The Great Equalizer for Texas? Property Tax Assessments

[Mark S.]

As an active investor in the DFW area, mostly Collin, Dallas, and Grayson counties I am often asked if we are in a bubble. My answer is no, at least at the moment. The reason I say this is my day job is a mortgage lender in Addison and so many of the people moving to Texas are from California and the East Coast. These transplants are used to property values with a price per square for of over $375 (OC CA) and when they see what $117 (Collin TX) per square foot buys you in Texas they are amazed.

Until we have an equalization of the property values, or the monthly payments homeowners are making, we will not see a slowdown for areas which are doing well and continuing to develop (I know this is a broad statement but I am still expecting people to make good decisions and buy good deals in good areas, there are definitely bad areas in Collin County and it is hard to find good deals).

My main concern in this equation is we are leaving out is the property tax rates and assessments. More than the property tax rate itself it is the assessment which is having the greatest impact on homeowners in the metroplex. The assessment rates also seems to be barely noticed by the population as a whole. While areas such as Garland see a valuation of 30% of the sales price other areas like Plano are being assessed above the sales price of the home.

People moving to Texas are increasingly alarmed by the property taxes we have and they add a significant amount to the monthly mortgage payment transplants are paying when they move to Texas. Granted the assessments are still less than many areas on the coasts but we are being taxed at 1.97%-3.43%. When you combine this with the huge increases we are seeing in property tax assessments it adds up to a very large monthly bill.

I understand the cities are not necessarily increasing their property tax rate, some of them are, but by continuing to increase the assessments at rates of 8-10% each year the cities are in effect growing their largest revenue stream exponentially. My current home is taxed at more than what I purchased it for 3 months ago (I am going to fight this). Even with the Homestead Exemption the assessment is only 12% under my purchase price.

My current home in Plano has increased an average of 7% each year for the last five years. My home in McKinney went up 9% the last five years as well.

I don’t think anyone, myself included, would argue the property is over assessed for its value, but that doesn’t change the fact of the huge increases the property tax assessments means huge increases in property tax revenues. Personally, it makes me wonder where all this money is going given that the cities expenses are not keeping up with their increase in property tax assessments. Cities such as Frisco, Plano, Allen, McKinney, Carrolton and many others will continue to grow and I can only imagine the property tax assessments will continue to climb.

But all politics aside the increase in these property tax assessments will eventually slow down the growth in DFW if it remains unchecked. For example on my old McKinney house the principal and interest payment would come out to $1540 per month and the monthly property tax payment would be $685. Not only does the property tax bill equal 45% of the entire mortgage payment but the homeowner can likely expect this payment to increase by 8-9% each year….

I am interested to hear if anyone else has similar feelings about the property tax rates here or how it will affect the growth of DFW.

[Leland Barrow]

Property taxes in Texas are not well understood by the general public. Prima face it appears that property taxes are unfair compared to some states. How can I pay more in property taxes on a 400k home in Texas than my in-laws pay on a 750K home in California? Not paying a state income tax seems to pale in comparison to homeowners shouldering the tax burden.

In reality high property taxes does not mean anything. States will always need a certain amount of funds to operate and how the states receive those funds is of little consequence. Everyone eventually pays their share. I pass on property taxes to my renters even though they do not own a home. Gasoline taxes are passed on through bus fares, taxi cab fares, or Uber fares for those that do not own vehicles.  

On my personal residence it seems like I pay a small fortune in property taxes but it all evens out to a certain degree. Not paying a state income tax is the most obvious example. The less obvious example is that the appearance of high property taxes works as a control mechanism for appreciation in Texas. I do not have the data but I intuitively believe that if we did not have high property taxes the Texas average home prices in metro areas would be far closer to California's average home prices. The perceived value of paying less for a home is usually greater than the increased property tax expense. 

I do not think property tax valuations will have much of an affect on DWF or any Texas metro area. I actually think it can help with turnover. The days of owning a nice home and staying in it until retirement are over. Fixed incomes cannot keep up with property tax valuations so it helps turnover properties, lock in equity gains, create wealth, and spur demand in retirement communities. 

The only real issue that I see is that rents lag behind property tax increases. That period between increased valuations and being able to increase rents is painful. 

I think property taxes is something home buyers are concerned with after buying a property. For that reason alone demand will not shift.