptcy settlements, are selling way
below the infrastructure cost to develop the townhome lots.

There is zero profit in developing townhome lots today because the
infrastructure costs exceed the value of the finished lot without accounting
for profit or the value of the land. So raw Townhome land today is worth
about as much as a Tiger Woods action figure.

Tuesday, January 12, 2010

Tax Appeals and Development Land

Tax Appeals and Development Land

There is a basic land development principal that was not taught in any of my
formal education for my real estate brokers license or my appraisal license.
And I seriously doubt that assessors are taught this fact in their

I learned this fact from years of working with Civil Engineers: "Shi_ flows
down hill".

Sewer lines don't go on forever--they operate on gravity. Sewer lines are
built to a certain capacity and then a new line needs to be constructed. Or
sometimes adjacent land is at a different elevation than then sewer line and
a lift station is needed. A lift station is essentially an elevator for

The physical ability to develop land is one of 4 main factors that
determines the value of a particular parcel. The other 3 are politics, the
local market, and the availability of financing. These factors came into
play in a recent tax appeal case I settled.

I had already settled nine cases in this particular county with reductions
ranging from 24-59%. The assessor brings up one of these settlements that
was in the adjacent city to the subject property and proposed the same
settlement amount.

I responded if the property was the same in character I would recommend the
taxpayer accept the offer. Two of the four characteristics, market
conditions and financing, were very similar. The land that was previously
settled is awaiting recovery in the housing and financial markets to
complete the subdivision but physically and politically ready to go.

Neither the political nor the physical piece are obvious on the subject
property. You can drive by the property and it looks nearly as development
ready as the one in the next town. So its easy to understand how assessors
overvalue land.

The political piece: the property that was previously settled had a
preliminary plat approved for over a hundred lots. The subject property,
while adjacent to development, has not yet been annexed into the City and
isn't scheduled to develop until 2020 in the comprehensive plan.

The physical piece: to serve the subject property with sewer requires a lift
station at an estimated cost of $1,000,000.

Once I introduced these facts into the negotiation the taxpayer got an
additional 25% reduction from the assessors first offer for an overall
reduction of 36%.

There is still time to appeal your 2010 property tax assessment. For a free
evaluation email me your property ID and the property location along with
your phone number to heresthedirt@visi.com

Tuesday, January 5, 2010

How the FDIC Hurts Community Banks

How the FDIC Hurts Community Banks

In 2006 Developer Dan approaches Elm Street Bank for a $2 million loan for a

subdivision. Its this great idea that had never been done before: the
subdivision has a central courtyard with pigs and a compost pile. He calls
it "The Pig Farm". Elm Street Bank has capital of $5 million so their
lending limit for any one loan is 20% of that, or $1 million. So the Elm
Street banker calls his buddies at The Neighborhood Bank and The Community
Bank and asked them to participate in the loan. After all, Developer Dan is
this great guy and land values never go down! So the Neighborhood Bank and
the Community Bank each chip in ½ million dollar loans for The Pig Farm with

this caveat: a "first out agreement". If the loan goes south and the land is

sold at a loss, these 2 participating banks get paid first, then Elm Street
Bank gets the rest.

Elm Street was so excited about The Pig Farm concept. When Developer Dan
bought 4 more parcels of land in different locations Elm Street Bank signed
on and went to various other community banks. During this time Minnesota led

the nation at new bank creation so there was no shortage of banks to
participate in The Pig Farm loans. And with the "first out agreements" these

loans were perceived as very low risk. And land values never went down.

How to appraise a concept that had never been done? Elm Street Bank just
called his buddy Mike at "Magic Appraisal Services", and, like Magic, the
appraisals supported the development loans.

Fast forward to 2009 and The Pig Farms, all 5 of them, were a tremendous
flop and Elm Street Bank foreclosed. FDIC comes in the middle of the night
and shuts down Elm Street Bank. Elm Street's loan portfolio was such a mess
that the FDIC had to pay SuperSaver Bank $15 million to buy Elm Street Bank
which included an escrow account to fund a "90% loss share agreement" on bad

So The Pig Farms were liquidated with a pig roast that just breaks my
vegetarian heart-those piggies are my favorite at The State Fair. So from a
$2 million loan, they were each liquidated at $800,000, or a loss of $1.2
million. Under the "first out agreement" SuperSaver, assuming Elm Street
Bank's position, would absorb the first million loss for a 100% loss and The

Community Bank and The Neighborhood Bank would each absorb $100,000 on their
$500,000 loans and receive $400,000 or 80% each, recognizing a 20% loss.

"Hold on", said the FDIC. When SuperSaver took over Elm Street Bank all
prior agreements for letters of credit and "first out agreements". The $1.2
million loan loss will be shared equally: $300,000 each to The Neighborhood
Bank and The Community Bank. SuperSaver's share of the loss is $600,000. But
as part of the deal to entice SuperSaver to buy Elm Street the FDIC will
participate 90% in the SuperSaver's share of this loss. So instead of
recognizing a $600,000 loss on each Pig Farm loan, SuperSaver's loss is only
$60,000. And since SuperSaver was paid $15 million to buy Elm Street Bank
they don't care about the $60,000 loss.

The FDIC cares about preserving the integrity of the banking system and
protecting the assets of Joe Voter's deposits. Protecting the healthier
community banks is not their first priority.

Meanwhile, back in Tax Appeal land, the assessor typically tosses out these
deeply discounted sales, like The Pig Farm, because they are "forced sales".

However, with the swirling mess encompassing Community Banks most are either
unwilling or unable to do new land loans, even though some projects make
sense. These "first loss participating agreements", aided by Magic Appraisal

Services, were large contributors to our current real estate economy by
creating the excess supply, often with questionable projects like The Pig
Farm. So when county assessors and fee appraisers take a 2006 land sale and
adjust downward for today-I don't buy it. Adjusting old sales from this era
ignores that fact the today's financial world has completely changed for
land development.