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Hearing Series: How HCAD Really Treats Flooded Homeowners

Have you ever wondered what happens AFTER you’ve filed your property tax appeal? How exactly does the hearing process work, and who makes the ultimate decision on value?

Here is a detailed explanation of WHY HCAD’s current approach so WRONG. You can review the Tax Code and the Appraisal Standards to confirm for yourself.

In an effort to bring as many answers as possible to property owners, and be transparent regarding the property tax system, here’s an inside look at an actual disaster re-appraisal hearing of a residential property flooded by Hurricane Harvey in Harris County, Texas.

Patrick O’Connor himself was representing this property in an effort to set the stage (and educate) the appraisal district. We have included the transcription below the video if you don’t feel like watching the entire hearing.

*Fast-forward 2.5 minutes into the video to get to the juicy stuff!

Suggestion: you might want to print this to read offline.

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HCAD Appraiser: Okay, so Panel, being as this is a disaster re-appraisal hearing, we did notate on our evidence that the property had about a half a foot of flooding, so we calculated that into the two story height of the building, which by our calculations, meant the percentage damage was twenty percent. We took that with the replacement costs new of the improvements at $1,214,629 … estimated the repair cost $242,926 … used that to come to our new calculated improvement value of $415,899 … which brought the … including the certified land value, to $640,774.
HCAD Appraiser: Now, again, we didn’t have any actuals, in terms of the repair costs, so we did have to estimate that based on our disaster calculation here at half a foot of flooding with two story height on this particular home which, again, brought to twenty percent. Now, again, I just want to stress that this is an estimate, because we don’t have actuals for this particular home.
HCAD Appraiser: That’s where we got our overall value for $640,774 on this particular property.
ARB Member: Any questions? Alright. Does anyone have any questions for the appraiser?
Pat O’Connor: Yes, quite a few actually.
ARB Member: Okay, go ahead.
Pat O’Connor: Could you tell us about your licensing. Are you licensed as an appraiser?
HCAD Appraiser: Yes.
Pat O’Connor: Could you tell us about your licensing and training?
ARB Member: Sir, we’re gonna stick to the evidence that he presented. That’s what you have questions to ask, okay. Is there anything in his testimony that you have questions about? We’re not gonna get into his … his training, or his education, or his background. Alright? So, we’re gonna stick to the evidence. If you have questions for that, you can proceed. If you don’t, then we’re ready for your testimony.
Pat O’Connor: The tax code requires that you prepare an appraisal, a mass appraisal. If you’re doing a mass … I’m not sure if you’ve done a mass appraisal or an individual appraisal, but if you’re doing a mass appraisal, the code requires that you do a mass appraisal in compliance with standard 6.
Pat O’Connor: I have a copy of Standard 6 here for everyone.
ARB Member: Mr. Connor, I know these are special hearing, and I’m gonna give you the opportunity to present some evidence; but I’m gonna tell you something. We’re not gonna have an hour and two-hour hearings on each one of these hearings. So, if you wanna give evidence, then we’ll listen to it; but I’m gonna start holding the hearings to a certain time to get through the stack. Do we understand each other?
Pat O’Connor: The first hearing to really get into this complex subject will take about an hour. I don’t see…
ARB Member: I’m not gonna listen to a hearing for an hour. I’m not. I’m not.
Pat O’Connor: With all due respect, this is a completely new subject.
ARB Member: I understand that, but it does not take an hour to do one hearing.
ARB Member: Please proceed.
Pat O’Connor: My team and I’ve spent five to ten thousand hours researching
ARB Member: I understand, sir. I don’t have the time to spend an hour on the hearing. I’m just telling you that we’re not gonna do it. So, I suggest that you please do your pertinent information that you want us to hear, and then we’ll proceed further.
Pat O’Connor: Please explain, and this isn’t between you and me. This is an issue that I have a concern that Harris County Appraisal District did not complete a mass appraisal. Just to be direct and private remains sort of neutral toned about it, and if you’re not the right person to address this, I’d be happy for you to bring someone else in …
ARB Member: Okay. Mr. O’Connor, I’m not going into this. I asked you if you had any questions for the appraiser with the evidence that he gives. Please ask those questions, and if you don’t have any … I’m not gonna go through this. I’m not gonna go through all the tax code. He gave his presentation. I want you to give your presentation and your evidence. So, please proceed with that.
ARB Member: I’m not going to … I’m not gonna spend an hour on this stuff. I’m not, so please proceed; and then if you’re not happy with that, you can appeal.
Tonya Felix: Ma’am the intention is not to spend an hour. Our intention is to present our evidence. It does pertain to the subject property. Initially, we would like to present … We are gonna take a little bit of time … The issues that we’re gonna present up front, they apply to all of those properties, so we will…
ARB Member: I’m not gonna talk about mass appraisals. We’re talking about how the district … He gave his presentation … Please proceed.
Tonya Felix: If a mass appraisal was used to come up with the value of the subject property, then it is relevant to this hearing.
ARB Member: It’s not.
Tonya Felix: I’m a licensed attorney. I’m familiar with the tax code…
ARB Member: That’s fine.
Tonya Felix: It is relevant, and the law says that we can protest, and we have the ability to present evidence relevant to the subject property.
ARB Member: I am here. This panel is here, to hear your evidence on your properties, of the property, if it got flooded or damaged. That’s what we’re here for.
Tonya Felix: And that is exactly what we are doing.
ARB Member: But, I’m not gonna go through that, and so I’m just telling you right now we’re not gonna do it. So, please proceed if you have any questions concerning his evidence that he testified to. Okay? Then, ask his questions. If not, proceed with your testimony and give us your evidence.
Pat O’Connor: Please give an oral mass appraisal of how you value this property and other flood properties.
HCAD Appraiser: Well, I get the question that you’re trying to ask, in terms of normally how would we use mass appraisal to determine that; but what we did was, we have work-up that we had that was worked up in 2008 to come to … and I know you’re familiar with this, so I know I’m not saying anything that you don’t already know …
HCAD Appraiser: We came to a general insurance report that we’ve used, and worked up back in 2008. In determining that, that’s how we use this. So, that is our method in disaster reappraisal, for using mass appraisal, as you wanna call it. This is what we used to mass … use mass appraisal for all Mobile’s properties. So, based on the story of the property, based on what we estimated the level of flooding to be, we came to a percentage that I went over in my disaster calculation.
Pat O’Connor: The mass appraisal for the cost approach, of course, involves land value plus replacement costs.
HCAD Appraiser: Not in terms, and since we’re talking about the tax code, and specifically when it deals with disaster reappraisal, that has to do with improvement costs based on the level of damage at the time that the government declared that that was a disaster, on August 23.
HCAD Appraiser: So, based on the factors of how much flooding it had, and the story, we come to a percentage that we calculate out, and that only has to deal with the improvements.
Pat O’Connor: Since you’re referencing the tax code, I’m familiar with that section. It’s 23.02.
HCAD Appraiser: That’s what I said. I said…
ARB Member: Okay. Gentlemen. I’m gonna state this. It’s the last time I’m stating it. If you have specific questions about his evidence and testimony, as his questions. If not, proceed with your evidence and your testimony. I’m not gonna listen to this back and forth.
Pat O’Connor: What … How did you estimate repair of costs?
HCAD Appraiser: We estimated the repair costs, again, based on the story height and what we estimated to be the flood depth, and we came to a percentage that we calculated for the replacement cost
ARB Member: And that was in his testimony.
HCAD Appraiser: Which was in my testimony, again.
Pat O’Connor: What’s the data source?
HCAD Appraiser: It was a general insurance report that we developed back in 2008. I’m saying the same things over and over.
Pat O’Connor: And what type of repairs does it include?
ARB Member: Mr. O’Connor…
Pat O’Connor: It’s a relevant question
HCAD Appraiser: I’ve answered your question more than once. I said the feet of flooding…
ARB Member: Mr. O’Connor…
HCAD Appraiser: Combined with the story height gave us a percentage, an actual percentage damage. So, again, I’m referencing that these are estimated based on this specific information. We don’t have actuals because we’re not the property owner, so that’s the same thing in terms of when we’re estimating repair costs for if this house just experienced normal deterioration. If we don’t have actuals, we have to use something to come to an estimated level.
HCAD Appraiser: So, if you have actual repair costs, I would be more than happy to include that in the replacement cost in this building, but this is the way we have to do it. So, to answer your question in terms of how we came to mass appraisal, feet of flooding combined with the story height, gave us a percentage … estimated percentage damaged, which gave us our estimated replacement costs for this particular building, which we included with the certified land value; and yes, we can do that in the event of a disaster reappraisal.
Pat O’Connor: Did you consider economic obsolescence or economic depreciation?
HCAD Appraiser: I’ve answered the question.
ARB Member: You have.
Pat O’Connor: That’s a different question. That’s ….
ARB Member: Mr. O’Connor
Pat O’Connor: That’s at the heart of the matter here, ma’am.
ARB Member: No, no it isn’t.
Pat O’Connor: Yes ma’am, it is.
ARB Member: No it isn’t. If you wanna us estimates in testimony of what the damage was to your specific properties, we’ll be happy to look at them; and we’ll adjust accordingly, okay? But, we need that information. If the district doesn’t have anything … I’m not speaking for them, but if they don’t have anything … They gave us what they think the value should be. This is the sheet they gave us. They said that’s what the value should be. Okay, I want to hear your evidence. I wanna see your evidence of what the cost to repair, or what the damage was to subject properties.
ARB Member: That’s what I’m here for. That’s what this panel is here for, and that’s how we’re gonna proceed.
Pat O’Connor: Okay. I’m happy to provide that, while I do want to protest in the strongest possible terms, the tax code does allow us to cross-examine. The issues aren’t resolved, and this is a matter where … that is new to all of us … but, I will go ahead and present my evidence.
Pat O’Connor: The first thing I will start with is information on the types of depreciation. There are three types of depreciation. Depreciation is part of the cost approach, and the three types of depreciation are …
Pat O’Connor: Physical, which is a gradual wearing away of property.
Pat O’Connor: Functional. An example of functional depreciation would be not having a bathroom that en keeps the house, or not having enough bathrooms in the house, includes not having air conditioning, having a torn ceiling tile. Those would be examples of functional depreciation.
Pat O’Connor: Economic depreciation is also called external obsolescence. The terms are interchangeable, and it’s a change in value from a source outside the property. So, if someone was underneath a landing flight near an airport, that house would be worth one that didn’t have that impact. If someone lived next to a slaughtering house or another property, that would have an impact; and if you look at the issue of, is there an impact to buying a house on, effectively September 1, before it’s even been dried out, 2017, there’s a reasonable question as to whether or not there is a reduction on value.
Pat O’Connor: We did that study in October and November of 2017.
ARB Member: We need another copy. I think you might as well hand us all your evidence on this property at once. I’m not gonna piece meal it, so get all your evidence together for us.
Pat O’Connor: Okay, but I would suggest this will make it harder to…
ARB Member: You’re supposed to do this before hearing. Reference of median … we need another copy. Reference of median …
Second ARB Member: Right there
ARB Member: You have one. I gave you one.
Second ARB Member: Oh okay.
Pat O’Connor: So, I believe the beginning point is to look at the definitions for depreciation.
ARB Member: You’ve already gone over those.
Pat O’Connor: So, this…
ARB Member: I’m gonna give you a little longer. I’m gonna give you ’til 9:15 to get through all this for this first hearing. We’ve already been on it for like thirty minutes.
Pat O’Connor: Ma’am you can read an arbitrary guideline if you want. I’m just trying to do the right thing…
ARB Member: I understand but I …
Pat O’Connor: So we can have the information of value for this property owner.
ARB Member: It would be more prudent to get to the actual information that you have for this particular hearing.
Tonya Felix: All of the information we’re presenting is relevant to the subject property, to all of the subject properties on this docket today, so we would like to take a little bit more time…
ARB Member: You’ve got ’til 9:15
Tonya Felix: It is going to…
ARB Member: You’ve got ’til 9:15
Tonya Felix: Alright, well the law says that we have the opportunity to present our…
ARB Member: Yes you do, but it’s not unlimited time. Proceed.
Pat O’Connor: Economic obsolescence is the least understood type of depreciation, and the cost approach is the most difficult approach to value. It’s more difficult than the income approach. It’s more difficult than the sales comparison approach. In addition to having three different kinds of depreciation, you have both physical … you have both curable and incurable.
Pat O’Connor: Curable depreciation would be something like Harvey, where there’s a cost to fix it, and you can fix it.
Pat O’Connor: Incurable would be something like a house built without bathrooms. That’s very difficult to cure, something like that.
Pat O’Connor: The economic depreciation that occurs, occurs because people do not want to own that house that was previously flooded. So, go to the Property Analytic Survey. This was conducted in October and November, and our effective date basically says the first week of September, so if anything we’re feeling at the beginning of September, then they were later.
Pat O’Connor: This is showing a meeting and discount, page 3, for houses that have been repaired of 11 and 14%, and showing a discount of unrepair houses for 61-65%. It probably took over 1000 hours of work to conduct this survey, and I’d like to tell you what was done, but what I’m gonna do instead go to the survey, which begins … The page is not numbered but it’s the first page that has a bar graph like that.
Pat O’Connor: The first question is … Would you be less likely to purchase a house if the seller indicated it had flooded on the Texas seller disclosure form? Ninety-one percent said “Yes”. This is in October/November, shortly after, and it’s after our valuation date; and you may or may not be aware, but if you sell a home in Texas, unless you’re a banker or an executor, you must supply the Texas Seller Disclosure Form. It’s mandatory, and if there’d been flooding, and this part is not as clear … The flooding is not of the home. The flooding is of the property. If you look at the form, it refers to the property, so if water comes halfway from the street to your home, your property flooded, and you have to check the box.
Pat O’Connor: The next question addresses that, and sixty-seven percent said that it’s more important that it flooded than [inaudible 00:18:40] the flooding. Next one is, would you buy a home that flooded? Harvey’s own is what I intended it to mean here, under any circumstance. Seventy-seven percent said “No”.
Pat O’Connor: Then you get into the discounts that are appropriate. People had a number of different opinions in different cases, but the basic bone of contention between us and the appraisal district is this … We believe, if someone were to buy a flooded house, there’s an adjustment in addition to the cost to repair it. So, I’ve asked you to sort of work with me in this thought experiment for just a second.
Pat O’Connor: Imagine it’s a week after Harvey, when we’re doing our valuations, and a friend comes to you … actually not a friend, just say someone comes to you and they say, “Hey, I heard about this house that flooded. Before Harvey, it was worth $200,000, and we figured it out to the penny, it’s gonna cost $50,000 to repair. Would you pay $150,000 for it?”
Pat O’Connor: That’s really the question we’re trying to address here. If not, why not? There’s two reasons people would not pay the $150, 000 for a house in that case. The first is that it may not be worth $200,000 when it’s finished. We’re seeing about a 10-15% differential, and [inaudible 00:20:06] this will diminish over 2-5 years; and one of the studies I’ve given you has information on a number of studies, and it shows that these effects do diminish. But, as of this time, there is a difference in value.
Pat O’Connor: The other one is the profit incentive, and people do not buy flooded homes just to break even. People who buy flooded homes and other investment properties, do it to make a profit, and the normal profit margin is in the range of about 25-35%. That’s what people do. I’ve done this myself. I’ve bought about a hundred and eighty properties. I still own about sixty of them that I’m trying to sell one way or another, and that’s our typical margin. We’re able to buy properties that trustees sell for the 30% discount.
Pat O’Connor: You may not agree with me that 30% is an appropriate discount off the value of a home forthwith because that’s what an investor will pay.
Pat O’Connor: Did you give out the Chronicle article?
Tonya Felix: Yes
Pat O’Connor: One of the Chronicle articles you may have seen already has a reference to dimes on the dollar … if you saw that article. So, we’re not asking for dimes on the dollar. We’re asking you to take a look at the data; and so basically, maybe I’m trying to do too technical approach, but the issue again, in summary, is, the appraisal district, in my opinion, is not considering the impact on value beyond the repair costs. I do not believe that that fully accounts for all [inaudible 00:21:36] in value that occurs.
Pat O’Connor: So, why do I say that? If you’ll go to the packet that looks like this. Just stay on the front page for a second, and I’ll explain my handwritten notes.
ARB Member: Okay.
Pat O’Connor: Then we can look at some of the detail behind it, and I actually numbered the pages. Remember how much easier that makes it.
Pat O’Connor: On the first page, when we looked at sales compared to HCAD’s certified value. So, believe or not, we’re trying to work within HCAD’s construct of working off the certified value, so we’re comparing the sales prices of homes that flooded to the certified 2017 value. What we saw, for a sample that’s included that’s in the same area is a 31% reduction. I’m sorry, 39% reduction.
Pat O’Connor: So we’re multiplying the pre-flood value by 61%, 100% minus 39%, and that generates a value of $534,000. From that, I would deduct $30,000 for remediation, because the homes that sold have not had issues … I’m sorry … The homes that sold have had sheetrock removed, carpet removed. Most of them have mold certificates. They’ve been dried out, and from the numbers I’ve seen, it’s numbers like $10,000 for a smaller house to $30,000 for a larger house.
Pat O’Connor: If you don’t agree with my numbers, pick what number you think is reasonable, but it really does cost money, and we’re looking at market values here. We’re not looking at how much [inaudible 00:23:14] do it yourself if you did it. Again, you may or may not agree on that, but my opinion, we’re looking at market value. You’re to sell this property, what would someone consider paying for the property, based on the condition that they would also have to trash it out, including the sheetrock, carpet, drying it out with all those fans, and then mold remediation mold certificate.
Pat O’Connor: So, it’s 534 minus 530, call it $505, 000. The second ones, I looked at the improvements on the properties that sold, and we subtracted out the HCAD values. I know you’re all familiar with that method, so we simply, for these properties, took the sales price of the properties, we deducted the HCAD 2017 certified value, and then we … I think the value in the range of $16/sq ft is reasonable based on that data. When you do the math, and I’m gonna round to the nearest thousand unless anyone prefers more numbers, but it’s $336,000 for the improvements, and notice for the certified land value, if I have it right is $231,000. That’s roughly $567,000. Again, I’m deducting $30,000 for the remediation, so I’m at $504,000 on the median reduction approach. I’m at $537,000 on the per square foot approach.
Pat O’Connor: If you’ll turn to the next page, this is information on, I can’t see the number, but these are sales in that general area. For whatever reasons, there’s more Ds and Cs. There’s a couple at the bottom that are As, and if you look at those two comps, there’s a column that’s a little bit to the…
ARB Member: We’re not looking at equity on this. We’re only looking at market.
Pat O’Connor: This is market Ma’am. These are the sales.
ARB Member: Yeah, but these are … Go ahead. You’ve used up your time. You’ve got about ten minutes.
Pat O’Connor: Maybe I’m not being clear, but these are comparable sales. All these properties sold, and this is not an unequal appraisal analysis. There’s, I mean the one good news perhaps, is there’s not gonna be an unequal appraisal presented. These are comparable sales in the area of the subject, and this shows the value, the 2017 certified value; and it’s showing that on median, the sales price is 39% lower than the 2017 certified value. So, if you look at the top one, the sales price was $142,000 versus a certified value of about $290,000 I think. $280,000/$290,000. So, these are comparable sales. For the eight properties, the sales price per square foot is in the range of $16 a square foot.
Pat O’Connor: The subject property was built in 1982. The item 2 sales, one’s an A, one’s an A- and they were built in ’80 and ’82, so they’re very similar in terms of the age. They are a lot smaller, so if anything, that would indicate a lower price per square foot for the subject. The subject is 5,600 square feet, and it’s seemingly much larger. I’m not taking any adjustment for that 3,400 and 3,200 square feet for the two sales.
ARB Member: The problem that I see with this report … None of this report tells me anything about the property, if they flooded, if they didn’t flood, what was wrong with them, what the condition was, so you can give me a median from this market. What I’m interested in is trying to determine, help determine the value of this property at. For disaster reappraisal is what damage did this property have, specific property have, and what evidence do you have to support that? That’s what I’m looking for. That’s what the panel’s looking for.
Pat O’Connor: Well, I’m excepting HCADs level of flooding is the evidence of the level of flooding, and I’m working from that to value the property.
ARB Member: Do you have any estimates it cost to repair?
Pat O’Connor: Most of our clients did not provide us any estimates for cost to repair, but it’s the appraisal’s job to value property.
ARB Member: See, I understand your argument, but this issue isn’t about an argument. This is about evidence and what you can support, what the damage was, and the cost of repair. That’s what we’re looking for.

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Blog Author

Patrick O’Connor, MAI, Owner and President
Patrick O’Connor has been active in reducing property taxes, providing expert witness testimony and appraising commercial real estate property since 1983. Pat is active in publishing analyses and data with respect to the real estate market, while being a highly regarded media spokesperson for the real estate community. He holds a MAI, the highest achievable designation from the Appraisal Institute, and is a licensed senior property tax consultant. Pat earned a Master of Business Administration from Harvard University. In 2001, he authored the first definitive consumer guide to Texas property taxes, Cut Your Texas Property Taxes.

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