How a Property Tax Equalization Factor Works in Real Estate

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When it comes to a neighborhood that has low assessed values for its properties but is surrounded by higher valued homes, there may be something called a property tax equalization factor involved.

The astute real estate investor that locates a neighborhood that they believe is about to "take off" may find that the tax authorities have a property tax equalization factor in place. This is there to bring the assessed values more in line with surrounding areas.

Key Takeaways

• Real estate property taxation sometimes involves an equalization factor to bring the assessed tax values of properties in line with those in surrounding areas.
• The equalization factor could be a percentage increase that is applied to the lower valued property to bring it more in line with those properties in surrounding neighborhoods.
• Location, neighborhood characteristics, home size and characteristics, features and amenities, and price all play a part in the equalization factor.

How Is a Property Tax Equalization Factor Calculated?

It's a simple calculation, in that there will be some assigned multiplier factor to apply to the properties. Assuming an area that the tax authorities believe is under-assessed in relation to surrounding areas, they might apply an equalization factor multiplier of 1.25 or a 25% increase.

Here's how that works. You'll need the two numbers:

1. The assessed value of the property: \$225,000
2. Equalization factor: 1.25

And now you can calculate it:

1.25 x \$225,000 = \$281,250

\$281,250 is the new value of the property so that it's more in line with those around it.

Note

While equalization can help you determine the value of a property and how much you may want to rent it out or sell it for, equalization is also a primary factor in taxes. It's the process of ensuring that each property pays its share of the tax burden in that town and county.

Components That Impact the Value of Real Estate

There are certain components that contribute to and influence the value of real estate, in this case, a single-family home. These are roughly in order of their importance in the decision-making process of a buyer, but that varies somewhat by the buyer.

Location

We've all heard it: "location, location, location." It sticks around as a slogan because it is true. Where a home is located is arguably the most important factor in the home purchase decision. After all, if you love a gourmet kitchen and you live in Texas, you're not going to buy a home in Philadelphia just because it has the most amazing kitchen you've ever seen. Other factors are involved in location as well:

• Schools
• Culture
• Shopping and entertainment
• Proximity to employment
• Climate
• Other amenities

Neighborhood Characteristics

This could be considered a subset of location, but it's more than that. People want to drive through a neighborhood to see how their neighbors keep their homes and yards, how quiet or active it is and the amenities offered, like sidewalks, streetlights, etc.

Home Size and Characteristics

A new family may be happy with a two-bedroom home on the small side, especially if it's their first. A larger family may want one much larger, perhaps with a room for a home office as well. Large families likely want more bathrooms. Older people usually want only single-story homes with less stairs to climb.

Features and Amenities

A gourmet kitchen, a large garage with workshop space—some people get really excited about the yard, outdoor decks, pools, hot tubs, etc. Whatever it is, homebuyers and renters want features and amenities, and that may factor into what they'll pay for a property.

Price

This one moves around in the order because it's much more critical for some than others. Of course, everyone has a range, and they'll compare the price with how well the home meets their requirements in the areas above.

Investor Valuation Considerations

All of these factors matter for homebuyers, renters, and real estate investors. If you're a real estate investor, you'll likely need to consider a few more factors when it comes to valuing a property. If you're looking to buy a new rental property, or already own one and are gearing up for a new tenant, consider these two things:

Prevailing Rents

If you're going to buy a home as a rental property, you definitely want to know if you can charge enough in rent to pay the mortgage, recoup your expenses, and then still have a positive cash flow every month. A careful analysis of the rental market and competitive homes, and some phone calls, can do the trick.

Age of the Home and Expected Maintenance

On the day a property is purchased, the numbers may all be figured out and the cash flow should be right. However, things change over time. Homes age and rents can't always go up. You as a real estate investor must evaluate how much money will be spent in the future for minor and major repairs and possibly equipment replacement.

What is a property tax equalization ratio?

The property tax equalization ratio, or rate, is the percentage that the property is assessed at compared to 100% market value. It may also be called the "residential assessment ratio." For example, if a town has an equalization rate of 43%, it means that properties are assessed at 43% of the 100% market value. When this happens—a low equalization rate—it's likely due to a town now doing an assessment in a long time.

How do you check property tax equalization?

You can check on a property's tax equalization rate by going to the municipal office in town. You may be able to find this information online or by phone, too. A state may also publish a county-by-county breakdown of equalization rates on its website.