UW tax questions

I often speak directly with the assessors in the municipality where the property is located. Every municipality is different, and having a strong understanding of how they come to their values is at the heart of your question.

Based on your question, I either assume that 1) you are asking about when the assessed value is lower than the purchase price, or 2) when tax assessors utilize what's known as an assessment ratio to come to a value that is utilized to then calculate the tax bill. They're really the same thing, just different ways to "skin the cat".

Under scenario 1, many assessors will take some arbitrary non-standardized haircut off the purchase price. It also depends on when the last property traded, and how significant the delta is between the new purchase price and the existing assessed value (i.e. if the last sale was 20+ years ago and the area doesn't regularly reassess, probably going to be a big delta. I've found that when the delta between the purchase price and historical assessed value is significant, they won't bring it right up to the new purchase price, but that is by no means standard in every market. Many assessors will use a combination of sales comps and the income approach (NOI and some market cap rate)

Under scenario 2, I dig through historical tax data to see if the assessment ratio has remained fairly consistent. The best thing to do is to speak with the assessors directly to understand their view and methodology as well. They're generally fairly willing to speak if you're just transparent about what you're looking for. In many markets the assessment ratio may be 35-75%. The lower assessment ratio doesn't necessarily mean lower taxes, because this municipality could have a higher millage rate.

The millage rate will often change to reflect the current budget needs of the municipality on an annual basis. It's helpful to understand how mature this municipality is, how rapidly it's growing etc. to get an understanding of how and why the millage rate may or may not change significantly. 

Ultimately, just speak to the assessors office and ask how they come up with their tax formulas, if properties are reassessed on a sale, every 3 to X number of years etc..

Some municipalities are quite challenging. I was working on a deal recently where the assessed value for the market ranges from 50-85% of purchase price, with the same millage rate regardless of the assessment ratio. This was a significant risk and no matter what tax consultants or which assessor from the county we spoke to we got the same answer, that it's somewhat of a crap shoot. We underwrote the 85% which was the most conservative scenario, with any lower assessment ratio being gravy if that's what the final tax bill was based off of.