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Property taxes can jump after a sale, skewing real estate underwriting
Using the seller’s current tax bill can miss reassessment rules, and a higher assessment can materially reduce NOI and property value.
HousingWire warns that a common underwriting mistake is simply carrying over the seller’s current property tax bill into the deal pro forma, without accounting for reassessment after the purchase.
The outlet says reassessment near a new market value can raise taxes materially. It illustrates this with a simplified apartment example, where a property worth $1 million under the current assessment and paying about $20,000 per year in property taxes could face taxes that rise toward roughly $60,000 if reassessed after the property’s value increases to $3 million.
HousingWire notes that underwriting based on outdated tax costs can then ripple into valuation because real estate is generally valued using net operating income, or NOI. In the example, a $40,000 annual increase in expenses lowers NOI by $40,000, and at a 7% capitalization rate, the outlet estimates the NOI drop translates into about $571,000 less value, along with a potential cash flow shortfall for the buyer.
The piece emphasizes that historical financial statements reflect how the property performed for the seller, while an investor’s underwriting must model how property taxes and other expenses will behave after the sale, including jurisdiction-specific timing and mechanics.