Taxation of Residential vs. Non-Residential Property In Colorado Is a Growing Problem

How real estate is taxed varies greatly from state to state. Here in Colorado, we are blessed with very low property taxes compared to many other states. According to USA Today, Colorado has the 7th lowest property tax rates in the country, although that is a statewide average. The median-value home in Colorado has a property tax bill of just over $2,000 per year, whereas the median-value home in New Jersey, the highest taxed state, has an average property tax bill of over $7,200. In suburban New Jersey, property tax bills over $20,000 per year are not uncommon because of the higher values, not just due to higher local tax rates.

In Colorado, property taxes are very much a local affair. Recently there was a hullabaloo over Metropolitan Tax Districts, in which mill levies can double the property tax in newer subdivisions. You can read my Dec. 26  column on that topic at JimSmithColumns.com.

This week, however, I’m going to address a different property tax problem that is getting worse every year and has little prospect of being solved politically.

The problem is the growing differential in property tax rates for residential vs. commercial and other non-residential real estate, such as vacant land. First you need to understand that property taxes are levied against the “assessed” value of real estate, which is a small percentage of its  actual value. While the assessment rate for residential property — currently 7.15% — keeps going down, the assessment rate for non-residential property is fixed by the state constitution at 29%. That means that the property tax on residential real estate is 1/4 the property tax on non-residential real estate of the same value.

Rita and I own two pieces of real estate—our south Golden home and the Golden Real Estate office building. The county assessor values our home at twice the value of the office building, but the property tax for our home is one-half the property tax for the office building.

Vacant land is considered non-residential, so it, too, has an assessment rate of 29%.  As I’ve written before, this puts enormous pressure on the owners of vacant land to develop it, which is upsetting if, like me, you value keeping vacant land undeveloped.

To understand how unfair the taxation of vacant land can be, consider a 20-acre parcel in Jefferson County that is currently listed for sale. The county’s current valuation of the parcel for tax purposes is $275,554, so its assessed valuation is 29% of that, or $81,071.  If the buyer of this land builds a high-end home on it, the valuation might increase, for argument’s sake, to $700,000, but its assessed valuation would be only 7.15% of that value, or $50,050. Thus, the property tax bill would drop by nearly 40%, even though the value of the parcel has nearly tripled!  The current owner is paying over $7,000 per year for his land to sit vacant.

As I’ll explain below, the assessment rate for residential property keeps falling.  Last year it was 7.2% and two years before that it was 7.96%.  Prior to 1982, property of all types had an assessment rate of 30%, but the Gallagher Amendment changed the non-residential rate to 29% and the residential rate to 21%.  Most significantly, the amendment also dictated that the residential assessment rate should be adjusted to retain that year’s 45:55 ratio of residential to non-residential statewide property tax revenue in subsequent years.

As a result of that provision, since total residential valuations have grown much faster than non-residential valuations statewide, the 21% assessment rate of residential property has kept falling and will continue to fall.  And this is likely never to change, since owners of residential property are the voters, and it’s unlikely that homeowners would ever vote to increase their residential property taxes in order to soften the property tax burden of businesses. 

Bottom line, residential real estate will continue to bear an ever smaller property tax burden compared to non-residential real estate, and owners of vacant land will feel more and more pressure to develop their vacant land or sell it to developers. The only alternative is to put livestock on the land or to farm it so they enjoy the even lower agricultural property tax rate, but the rules for qualifying for the agricultural rate are fairly strict and are aggressively audited, I would expect, since the cost to counties in lower tax revenue for agriculturally zoned property is pretty substantial.

As the Housing Crisis Deepens, Zoning Laws Are in the Crosshairs

In December 2018, Minneapolis made news when it abolished single-family zoning. That began a nationwide conversation about the use of zoning laws to restrict growth and density at a time when housing affordability was worsening and homelessness was increasing.

One of our broker associates, Chuck Brown, attended the National Association of Realtors convention last November in San Francisco. I had attended the same convention there several years ago. I hadn’t noticed many homeless people on the streets back then, but Chuck reported that it was way out of control now, with the streets overcrowded with homeless people.

You, like me, have probably followed the coverage of homelessness in Denver, with that city passing an urban camping ban, which was ruled unconstitutional by a lower court but is still being enforced pending an appeal by the city. It could go all the way to the Supreme Court.

The conversation over zoning created by Minneapolis 13 months ago is growing louder. That’s because the history of zoning is one of intentional discrimination. In researching this topic, I read a Fast Company posting on the history of zoning in San Francisco.. After the 1906 earthquake, the Chinese population there was targeted by zoning changes designed to promote and protect white enclaves. This was long before there were federal laws making discrimination based on race or national origin illegal.

That Fast Company article included the following detail regarding the role of the mortgage industry: “In 1934, as part of President Roosevelt’s New Deal, the Federal Housing Administration (FHA) was established to insure private mortgages. The FHA’s underwriting handbook included guidelines that pushed cities to create racially segregated neighborhoods and encouraged banks to avoid areas with ‘inharmonious racial groups,’ essentially meaning any neighborhood that wasn’t exclusively white.”

Another New Deal program to help homeowners threatened with foreclosure to refinance their home with low-interest long-term mortgages, provided lenders with “safety maps” which used red shading for risky areas which were under “threat of infiltration of foreign-born, negro, or lower grade population.”  This is the origin of the term “redlining,” and the practice wasn’t outlawed until the Fair Housing Act of 1968.

Last week I attended a meeting of the Group Living Advisory Committee in Denver’s municipal building, where they are discussing a zoning amendment which would dramatically increase the number of unrelated persons who can live in a single family home. You can expect this proposal to arise in suburban jurisdictions, too, even if they don’t follow Minneapolis in getting rid of single-family zoning altogether.

I’ll be reporting again as this conversation evolves. Don’t shoot me. I’m just the messenger.

Buyer Beware: You May Be on Candid Camera When Looking at a Home

The use of internet-connected cameras such as the Ring doorbell is becoming more and more common. Rita and I have both a Ring doorbell and four other cameras protecting the entrances to our home plus the garage, and the Golden Real Estate office has a total of 10 cameras covering the interior, exterior and our parking lot. Such systems are increasingly affordable and easy to set up, since they require no wiring and can be monitored on any smartphone. Their video (with sound) is motion-activated and uploaded to “the cloud” so that you can go back in time to see past activity. You can also be alerted real-time on your smartphone when motion is detected by any of the cameras.

With the widespread adoption of such internet-connected home cameras, it is becoming more and more possible for sellers to eavesdrop on buyers who tour their home. You can understand the value to a seller of hearing what you say as you look around. Imagine, for example, if you were caught on video saying to your agent, “I love this house! I’ll pay whatever I have to for it!”  You wouldn’t want the seller to hear that, would you?

There are, of course, legal implications to such surveillance. On the one hand, sellers have the right to install such equipment for home security, but buyers and their agents also have a “reasonable expectation of privacy” while touring your home when you’re not there.

While Colorado law allows you to record your conversations with another person secretly, that is only because you are a party to the conversation. Taping a conversation to which you are not a party is a serious matter for which you could be subject to both civil and criminal liability.

Every year, licensed real estate brokers are required to take a 4-hour real estate update class as one element of their continuing education requirement. This year’s class, which all Golden Real Estate agents take in January instead of later in the year, devotes 10 to 15 minutes to this topic of audio and video surveillance by sellers. 

In that update class, we were instructed to advise our buyer clients that they might be under surveillance while touring a home and should be careful what they say. We were also instructed to have a conversation with sellers about this topic, advising them of the legal dangers of recording buyers. It was suggested that, if our sellers do have such equipment, we urge them to post a notice next to the doorbell or prominently inside the house to the effect that “audio and video surveillance is in use” in the house. We should also put that information in the MLS listing, to protect ourselves as listing agents.

It is understandable for sellers to be concerned about strangers being escorted through their home by brokers who they do not know. When this issue is raised by a seller during a listing presentation, I let them know that no buyer will be touring their home without a licensed broker, and that all licensed brokers undergo a criminal background check and are fingerprinted in order to be licensed. Brokers would be risking their license and their livelihood to allow themselves or their buyers to commit a crime in your home. Moreover, the showing service is diligent about not providing the lockbox combination to anyone who is not a licensed broker. Your broker can also install an electronic lockbox which provides even greater accountability as to when each broker enters and leaves your home.

I have been a practicing real estate broker in Colorado for nearly two decades now, showing hundreds of listings per year to prospective buyers and holding scores of open houses for my listings.  I have yet to be made aware of any loss sustained by a seller or any misdeeds by my buyers.

Our low crime rate here in Colorado is reflected in our lowest-in-the-nation premiums for errors and omissions insurance.  In Colorado the cost of such insurance is $200-400 per year, depending on the coverage limits. In some states, like California, I’ve heard that brokers can pay that much per month for E&O coverage. 

Is Your Gas Furnace or Gas Water Heater About to Fail? Consider a Heat Pump

A reader called me last week because her gas furnace had quit working and, knowing my expertise regarding sustainability, she wanted my advice on replacing it.

I told her that this was an opportunity to do something other than buy a new gas furnace.  I told her about my Carrier “Hybrid Heat” furnace which uses an air-source heat pump for heating as well as cooling and only burns gas when the outdoor temperature dips well below freezing. With her solar panels, it’s possible she won’t even pay for the electricity consumed by the heat pump, and her gas consumption will plummet.

That hybrid system would use her home’s existing ductwork, but, since she has a one-story home, I suggested she consider a ductless mini-split heat pump system like the one we have at our office. I gave her the name of the vendor who installed both my home and office systems who could advise her which system was best for her.

I also suggested that she look into replacing her gas water heater with a heat-pump model when it fails.  My gas water heater is over 15 years old, so I’m thinking of replacing it before it fails. Home Depot sells a Rheem 50-gallon heat pump water heater (model #XE50T10HD50U1) for $1,299. Best off all, Xcel Energy gives its customers a $500 rebate for purchasing it.  I have enough solar panels to handle the extra electrical demand and eliminate much of my current gas usage, which is mostly for water heating, since I have that Carrier hybrid furnace. Our only other gas usage is for cooking and grilling.

Celebrating Martin Luther King Jr. With His Words

We’re all familiar with Martin Luther King Jr.’s “I Have a Dream” speech on the steps of the Lincoln Memorial, but this Monday, CBS This Morning (my favorite morning TV habit) featured the audio of Martin Luther King Jr.’s “American Dream” speech given on Feb. 5, 1964, at Drew University, interleaving the recording of his words with two of his children and one grandchild reading his words. It was very inspiring.

You can watch that well-produced segment online at: https://www.cbsnews.com/video/mlk-jr-s-children-grandchild-read-his-american-dream-speech/

You can read the full 6,700-word speech at: https://depts.drew.edu/lib/archives/online_exhibits/King/speech/TheAmericanDream.pdf

Plant-Based Meat Has Won Us Over

First, Rita and I tried the “Impossible Whopper” at Burger King, and we liked it — can’t tell it from the regular Whopper. Then Rita found the package shown here at Costco — eight 1/4-lb. patties for $14.99. She cooked them in a pan and seasoned them as she would regular burgers, topped with pepperjack cheese and sautéed mushrooms, and served the patties on a bed of romaine lettuce and sliced tomatoes with a balsamic vinaigrette dressing. On another occasion she substituted Roast Pineapple & Haberno Sauce for the dressing, and it was even more delicious.  Try it! You’ll thank me for telling you about them!

Committed as Rita and I are to mitigating climate change, we recognize the desirability of reducing our consumption of beef, and this product makes that really easy and enjoyable.

Let’s Separate Fact From Fiction Regarding Credit Scores & Home Mortgages

By JIM SMITH, Realtor

The ink may barely be dry on your 2020 financial resolutions, and already there is great news for those of you who have resolved to become first time homeowners or to increase your real estate holdings in 2020. Both the National Association of Realtors and the Mortgage Bankers Association predict that interest rates will remain at record lows (at or below 4.0%) for most of 2020. 

Of course, interest rates directly affect your home buying power, and you are probably aware that credit scores also directly impact the interest rates offered to you by mortgage lenders. What we don’t always know, however, are the specific actions that will hurt or improve our credit scores. 

So, let’s separate fact from fiction. I thank Jaxzann Riggs of The Mortgage Network for helping me with debunking the following fictions.

Fiction: Shopping for a mortgage lender and allowing more than one lender to review your credit report will hurt your credit score.

Not true. When multiple inquiries appear on your report from mortgage lenders, the scoring models assume that you are shopping for a home loan. Most scoring models consider inquiries from mortgage lenders that occur within a 15 to 45-day period to be one inquiry, having little or no impact on your score. Regularly monitoring your own credit score online prior to applying for a home loan is an effective way to identify any errors contained in your credit file and to obtain a sense of the score that lenders will be using when preparing credit offers for you. It is important to note however, that there are in excess of 20 different scoring models and that online “consumer” reports typically have a higher score than your mortgage lender sees when pulling a “tri-merged residential mortgage” report. Most lenders are willing to start the prequalifying process with a copy of your online report but will require their own report prior to issuing a preliminary loan commitment which is normally required at the time that you write an offer to purchase a property.

Fiction: Opening a new credit card account will increase your score.

The average age of your open accounts impacts your score, and since opening one or more new accounts brings the average age of your total credit profile down, opening new accounts is normally not wise. The exception to this is the prospective first-time buyer who has little or no credit. Obtaining a retail or major credit card helps to build credit “depth.”

Fiction: Carrying a balance helps to boost your score.

Maintaining a balance on your cards does not improve your score, it simply costs you more in interest fees. Utilization of available credit is an important factor in determining your score. If you are unable to pay your credit cards in full each month, keeping the balance on the card below 30% of the credit limit is best. Another strategy to improve “utilization” is to request that your card issuer increase your credit limit. By increasing your available credit line but not your balance, you instantly lower your utilization.

Fiction: Closing accounts that you don’t use will boost your score.

Rather than closing a high interest rate card that you no longer use, request that the creditor reduce the rate and/or occasionally use and then promptly repay the card in full. Closing accounts reduces the overage credit available to you, which negatively impacts both “utilization” and “duration” of your credit profile.

    Questions? Just call Jaxzann Riggs of The Mortgage Network at 303-990-2992.