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Here’s Hoping Property Prices Go To Zero!

This is a guest post from Sam at Financial Samurai, where he helps readers slice through money’s mysteries. He is also the founder of the Yakezie Network, a group of the best personal finance blogs on the web.

I got a postcard from a realtor the other day stating “JUST SOLD” at one of the resorts I own a vacation property. At first, I was like wow, that’s quite a decline in property prices given there are several foreclosures. Somewhat dismayed, I threw the postcard in the recycling bin and went up stairs to change into some comfy clothes. As I walked down stairs again it dawned on me, the postcard is going to save me a nice chunk of change!

You see, whether the property goes up or down in value matters little to me because I never plan to sell the place. It’s a lifestyle choice to purchase this vacation property for myself, friends, family, clients to enjoy now and during retirement. What I am concerned about is operating costs and cash flow. Before buying any property I run the numbers over and over again to make sure things work, even in the most dire scenarios. It’s all about increasing rental income and lowering mortgage and maintenance costs over time.

The property is in a rental program which covers all costs and then some for 8 months of the year based on a 60% occupancy rate. The other 4 months is cash flow negative, which is simply the cost to use the place for “free”. If I wanted to hustle more, I could privately advertise the place online to increase the occupancy rate and make more money. However, that takes time and not something I have much of nowadays.

One key expense is property taxes, which is 1.16% of the property’s assessed value in the state of California. Not bad, but still a recurring expense nonetheless.

EXAMPLE OF WHY YOU WANT PROPERTY VALUES TO TANK

Let’s say your $1,000,000 vacation property declines by 50% to $500,000. Oops! But, the bright side is that you go from paying roughly $11,600 a year in property taxes down to $5,800. A $483 a month savings is a meaningful amount, and one which is an unexpected positive upside surprise to a person who never plans to sell. In fact, it would be better if you could get the county to assess your property at just $100,000, thereby saving over $10,000 a year in property taxes!

Granted, obviously it is better to buy after the property declines by 50%, but if you are a rational buyer who has run all the numbers, you can clearly afford the property no matter what the paper value is, otherwise you wouldn’t have bought in the first place.

If you follow my 30/30/3 rule for home buying, I’m pretty sure you’ll be fine even if you lost your job for years and enter an economic crisis. If I couldn’t find work after a year, I’d go work at McDonald’s for 6 hours, teach tennis for 2 hours, and then go wait tables at night if I had to! Oh yeah, and of course there’s this online income gig as well.

ANOTHER EXAMPLE WHY YOU WANT PROPERTY PRICES TO TANK

My parents have a paid off home they live in for half the year. Given the property was purchased over 6 decades ago by my grandparents, the price has jumped probably 40 fold. Pretty sweet right? Not really because my parents never plan to sell as it is a house for all family members to use for generations to come. If I ever moved back home to be with them, I’d live rent free and just pay for all utilities, cable, and share the maintenance costs. I’d also have to split the property tax bill.

It would be a complete blessing if the assessor would come by and slash our property’s value by 90%. Too bad, prices in the governments eyes are sticky on the way down and easy on the way up. If you’re someone who plans to live in their house forever, start rejoicing at this housing downturn. Folks around you who are foreclosing are helping you save thousands of dollars a year. Take advantage of the situation and make sure you get the county to lower your assessed value! When property prices fall to zero, it’ll be such chaos and Armageddon that nobody will have to pay for anything ever again!

Please read: “How To Lower Your Property Taxes” for more insights.

Readers, any homeowners out there who are taking advantage of property price declines and lowering their property taxes? I strongly suggest you keep all those realtor postcards in the mail, and use them as comparables when you contact the county assessor’s office.

Anybody have any great stories where they were able to use really bombed out comparables to lower your property taxes more than the market value?

Am I the only one who wishes property prices go to zero in certain areas to help relieve the property tax burden?

Regards,

Sam @ Financial Samurai – “Slicing Through Money’s Mysteries”

{ 47 comments… read them below or add one }

Financial Samurai

Cool! I forgot I wrote this article for you and submitted it as a guest post. The post makes perfect sense to me! Lol. Who disagrees?

Best, Sam

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Jon - Free Money Wisdom

Haha, I love it. I am sure it does make perfect sense to you…considering you ARE the author. :) This is a great post….but I’m sure for those who are eager to get out from under their vacation spots/homes it’s a discouraging one. I don’t have either so I’m in the clear.

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Jeffrey Trull

Sam, love how you added “in certain areas” to your final statement about property prices decreasing. In that case, I hope prices go way down for your vacation property and no where else :)

Not to be morbid, but I suppose the only argument I would make against this even if you never plan to sell is that after you die, it might be nice for it to have value to pass on to a significant other and they don’t intend to keep it. Not sure of your specific circumstance, but that’s one point of view(I know this isn’t a 100% serious post, but hey, had to throw it in there)

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Financial Samurai

Thanks Jeff! Me too.

Better to have the kids start with nothing. Build character!

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Barb Friedberg

Sam, I found this article entertaining and informative. Lemons out of lemonade!!! BTW, where is the vacation property? Do you go there often?

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Financial Samurai

In the mountains and near a lake Barb. It’s heaven, and I alway feel that way when I’m up there. I spend about 15-20 days a year there. Snowboarding and hot tubs in the winter, hiking, biking and swimming during the summer.

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Kevin @ Thousandaire.com

As a renter, I would love property values to decrease substantially. Right now, I just can’t justify the costs of owning a home. I’m just gonna keep renting.

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retirebyforty

I got my property tax adjusted last year and saved a little bit every month. I don’t think I can get it any lower so I skipped the appeal this year. I’ll keep an eye on it and see what happens in 2012.

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LaTisha @ YoungAdultFinances

I’m pretty indifferent to property values changing. However, from what I understand, as property values rise, homeowners begin to spend more. Wouldn’t that be better for the economy?

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Financial Samurai

That makes sense. Or, homeowners spend more b/c they have more disposable income in their pockets due to lower property taxes, and it’s not just a psychology thing that their home price has gone up. Hard to get cheap HELOCs now.

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SB @ One Cent At A Time

Sam I agree to your point. When you aim to keep the home for post retirement use and don’t have a problem paying off the mortgage, you shouldn’t worry about the decreasing price. Its same when your stock prices go down and you buy more of it. Its good that falling price is working in your favor. Not a home owner yet, but I am sure when I’ll buy I’ll run all the numbers.

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Financial Samurai

Run the numbers, and run em again. Calculate a down 50% scenario on purchase price and income and see how it goes.

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Miss T @ Prairie Eco-Thrifter

In Canada our house prices haven’t seen quite the dip the US has. In fact in some places, the prices are still increasing. There isn’t much room for the opportunities you speak of. Cool though.

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Financial Samurai

All ya gotta do is come some with your strong Canadian dollars and buy US property!

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Denise @ The Single Saver

I agree to a point. However, if property taxes decline so does the money that goes to local services, such as police and fire protection. If an area become unsafe or run-down I don’t suppose you would want to live or vacation there. But all in all, I agree lower taxes are a nice perk to the downturn in the housing market.

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krantcents

Following your premise of property values and taxes going down, don’t you think our various governments would find other ways to raise revenue? In Texas, there is no income tax, so they receive revenue from property taxes and sales taxes. There is no free lunch here. I would rather get to the root of the problem which is the way in which they spend the revenue (taxes). I am not infavor of just cutting expenses, instead really examining the expenses.

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Financial Samurai

Great point Denise, which is why I’ve been a strong advocate of Renters paying more tax and pitching in. Let’s share the tax burden on all, not just homeowners. Or at least let’s have different voting power for homeowners.

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Financial Samurai

Krant, most definitely. We should raise the Sales Tax. That way, all people who choose to consume pay more.

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krantcents

I personally prefer no taxes, however the various governments will find ways to raise revenue! Prop 13 was suposed to curb spending by limiting revenue (taxes), it is not working. When they enacted Prop 13, they forgot about commercial property that turns over so rarely. My suggestion is to reduce spending so we can have less taxes, but feel free to donate as much as you want.

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Khaleef @ KNS Financial

I like your perspective on this. I’m with Kevin – a renter who needs prices to drop a lot more (especially in New Jersey) before I can justify becoming a homeowner.

I also think that as long as we (meaning the government) artificially prop up home prices, the economy will never stabilize!

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Financial Samurai

Why fight the government? I will never rent again, especially after that financial planner guy killed it living in a million dollar house, and turned over the keys and forclosed and is now making bucks advising others. Good stuff!

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Eric

Interesting perspective from the eternal optimist. Even the worst economic news is good for someone!

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Financial Samurai

I feel so blessed to be alive! Whoooo hooo!

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Financial Samurai

I feel so blessed to just be alive. Whoooo hooo!

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YFS

At this present time I do not want my primary residence to be valued at 0. For my rental properties, cut the value all you want. I will simply just pay less taxes and use the new assessed values to buy more cash flow positives rental units. The problem with home values going down is that my county simply adjusts the rate and you end up paying the same in taxes anyway. So even if you get your home value adjusted they account for it with rate increases.

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Six Figure Investor

Ok, I found this article entertaining (as always), however there is an oversight on how property ratables are calculated. Here in NJ where property taxes are high, I can show you two different communities where say, the average homeowner pays 12K/year in taxes. However, the average home price could be different by 500K. Yes this is NJ. Lower prices simply causes tax rates to increase because the bills for the town to operate are the same. There is no free lunch with this.

But, there is a point to be made here in that taxes are going up due to inflation (I think that is the larger point here). So, when you sell the home in NJ, a transfer tax is assessed on house value, even if there is no capital gain (it’s about 1%). So an inflated home price causes this tax to go up.

I could go on, in this state, income tax rates are not indexed for inflation, so over time people move to higher tax brackets by inflation alone.

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Sam

Yep, which is why cities love turnover of property. I hear NJ property taxes are HIGH!

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20's Finances

I love it. My wife and I have been discussing purchasing a vacation home in Maine (as it’s nice there) and if we could rent it out by the week, we could cover most of the costs (without factoring in taxes of course). :) If the prices would drop, it would be even better for new buyers. Then, keep it forever. :)

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Marissa

We have a lot of family and friends buying US property lately, especially in the south, because of the lower prices and strong Cdn dollar. Cdn housing prices are rising in the major cities. Some of us are waiting for the bubble to burst, or deflate slightly, in order to be able to afford property.

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MoneyCone

Next time I’ll pay more attention to those realtor postcards! :)

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Sam

They are more valuable than you can imagine!

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PKamp3

Not afraid of the seedy folks who might move in if houses were cheaper than rent? I kid, I kid! Home prices is not something I want to start a class war over!

I agree… but if prices fell enough you have to expect property taxes to rise, even in California. Also, there are other assessments on the town and even neighborhood level which brings a lot of places in California over 1.16% – and you’ve got the homestead exemption and Prop 13 to factor in for some cases. Property taxes are a mess here, haha. I think I’ll end up paying around 1.22%, for the record.

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Crystal

Since we aren’t planning to sell anytime soon, I’ve been doing a happy dance every time our property value has decreased since we bought our home in 2007. We’re only paying $2500 a year in property taxes…love it!

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Financial Samurai

PKamp -> Gated community man! Lol
Solution to you question is simply a Renters SurTax so that everyone shares in the burden. Whoo hoo!

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Financial Samurai

Iff property taxes decline significantly, the government will tax more people beyond homeowners, therefore helping more people put more skin in the game to help our local communities.

Win-win!

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Christa

Good point! I plan to live in my house for quite a long time, if not forever, so they could slash my property value now :-)

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Amanda L Grossman

I took on our tax people in 2010. We had purchased our home in September 2009 and slowly found out several large issues with it that would cost a chunk of change. The county declared that the value had increased to the price we paid (fair assumption), but that was like $40,000 from what the original property value was! I took photos, wrote up descriptions, and was denied. Then I asked for an appeal, went in front of a board, and was able to get the price down by the estimated cost of repairs. A lot of work, but it paid off. They did not raise it this year back to the other price, so that was nice to see as well!

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Sam

I’m glad you took the time to fight it Amanda! Good experience and standing up for what you believe in!

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Eric J. Nisall - DollarVersity

Where I am, almost everyone has seen their values (both market and assessed) decline. Some (like me) more than others. In the past 4 years I’ve seen my tax bill slashed by 72%. That’s not necessarily a good thing if I want to sell, but if I decide to rent it out, that would be a major plus.

I can’t say that I agree about wanting property values to go to zero. After all, if there are no property taxes being paid, how are the cities and counties going to maintain the roadways, pay public service personnel, and the like especially if there is no state income tax? If that happens the most likely things that will happen are major increases in sales tax and licensing/regulation (drivers, occupational, corporate,etc).

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Sam

Hey, if you don’t plan to sell, and you can reduce your prop tax bill by 72%, sweet!

Not a bad thing to jack up the sales tax so that all pay no? How about cig and alcohol tax, and huge car registration fees to reduce pollution? Not bad!

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Eric J. Nisall - DollarVersity

The problem with raising other taxes, especially tobacco is the backlash that will follow. I don’t know if you heard what happened in NYC, but they raised their tobacco tax to the point where cigarettes are $13. That led to an outbreak of scams and attempts to skirt the law like people going to Native reservations (where only members are supposed to be able to take advantage) to buy them tax free and sell illegally, or the new thing where shops sell the loose tobacco and papers separately thereby avoiding the cig tax since there is a different tax for loose vs. pre-rolled cigarettes. It has caused the loss of millions of dollars of tax revenue and a new crackdown on these outfits. The combination of less tax revenues and increased law enforcement doesn’t add up to a good situation. If that happened everywhere, the lower RE taxes would be nullified and the effects could cripple some localities completely (as if there weren’t enough in trouble already)

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Untemplater

I wish the property market would turn up for my dad because he’s been trying to sell his house for a while with no luck. Great tips on using the realtor postcards for lowering property taxes! It takes our own action to lower them cuz the state wants as much as it can get! -Sydney

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Financial Samurai

I hear you. I wish this for your dad as well. Although, once he sells the property, where will hel live?

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Untemplater

He has a smaller house that he’s already living in so he may have to try and rent out the other place if it continues to just sit. -Sydney

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Everyday Tips

Sorry if thiswas discussed, but I did not have time to read thru all the comments…

Am I missing the boat here? I would think that if your home value drops significantly, then the rent you can charge would also drop accordingly? There is a place we vacation at almost every year that is in an area hit hard economically, and our weekly cost is less than half of what it was years ago.

Thoughts?

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Sam

Not necessarily. Guess it depends on where one owns property. Rents have been stable to going up in SF for example… actually surging is the right word, while property prices declined 15% from the peak, and have since recovered probably 5% of that loss or so.

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Sean @ EconomicallyHumble.com

I don’t own ANY property yet… but I’m about o graduate and expect to buy my first house in a few years. After that, I expect to buy a second property and have a rental…. then a vacation home on an island or feign country that I can rent out to tourists. (gotta have a plan, right?) Post like this remind me to stay on the path and even though I don’t have much bank yet, I can learn for when the day arrives. Thanks for sharing your experience.

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