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The Great Grand Rapids Property Tax Swindle

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I mentioned that I would post something about this again at some point, and with only four days left for people to appeal their 2011 taxes, now seems a perfect time. Unfortunately, I'm in a bit of a rush today, so this will have to be brief, but at least it might help give a small glimpse into how Grand Rapids is quite literally fleecing its property owners by claiming their properties are worth vastly more than they actually are. I'm not convinced this is being done intentionally, but the fact that it is occurring at all is highly trouble and disturbing, and portends years and years of continuing declines and erosion in the City tax base.

Here's how it works: Most people would agree that sales from banks to individuals are dominating the market throughout much of Grand Rapids, or at least constitute a significant part of the market. What most people do NOT know that as far as the Assessor is concerned, those foreclosures do not exist. Unless things have changed over at the Assessor's office, they simply toss out the sale if it occurs after a bank takes possession following a foreclosure. Now, mind you, after someone buys the beat-down dump and puts tens of thousands into it, they'll count that sale. The net result of this assessing trickery is that the City has been: 1) Artificially pumping up values ever since the decline started, 2) has booked only a small fraction of the decline in property values, and 3) is extracting far more money in property taxes than it is lawfully or even constitutionally entitled to receive.

The City's response to an allegation like this, I presume, would be to claim that "we're just following the law--by law we cannot count a foreclosure because is is a 'forced' sale." There is some truth to this statement. When a bank buys at an auction on the court house steps, that sale indeed cannot be counted. When a lender is about to foreclosure or the sheriff's deed has gone out, that sale also cannot be counted, since it is truly a "forced" sale--if the sale does not occur, the person loses the house. The tremendous leap of logic that has occurred is that the City of Grand Rapids (and some other assessors) began a policy of regarding any sale where a bank owned a house and sold to an individual as an invalid "forced" sale. When determining if values went up or down, they simply toss the out. Of course, a sale by a bank is not actually a forced sale. No one is forcing the bank to sell anything. Indeed, there is much talk a "shadow inventory" of banks holding houses off the market to avoid crashing prices. The position that Grand Rapids has adopted is neither in compliance with law, nor with factual reality.

To be fair, the problem did not originate with Grand Rapids--they're simply one of the worst around when it comes to overassessments because they have an enormous volume of foreclosures, and have subdivided the whole city into so many dinky little assessing districts that there are often few sales other than foreclosures. The problem actually originated with the State Tax Commission, which generates guidelines assessors are supposed to use when preparing their studies to revalue property each year. For many years, those guidelines said to disregard a foreclosed property, and largely still do. Fortunately, however, in 2007 the STC finally admitted that foreclosures have started to "have an impact" on some markets. No kidding. They also put together a number of steps that they said "should be used" to verify sales from banks. As far as I can tell, however, few jurisdictions actually bothered to do it. Wyoming, to their credit, has been far more pro-active in this regard. Grand Rapids, on the other hand, continues to pretend it does not have to count sales from banks, and bilks everyone accordingly.

Let's look at it this way: When you claim that values in the "Baxter Neighborhood" held steady from 2009 to 2010, you've clearly got an enormous problem with your assessments. You've been able to buy houses over there for next to nothing for the last three years. Either you're playing fast and loose with reality, or your assessment were a disaster to start with, and were too low across the board. Someone, I suspect the former rather than the latter. Long story short, if you've got a property in GR, you probably need to appeal the assessment, because the odds are that you're getting taken for a ride.

So what about that years and years of declining tax base? Let's say the real world had a 35-40% drop over the 2005 assessed value. In the assessor's world, however, he claims perhaps a 10% drop to date because he tossed out the foreclosures. Ultimately, even those "good sales" are going to be less than the assessed value at even a 20% discount over the 2005 value. Thus, while the real market goes up, the assessments in Grand Rapids continue to skid backwards. On the plus side, they have then avoided the massive single-year slam to their budget that they should have had.

The ONLY way to avoid this is a little game I call "paying taxes on your neighbor's new refrigerator." Let's take two identical properties, both assessed at 100k and in really bad shape. In reality, they're worth perhaps 60k. The bank forecloses on house "A" and it sells at 60k to an investor. That sale, of course, doesn't count in assessor world. The other house "B" is owner-occupied, and he stays put. Our investor proceeds to dump $40k into "A" with new windows, new kitchen, new paint, new furnace and the obligatory granite counters and shiny new stainless steel appliances. "B" of course remains the dump it is. Our investor then turns around and sells the property for $115k. Repeat this pattern enough times, and "B"s property value (in assessor world) goes UP (along with all of his neighbors) even though the market isn't. Granted, the assessor should catch this sort of thing and toss the sale, but what do you think the odds of that are? Ultimately, B winds up paying property taxes on his neighbor's new stainless steel refrigerator. Nifty, huh?

And that, folks, is what I call Grand Rapids great Property Tax Swindle. It's how you manage to have only 5% to 10% drops citywide while more desirable outlying areas have much larger drops. I haven't looked at the overall numbers for this year, but I would bet a dime to a dollar this went on again. The whole city should have dropped by 30%+ by now, but it hasn't. This is why, at least partially.

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I bought a house in baxter in 2007 for 67500, sold it two years later for 73k. Value went up. The SEV has gone down and is sitting at 24k, way less than the 'value.'

Also, the current place we have in Eastgate is assessing pretty darn close to the appraised amount and went down again this year.

Maybe you're on to something, but you generalize like its a problem for everyone, which it's not.

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Every individual circumstance is going to be somewhat different. If you improved the property, value certainly goes up. If you did nothing to the place over those two years other than live in it, you just got really lucky. :)

I bought a house in baxter in 2007 for 67500, sold it two years later for 73k. Value went up. The SEV has gone down and is sitting at 24k, way less than the 'value.'

Also, the current place we have in Eastgate is assessing pretty darn close to the appraised amount and went down again this year.

Maybe you're on to something, but you generalize like its a problem for everyone, which it's not.

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I agree with you that values have fallen faster than the assessor's numbers would suggest. However, I think prices have plummeted more like 25-30% rather than the 35-40% you suggest. Grand Rapids didn't experience the same overinflation much of the rest of the country did in the first place. I actually do believe prices remained pretty steady throughout 2010 since they had already erased whatever gains the bubble caused and then some when you adjust for inflation.

I also agree with you that bank sales should be counted, as they are part of the market. A bank may be a more motivated seller than most, but it still forces other non-banks to lower prices in order to compete.

FWIW, I did challenge my assessment a couple years ago and got a significant drop. Of course, most of this was due to a blatant over-assessment that was clearly in error. The assessment fell again last year.

EDIT: I accidentally mult-posted. Anybody know how to delete my extra replies below. Or maybe a mod will do it?

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I've been in my house for a year and a half. it dropped in value for the previous owner who lived there about 5 years but only about 3 percent. he didn't do much to it except for basic maintence. Prices for well maintained homes I don't think have dropped as much a you claim. the problem is that foreclosed properties don't fall into that category as you mentioned earlier. they are usually poorly maintained pieces of crap. if you throw out those sales which I think is correct because while not technically forced they cannot be assumed to be equal to sale of a owner occupied home. An owner of a home will do things to artificially raise the price of a home (i.e. mow the lawn). This is what has been done since homes have been sold which should be factored into the home sales price when figuring the taxable value. when maintenance is not performed it does not mean a well maintained home is worth less. another way of saying just because the average value of all homes sold is less does not mean that the assessed value of a properly maintained home has decreased.

appraisers also don't generally care about your gold plated faucets, heated driveway and zebrawood custom cabinetry, or lack there of. they take three comps and average the price per square foot, multiply times your square footage and there you go. they don't care if the comps are improved by developers or not.

you should also be aware that your efforts to get sympathy from city government will be hampered by the fact that for the last 15 years property taxes have been artificially low due to proposal A which linked property tax increases to the rate of inflation.

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I think that's probably fair that well maintained homes have fared better. The problem that seems to exist in areas like GR though, is the giant inventory of sub $30k homes. Subprimers bought these crap houses for ridiculous prices, and the assessors gladly followed them up. The problem is they don't want to go in reverse nearly so easily. Ultimately, when that garbage pile house gets renovated (which it probably will), that sale will get counted, and mask an overall decline. Admittedly, the truth is probably somewhere in the middle, but I suspect we're not even getting that.

Other than the general unfairness of artificially holding assessments high, there is a bigger risk to this practice, which I don't think is appreciated. What the assessor says is treated as gospel and counted in a fair number of stats. Legality and budget concerns aside, spreading out the pain is a terrible PR move, long term. Surrounding suburbs that said, "Fine, we'll count the foreclosures and drop 15% this year" can get back to a recovery that much sooner while GR continues to backslide. Instead of, say, -20%, -10%, -5%, +5% in successive years, we're more likely to get -7% for six years. (Ultimately, when the taxes are too high, you devalue the real estate and make things even worse!) I don't see this as helpful to the city's image.

I don't mean to assail the assessor's office. GR by far is the toughest one around to get right. Years of jacking up prices in the urban core with subprime loans and all other manner of creative financing certainly didn't help this. That said, there are some potentially very negative long-term consequences to not cleaning up the mess this made in property taxes.

didn't do much to it except for basic maintence. Prices for well maintained homes I don't think have dropped as much a you claim. the problem is that foreclosed properties don't fall into that category as you mentioned earlier. they are usually poorly maintained pieces of crap. if you throw out

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It's getting to be time for areas around Grand Rapids as well. This phenomenon of assessments going up (or not going down like they should) because of investor rehabs is very real, and stands to be very damaging for homeowners across the area. The "paying taxes on your neighbor's refrigerator" issue has never been bigger than it will be this year. If you don't see a decrease of at least 5% to 10% this year, take it to the Board of Review.

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I had a 10% bump in EGR this year.

Zillow.com and my own observations suggest my house has stayed flat since last year.

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I just got my 2011 tax assessment in the mail. 35% drop here in Plainfield township. Yeah, it seems to match the sale prices around me, but I'm honestly not very thrilled about it. (I'd be happy to pay higher taxes if that means my home is worth as much as I paid for it.)

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PM me your address and I can probably tell you how they did it. I would bet you its almost identical to the other situations that I've seen: The assessor does one of two things to game the system: 1) Counts land contract sales which are inevitably for inflated prices because no one ever actually expects it to be paid off and the buyer is unable to otherwise obtain conventional financing; or (the biggie) 2) Counts a bunch of houses that got foreclosed (which he did not count) and then had tens of thousands of dollars in rehab put into them.

I have to think these assessors know they're swindling people with this latter trick. They can't be so incredibly stupid that they actually think a house which sells for 15% to 20% more actually reflects the condition on their record card. When that is the case, they should do a more detailed review. Of course, they don't. Here's how it works in a nutshell: House is assessed at $100k. Banks takes the house, house sits on the market for awhile, and it finally sells to an investor for $80k, which is probably its market value. 20% drop, right? Wrong, this sale doesn't count. The assessor tosses it. The investor then puts $20k into the house and sells it for $110k. Even though both sales happen in the same year, only one gets counted--the $110k sale. Does the assessor stop to determine whether the place has new carpets, new roof, new bathrooms, new kitchens, new windows, etc? By law, those items should be taxed against just that one house. But they're not. Instead, the assessor counts that sale as a 10% increase in value. Then, he increases EVERYONE'S assessment by 10%.

All of this results in assessments that are completely and totally illegal, as well as unconstitutional, but there is almost no way to stop it. The only near-term way to fix this is if EVERY SINGLE PERSON files a tax appeal. Of course, then they can just deny you and then you've got to go to the Tax Tribunal. Fun.

Technically, you can also file complaints about assessing methods with the State Tax Commission. I'm considering it. I suspect this may be the only way to fix this in anything resembling a fair and timely fashion, short of a legislative solution. The legislative solution is easiest: "THE SALE PRICE OF REAL PROPERTY SHALL BE THE PRESUMPTIVE VALUE OF THE HOME, AND SHALL BE INCLUDED BY THE ASSESSOR IN ANY SALES RATIO STUDY UNLESS THE ASSESSOR IS ABLE TO CONCLUSIVELY DETERMINE THAT THE TRANSACTION WAS NOT AN ARM'S LENGTH TRANSACTION. SALES OF HOMES BY FINANCIAL INSTITUTIONS SUBSEQUENT TO EXPIRATION OF A REDEMPTION PERIOD AFTER FORECLOSURE SHALL NOT ALTER THIS PRESUMPTION." Some tweaking would be needed, but that would fix 90% of the problem, and force the communities to get their fiscal houses in order.

Townships, on the other hand, generally seem to be more honest. That's why you're seeing the declines in assessments happening more drastically in the townships than in the cities while in reality the situation is reversed.

I had a 10% bump in EGR this year.

Zillow.com and my own observations suggest my house has stayed flat since last year.

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