Are Cleveland (Area) Investors About to Get Hit?

Question

As I understand, Cuyahoga County is reassessing property values. Does that mean many of the people investing in the Cleveland area are about to have their cash flow reduced by a big chunk, or even wiped out? It sounds like a $200 cash flow (per month) can very easily be cut in half with a higher tax payment.

Bob Collett · Answer

@James Wise is correct... Cuyahoga County reassesses property values every three years. The new values will include recent sales and improvements. For example if an investor purchased a property for $14,000, then put $26000 worth of improvements in the property, the new valuation should reasonable go up to $40k based upon improvements.  If you neighbor does the same, and then sells the property for for $60k, it it reasonable to assume the new valuation of your similar improved home to now increase to $60k.

Now, every six years the county will do a physical valuation, meaning they visit each house.

As @James Wise stated, this is nothing new.

From January to March 31st, you can file a “complaint” to dispute your valuation... new or old.

It may take 9 months for yourdispute to be heard. If successful, the lower valuation will be applied retroactively to the time of filing.

Hint: never ask for more than 19% reduction, and don’t skimp on evidence. You will need “proof” of what your property is worth. So when you show up with comps illustrating garbage properties, expect the panel to ask you how you selected your comps, and if you made any improvements.They will ask about your rents.  Why 19%... because ask for more, and a lawyer for the school board May show up to the hearing to fight your request. Ask for a reasonable valuation based upon real data, and have a good story, and you will probably win. (Example: my house is worth less because it has  a creek running through the basement... I have unresolved housing code violations... I need a new roof, etc. The beautiful house around the corner sold last month for $10,000 less than what my property is valued at.)

Once I threw up my arms and said, “if you think this house is worth $900k, then buy it from me”...  my valuation was lowered by about $120k.

The reality, however is that property values took huge losses here during the financial crisis, and many  out of state investors bought property based on low tax valuations. Now with the market back, valuations have increased. Taxes will go up.

Garfield Hts has the highest tax rate in the State of Ohio. Many east side inner ring suburbs are also well above average. Cleveland proper is comparatively lower.

Keep in mind, however, that property tax funds the schools. When a city passes a tax levy, it works sort of like a zero sum system. So in theory, if you successfully lower your property tax, that decrease in is spread around as a increase to every other property.

A bigger concern is that the city of Cleveland recently hired more than 30 inspectors to physically inspect the interior and exterior of every rental property every year. These inspections come with violations and the typical 30 days to cure.

Both the city of Cleveland and Cuyahoga Couny require every rental property to be registered.

Try doing an eviction in Cleveland without proof of registration... your case will not be heard.

James Wise · Answer

This isn't a new or isolated thing. The county is constantly reassessing the property values. They do this every 3 years.

Kristopher Hanks · Answer

@Miguel Nava

No, I am more concerned about rent being in line or just below the average rent for the 1.5 mile radius from the property's address. I am also more concerned about how much capital I have tied up in the house. If the house appreciates that's the icing and cherry on top. The home's value does not translate into higher rent in my mind. The cost of maintaining the house and operational costs are what determine my rent increase every 12 months.

If the tenant signs another long term lease I will give a discount on that rent increase because I will subtract the turnover costs from the rent increase. I have had the same tenant in that house since March 2017. But I will not discount it to the point that I can not cover the % increase in property tax.

Roger R. · Answer

Another budding problem on the horizon for  a myriad of other states is the pension crisis.   States are running out of money to pay their pensioners.   Illinois has the same problem, but they are handcuffed by politicians kicking the can down the road for years not raising taxes enough and a state constitution that forbids changes to the pension system.  When a state or other municipality has an issue paying it's bills, the only real way to offset this is to raise property taxes.  That's what we do in New York and our pension system is mostly funded despite being one of the biggest.  We had almost a 50% increase in property  taxes in the early 2000's.  Not getting into politics, but add the fact that the Trump tax plan has cut taxes for most; the federal government  will be taking in less  money to that would  be distributed to the states.  States then will have to cut money given that in the past was earmarked for  local municipalities which will create big shortages..  Either taxes will go up, services will be cut or a combination of them both.   Interest rates are going up which reduces buying power.  A bit of a perfect storm.   We are all going to feel it somehow.   This unfortunately is our reality as Real estate investors.

Tom Ott · Answer

This happens all the time. You can also challenge it if you think it is too high.

Kristopher Hanks · Answer

For existing owners it is important to increase rents, if possible, every 12 months to offset this cost increase. I took that into account with a performing rental I have on the south east side of Cleveland. I have the reserves to absorb the increase. I also have a plan in place for increasing rents every 12 months to build the reserve back up after the 3 year reassessments cut into that reserve.

Brian Burke · Answer

I called Cuyahoga County about 3 weeks ago and they told me they were sending notices regarding new appraised values the week of 7/23. I was under contract on on a property and the increased asssessed value based upon the same tax rate (an assumption but also an unknown at present) would have taken annual projected cash flow from $2000 to somewhere around breakeven.

I was told transactions such as a sale will not affect the 2018 assessments which have wrapped up, but come 2021 when they review values it will be on their radar then.

Brandon Sturgill · Answer

@Miguel Nava It's a likelihood...we had a "correction" in Franklin County/Columbus last year and some of my clients realized a 30-40% jump in property taxes (me included both investments and primary). We fought for reassessments and were generally pretty successful at getting valuations reduced through the appeal process.

In Franklin County it was long overdue and expected, so the valuations came in purposefully high to gauge reaction. It's just a matter of time. As an MSA Cleveland is comparable to Columbus, but on a city level there is no comparison between Columbus and Cleveland...

I would suspect that any tax increases directly impacting Cleveland city would be in alignment with what's tolerable and possible- which isn't much...unfortunately, they have had a steadily declining population for 40-years....it's just the way of a declining city. Levying higher property taxes in an effort to keep coffers full may backfire if the city can't stand the strain.

Zareth Gray · Answer

I just received paperwork today from Lucas County and they reassessed my property values as well. So it maybe the entire state.

James Wise · Answer

#FireSale?

Are Cleveland (Area) Investors About to Get Hit?

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