The Challenges of Texas Property Tax Assessments

August 8, 2023

Navigating a Complex System


Property tax assessors have become increasingly aggressive and unrealistic in recent years, causing frustration among property owners. While a proposed property tax relief plan in Texas offers some hope, it primarily benefits homeowners and offers limited respite for commercial property owners facing steep tax hikes. As someone with extensive experience in the real estate industry and a background in property tax consulting, I have witnessed firsthand the challenges faced by average investors when protesting their property tax valuations. In this article, we will explore the intricacies of the property tax system, shed light on its shortcomings, and discuss the implications for property owners, tenants, and the local communities they serve.

The Burden of Overvaluation:
In my own experience as a property owner, I encountered an assessed value that far exceeded the purchase price. Faced with the choice of accepting an inflated appraisal or pursuing legal action, I opted for the latter. However, it is important to note that contesting a valuation does not exempt one from paying taxes on the proposed assessment. Consequently, property owners are forced to wait indefinitely while their money sits in the hands of the authorities until a resolution is reached. In some cases, counties may attempt to settle disputes through informal hearings, as in my situation. However, the proposed settlement may still fall short of a reasonable valuation, leaving property owners with few options other than suing, which is costly and keeps the owners’ money in the taxing authority coffers giving them little to no motivation to move the process forward.

The Role of Cap Rates and Valuations:
Understanding the process employed by county assessors and tax consultants is crucial in comprehending the discrepancies in property valuations. Assessors and consultants utilize an equal and uniform approach (if the appraised value of the property exceeds the median appraised value of a reasonable number of comparable properties appropriately adjusted) or an income capitalization approach, (stabilized income and expenses, normalize anomalies, and apply taxes at a “loaded” cap rate (the large differences in value stem from what the market and what the consultant believe is the current market cap rate. Many assessors are still using 3% and consultants are arguing 5% plus)). In my case, by employing the income capitalization approach, a fair valuation should approximate market trends, suggesting a value between $10 and $11 million for the 2023 tax year. However, the county assessor sought to assign a value of $13 million, disregarding market realities, I think we can all agree multifamily values have not increased from 2022 to 2023…now the question is why my tax consultant cannot (I’ve been told there is a lot of emotion that is part of the negotiation).

The Impact on Property Owners, Tenants, and Communities:
Excessive property taxes can have dire consequences for property owners, tenants, and the communities they inhabit. During the global financial crisis, high taxes burdened property owners already grappling with distressed investments. Unable to increase income or occupancy, many property owners were forced to reduce expenses, including maintenance, repairs, and services, leading to a downward spiral. Neglected properties became substandard, attracting undesirable elements and endangering the safety of tenants and surrounding neighborhoods. Moreover, exorbitant tax burdens can push landlords into bankruptcy, undermining the real estate market’s stability and straining local resources, including law enforcement. Property owners have been faced with ever-increasing insurance costs that are out of their control, logically, using an income approach we should see a reduction in taxes as an offset. Maybe our government officials should focus on this problem as it would benefit them by increasing the taxable valuations, but they cannot have their cake and eat it too (higher expenses, lower NOIs, and increasing valuations).

The Role of Property Tax Consultants:
While it is wise and nearly essential to hire a good property tax consultant, owners need to be careful as they often pressure property owners to accept settlements, simplifying their workload at the expense of owners’ rights. This approach can undermine the interests of hardworking investors, who, along with their limited partners (small “Main Street” or “LP” investors) have diligently invested their savings in properties. Assessors may misinterpret property owners’ intentions, assuming they are only seeking to maximize profits. However, the reality is that maintaining profitability is essential for landlords to fulfill their obligations and maintain their properties responsibly. Failure to provide logical and rational tax relief during market downturns can have far-reaching implications for the overall real estate market, tax valuations, and the overall health of the communities.

The current property tax system presents significant challenges for property owners, often resulting in inflated valuations, burdensome tax obligations, and a negative impact on the communities. The discrepancies between market realities and assessed values demand a fair and rational approach to property tax assessments. Property owners must advocate for themselves and make difficult decisions to ensure their investments remain viable and communities remain safe. A transparent and standardized system, incorporating market trends and comprehensive underwriting, would offer a more equitable and sustainable approach to property tax evaluations. It is essential for stakeholders, including property owners, local and state authorities, and tax consultants, to collaborate and strive for a fair and balanced property tax framework that supports, strong communities, economic growth, and stability for all parties involved.


Author: Todd Franks