When buying a real estate property in Texas, there are several factors you should consider when underwriting and doing due diligence. One of the most important factors is adjusting appropriately for property taxes. Here are some key points to keep in mind:
1. Property Valuation
The first step is to determine the appraised value of the property and how the local assessor triggers a reassessment. The local county appraisal district assesses property values, which form the basis for calculating property taxes. Research the recent sales prices of comparable properties in the area to ensure the appraisal is accurate. The “reassessment trigger” varies wildly by state and county. In Texas for example, properties are reassessed every year. In a state like North Carolina, values are generally reassessed every 4 years.
2. Disclosure state or not-disclosure state?
Some states are disclosure states, meaning the assessor will have your purchase price. In some states such as California, this will be your new baseline value of assessment. In some other states like Texas, this is not always the case. Make sure if you are in a non-disclosure state, not to reveal your sales price, especially if that value is higher than your current assessment.
3. Tax Rates
Each taxing authority, such as the county, city, school district, and special districts, sets its own tax rates. These rates can vary significantly from one area to another. Research the tax rates in the specific location where the property is situated. In general, over the past 2-3 years, we have seen tax rates actually come down 2-3% overall each year. This is not always the case.
4. Exemptions and Deductions
Check if you qualify for any property tax exemptions or deductions. Texas offers various exemptions, such as the homestead exemption, which can reduce the taxable value of your property. If this is an investment property and not your primary, you won’t qualify for the homestead exemption.
5. Tax Assessments and Appeals
Familiarize yourself with the property tax assessment process in the county where the property is located. Understand the deadlines for filing appeals if you believe the property has been overvalued. Being proactive in challenging an unfair assessment can potentially save you money.
6. Budgeting for Increases
Property tax rates and property values can change over time. Account for potential increases in property taxes in your budget to ensure you can meet your obligations in the future. It’s in your best interest to work with an outside consultant (even if free of charge) to help provide guidance on increases. It’s very difficult even for the best of firms to provide guidance here, but it’s better to rely on an agent rather than a broker who is trying to get the deal sold. One of the worst things you can do is not budget appropriately for your first or second largest expense item, it can make the deal go upside down quickly.