Property tax appeal for lakefront home purchased in “short sale” falls short – Indiana Board of Tax Review finds that seller’s “financial duress” and limited marketing time for property sold at auction compromised reliability of comparable sales

Taxpayers acquired a lakefront home at auction in 2009 and challenged the property’s assessed value.  The Knechts relied on the price that they paid for the property in a “short sale,” as well as on two appraisals prepared in conjunction with obtaining financing.  The date of purchase and the effective dates for the appraisals were more than one year following the relevant valuation date for assessment purposes.

Before 2010, the assessment and valuation dates in Indiana were different.  The assessment date is March 1 every year; for the March 1, 2009 assessment date at issue in this appeal, the valuation date was January 1, 2008 – this bifurcation has been the source of much confusion and frustration over the years.  Starting in 2010, the dates mercifully were merged.

The Owners’ position.  The property was assessed at approximately $2.5 million.  They owners asked the Indiana Board of Tax Review to consider what they had paid for the subject property ($1,425,000) and the two appraisals valuing the property at $1,500,000 and $1,535,000, respectively.   The Knechts purchased the lake home at auction for $1,425,000 in March 2009.  The owners claimed that, even though the sale was a “short sale,” it was an arm’s length transaction involving five or six bidders at the auction.  The owners’ appraisal developed both the cost and sales approaches to value, relying on the sales approach to conclude to a final value.  Their appraiser (Rutsey) certified that the report was prepared according to the Uniform Standards of Professional Appraisal Practice (USPAP).  The appraisal valued the property at $1.5 million as of March 25, 2009.  The owners offered a second appraisal (by appraiser Capozza) valuing the property at $1,535,000 as of March 1, 2011.

The Assessor’s position.  The Assessor’s witness, an appraiser (Beer), “felt that the sale was something less than an arm’s-length transaction.”  Page 7, ¶ 23.   Beer believed that short sales were improper comparables because “the seller is usually under duress.” Id.  He further described auctions as normally “stressful‖ situations.” Id.  Beer further contended that, regarding the subject sale, the seller (a) was in financial trouble and (b) was forced to sell in a timeframe that was shorter than most marketing times during that period.  In short, Beer believed that the owners acquired the lake home below its market value.

The Board’s ruling.   The Owners failed to prove that an assessment reduction was justified.  The problem, the Board explained, was that the evidence failed to relate the property’s value to the January 1, 2008 valuation date.  According to the Board:

The Knechts rely on their purchase of the subject property for $1,425,000 and on two appraisals valuing the property at $1,500,000 and $1,535,000, respectively.  All three items, however, have a significant evidentiary problem—they address the property’s value as of dates more than one year after the relevant January 1, 2008 valuation date at issue in this appeal. In fact, Mr. Capozza’s appraisal values the property as of March 1, 2011—more than three years after the relevant valuation date.

Page 10, ¶ 31.  The Owners “did not really attempt to explain how those items related to the subject property’s market value-in-use as of January 1, 2008.”  Page 10, ¶ 32.  The Board observed that appraiser Rutsey relied on sales from 2007 and 2008 – a period which might show some “inherent relationship” to the valuation date.  Id.  In fact, the Board noted that the Department of Local Government Finance – the Indiana agency responsible for crafting the State’s assessment rules – required assessors to use sales from this same two-year period to prepare sales-ratio studies for purposes of annual assessment adjustments.  Id. (citing 50 IAC 21-3-3(a) (2009)).  But the sells Rutsey used ranged from September 11, 2007 to August 7, 2008, and the Board noted that there was “significant market depreciation somewhere between September 2007 and August 2008.” Id.  Though it was unclear, the Board asserted that the market may have peaked around the valuation date. Id.  Consequently, “[u]nder those circumstances, neither the appraisals nor the March 2009 auction price reliably show the property’s market value-in-use as of January 1, 2008.” Id.  

The Board further reasoned that the auction price did not appear to reflect market value.  Page 10, ¶ 33.  The Board explained:  “The evidence in this case shows that two key indicia of a market value sale were missing—the seller was atypically motivated and the property was not exposed to the market for a reasonable time.” Id.  The Board assumed that by “short sale” the parties meant “a sale in which the sale price was less than the amount that the seller owed on the property.”  Page 10, ¶ 34.  Here, the seller was under financial duress, the property sold for significantly less than the seller’s original and last asking prices, and the property was twice offered for sale after having been exposed to the market for “significantly less than the average marketing time for lakefront properties” in the area. Id.  However, the Board stressed that its decision was not a bright line ruling about the reliability of “short sales” in assessment appeals.  The Board emphasized:

That is not to say that an auction or short sale automatically fails to qualify as a reliable indicator of a property’s market value-in-use. The same is true regarding sales for significantly less than a property’s list price. The Board also recognizes that there may be situations where enough properties in an area are sold in forced sales or are otherwise sold under duress as to effectively constitute the market. But that is not the case here.  Given the totality of the circumstances, the weight of the evidence shows that the seller in this case was under duress and the price that the Knechts paid for the subject property is not, by itself, probative of the property’s market value-in-use.

P. 11-12, ¶ 35.

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