Time for an equity check?

Property taxes, financial health among key motivators

By Inman News Feed
Add Comment Add Comment | Comments: 0 | Posted Dec. 10, 2009

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Property taxes, financial health among key motivators

Bernice Ross
Inman News

You take your car in for service and see your doctor for a physical -- Is it time for an equity check on your home?

The headlines are filled with news about how a majority of homeowners in some areas owe more on their mortgage than their property is worth. What the headlines do not trumpet, however, is that 35 percent of all U.S. homeowners own their property free and clear.

While you may not be considering selling your home, it is still extremely important that you know how much equity you have (or don't have) in your home.

For most people, the home is the most valuable asset that they own. The current market has depleted that value almost everywhere in the country. Here are three reasons for tracking this very important number.

1. Falling values can mean a reduction in your property taxes
Depending on how your state or local taxing district sets property tax values, you may qualify for a property tax reduction if property values in your area have declined. There are a number of ways to determine what your current property value is.

In my own case, even though I can search the comparable sales information using various online resources, I prefer to go through a local Realtor. Every time I have done this, she has found additional comparable sale information that was not included in the multiple sources I investigated online. Another option is to hire an appraiser, but it may cost more than what you could potentially save.

Whether you choose to do this yourself or seek the aid of a Realtor, you will need square-footage information and pictures of the comparable sales you are using (i.e., similar properties in your area that have recently sold and closed). If possible, it's also smart to include interior shots of the properties to make a valid comparison, especially if your property has not been upgraded or is in poorer condition than the comparables.

The next step is to calculate the price per square foot that the tax assessor used for your last tax appraisal. After calculating this number, locate as many local sales as you can find that resemble your property. As a general rule of thumb, choose properties that are within 10 percent of your lot size and 10 percent on your home's square footage.

For example, if your house were 2,000 square feet on a 6,000-square-foot lot, the best comparable sales would be those with 1,800 to 2,200 square feet on lots ranging from 5,400 to 6,600 square feet. Even if your Realtor supplies these numbers, be sure the ones you choose to show the appraiser meet these guidelines.

If you choose properties that are too small, this will tend to make your price per square foot too high. If you choose properties that are too large, this will cause your values to be too low.

As part of this process, make sure you have selected properties that have closed near the time that the appraisals are made. For example, in Texas they set appraisals based upon the Jan. 1 value of the property. With the last two years that we appealed, the agent at the appraisal district wanted to see comparable sales from November through February.

Even though we had three excellent comparable sales that supported a lower value for our home in April and June, we were told we could not use those. They determined the assessment based upon the property's value on Jan. 1. Prior to submitting your request, be sure you also have the correct forms and understand the complete process.

2. If you are 62 or older, the equity in your home may allow you to qualify for a reverse mortgage
Many seniors struggle to get by on their Social Security income. A reverse mortgage can be a way to tap into your home's equity. The way this works is that the lender (or approved institution such as a university or other charitable organization) will make monthly payments to you.

When you die, the property goes to the entity that made the reverse mortgage. If the property has increased in value, the remainder can sometimes go to your estate. Because there are quite a few scams in this area, you must investigate all options carefully.

3. If you owe more than your house is worth
If this is the case, there are numerous options available. The first is to continue to make your payments. If you're only upside down by a small amount, this is usually the best option. While there are many people who are electing to walk away from their mortgages, many fail to realize that if they have other assets, many lenders have the legal right to place a lien for payment against those assets.

These owners also don't take into consideration the higher costs for credit, including higher interest rates on credit cards, loss of ability to obtain additional credit, as well as decreased opportunity to buy a replacement property in the future. Other options include seeking a loan modification, doing a short sale if you must sell, or returning the keys to the lender.

If you find yourself in this situation, please speak to your tax professional and a consumer attorney (NACA.net is one resource) to determine the risks and the benefits before embarking on any of these actions that could seriously damage your financial health for years to come.

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