WHAT EVERY LAWYER SHOULD KNOW ABOUT PROPERTY TAXES
An insiders' guide to the confusing world of property taxation from BRUSNIAK TURNER. Providing insight and saving lawyers research time and their clients money since 1981

"IT'S NOT WORTH IT!"
PROPERTY TAX VALUATION — THE METHOD TO THE MADNESS
© John Brusniak 2024

WHY SHOULD I CARE HOW PROPERTIES ARE APPRAISED?
Understanding how properties are appraised is worth knowing. Sooner or later, you will be staring at an appraisal or needing one either in your professional life or your personal life. And it's an interesting question, too. How can anyone tell the value of something? Besides property tax, lawyers run into valuation issues in the acquisition and sale of real estate, in contesting condemnation proceedings, dealing with insurance claims, securing loans, handling estate tax issues, and resolving consumer disputes. Our Texas Supreme Court says market value is "the price at which a property will transfer for cash or its equivalent under prevailing market conditions" in an informed, arms-length transaction. If you haven't read my earlier article , "Taxation By Guesstimation," I recommend you do so. It describes the methods and procedures appraisal districts use to decide how much tax is going to be assessed on your property (or your client's property). To get started, you need to reframe your thinking. Normally, people take pride in how valuable their property is. In the real world, owning highly valued property is a good thing. Particularly when you are selling or trying to borrow against it. The reverse is true in property tax—the lower your property's appraised value, the lower your tax bill. My law practice involves
scrutinizing my clients' properties and finding their deficits. Basically, I make my living by "trash-talking" my clients' properties—and you need to do so too if you want to not overpay your property taxes. You need to argue that your property will never sell for what the appraisal district says it will.

MAKE SURE EVERYONE UNDERSTANDS WHAT YOU OWN
Recall the concept of the "Bundle of Sticks?” It refers to the different rights associated with property ownership. Determine if any rights have been transferred or lost such as through leases, easements, or deed restrictions. These can affect a property's value and marketability. Next, review the appraisal district's records to ensure that they accurately reflect your property. Discrepancies in land area or building size can impact the appraised value. Note: Minor differences such as square footage errors are common due to different measurement methods.

THE THREE METHODS OF VALUATION
Blame the Assyrians who over 2,800 years ago came up with the concept of funding government based on the wealth of its citizens. It took another 2,700 years before anyone
started asking questions about how someone knew what something was worth. Only in the late 1800s and early 1900s were principles of valuation methodology born. Since then, other than getting overly complicated, the 140-year-old methods and strategies are still used today. Their goal is to determine the market value of property. Appraisal is a branch o f general economic theory. It discerns human behavior through
studying motivations such as greed. At its core, appraisal relies on something called the principle of substitution. That principle posits that a person will not pay more for an item than the cost of a similar, equally desirable substitute.

The three methods of valuation in use today are:

1. SALES COMPARISON APPROACH
The Sales Comparison Approach, also called the Market Approach, estimates a property's value by comparing it to similar properties that have recently sold. Adjustments are made to account for differences in features, conditions, and locations. This method is typically used for residential properties as it relies on readily available market transaction data.

2. COST APPROACH
The Cost Approach values property based on the cost to replace or reproduce it, minus depreciation. This method relies on estimating the construction cost of improvements,
adjusting for physical, functional, and economic depreciation, and adding that sum to the value of the land on which the improvement is located. This method is particularly helpful in valuing new or unique properties. Appraisal districts tend to be overly fond of this methodology because the cost to obtain construction data is much lower than the cost to obtain data needed for calculating value under the other methods. It also tends to result in the highest value of the three methods.

3. INCOME APPROACH
The Income Approach evaluates property value based on the income it can generate. This is suitable for income-producing properties such as apartments and office buildings. It involves calculating the potential net profit from operations and dividing it by a market rate of return for that specific type of property.

APPLYING THE METHODS
Each method has its strengths and is applicable in different scenarios. Ideally, all three methods should be used and reconciled to arrive at a comprehensive valuation. However, in practice, one method often provides more reliable results based on the property's “highest and best” use.

CONCLUSION
Understanding these three methodologies can help you effectively dispute high property tax appraisals. By critically evaluating your property and identifying its discrepancies and deficits, you can begin to reduce your property tax bill.

UP NEXT:
I will explain the nitty-gritty of these three methods and how to strategically implement
them to minimize your property taxes.