Skolnik Real Estate Consulting Services
Martin A. Skolnik, MAI
President/Principal
Consultant
Property Tax Consulting – Fixed Fee or Contingency Fee??
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here’s
an old adage with says, “You get what you pay for!” That does NOT necessarily hold true in
property tax consulting work.
Generally,
there are two ways of paying for property tax consulting services. A flat fee based on the amount of work a
consultant will expect to perform, or on a contingency fee that is based on the
amount of property tax savings the consultant achieves for the client.
Each
offers the client benefits, and each has weaknesses. Ultimately, the client must decide what is in
their best interest when choosing a property tax representative.
The
question of which fee plan you go with depends in part on your understanding of
the property tax assessment appeal system in
Please
don’t confuse the job that an attorney will do for you in a property tax appeal
on a contingent basis with that of a “tax consultant” or “tax rep”. An attorney, regardless of how they are
compensated, provides useful legal services and can help navigate the
administrative rules and laws regarding tax appeals. As you will see as you read further, it is
the services of a “tax consultant” that I question, not that of an attorney.
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ome tax consultants contract with the property owner for a
contingency fee. That is, if the
consultant achieves a reduction in taxes for the property owner, the consultant
receives a portion of the tax savings as the fee. This percentage can be any amount agreed upon
by the two parties. In my experience
some of the highest fees I have seen have been in
Some property owners tend to favor a contingency fee
arrangement like this since it seems to place the risk of achieving success on
the tax consultant. If there is no
success, there is no payment owed.
On the other hand, many owners and consultants do a flat fee
or hourly fee arrangement whereby the consultant is paid based on the actual
amount of work they perform for the client.
The property owner benefits from a large assessment reduction, not the
consultant.
Remember, most reputable, professional tax consultants and
appraisers have a general idea of the merits of a potential case in advance of contacting the property
owner. Most consultants and appraisers
do this basic research in advance to determine for themselves the amount of
risk-reward for a particular contingency fee assignment.
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roperty owners must realize that professionals who are
licensed/certified real estate appraisers cannot, in many states, perform a
real estate appraisal on a contingency fee basis. Nor can they contract with a property owner
for a contingency fee and then subcontract
the actual appraisal work to a third party.
The Board that regulates appraisal licensing in these states can
penalize, fine and even revoke the license of a certified appraiser working on
a contingency fee basis.
Appraisers must take a flat fee for the appraisal (hourly or
fixed fee amount).
Just as an aside, if they are not licensed real estate
appraisers, why would you want them appraising your property anyway?
To still gain the benefit of a large fee, some tax
consulting firms charge contingency fees to the property owner/client, but then
subcontract with local appraisers to have the appraiser write valuation reports
on a flat fee basis. The flat fee
appraiser then becomes the expert witness at the Appeals Board.
If the appraiser is the expert witness, what then is the
function of the contingency fee consultant?
What do they do to earn the large
contingency fees?
The property owner must find out from the salesperson or
marketer selling the service who exactly is going to write the appraisal and
offer testimony to the Appeals Board.
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roperty
tax consultants offer their services, for a fee, to assist the property owner
in its appeal of the assessment. This
“service” varies from firm to firm, so the property owner must be aware of what
services it is getting, from whom, and for how much.
There
are several stages to an appeal:
Identification
of a potential case
Appraisal
Filing of
the appeal
Coordinating
the appeal
Appearance
at the appeal
Post-appeal
analysis and considerations
Appeal to
Court if the administrative levels are unsuccessful.
Most
property tax consultants do all these tasks for the property owner. The primary difference among service
providers is in the completion of the Appraisal. As mentioned, a consultant who is going to
accept a contingency fee as compensation for their services cannot complete an
appraisal or give expert testimony. An
appraiser who knows that his/her compensation is based on a large reduction in
taxes is motivated to provide a very low appraisal to persuade the Board of
Appeals to grant the largest reduction.
So,
what do property tax consultants do that are being paid on a contingency
fee? They hire outside appraisers
to complete the report for them. Then
these outside appraisers are the expert witnesses in front of the Board.
This
arrangement is perfectly legitimate.
Except that the property owner rarely knows that this is happening. The Tax Consultant, in many instances, leads
the property owner to believe that the Consultant’s firm will be completing the
appraisal. That, we believe is unethical
and not a good client relations practice.
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we have noted, a property tax consultant can be paid on either a fixed fee or
on a method contingent upon the results of the appeal. If there is a successful appeal, the
consultant gets paid. If not, the
property owner is not out-of-pocket for these services.
On
the face of it, it might look like a better deal for the property owner to work
out a contingency fee arrangement all the time.
After all, if there aren’t savings, there is no fee to be paid. This however, has several disadvantages,
which cost the property owner a lot of money.
Let’s
go back a step to the first bullet point above, “Identification of a potential
case”. In most instances, the property owner
is contacted by the tax consultant saying that there is a potential case. How does the consultant make this
determination? By research of land
records, experience with the appraisal of similar property types, and knowledge
of the local assessment appeals system.
Regardless
of whether the consultant will be paid on a fixed fee or contingent upon
success, s/he does the homework necessary to weed out marginal or poor appeals
cases. Taking a poor case to the Appeals
Board is a good way to ruin ones professional reputation!
If the consultant did not think your property is a
winnable case, you would not be getting contacted!
So,
what are the financial ramifications of flat fee vs. contingency fee? To the consultant, convincing a property
owner to accept a fee contingent on success is usually a windfall. The consultant attempts to convince the
property owner that he, the consultant is accepting all the risk of the appeal,
so that his fees should be higher. In
addition, many tax consultants will have the property owner sign two and three
year contracts, so that contingent payments are made to the consultant for
quite a while.
The
chart below highlights the differences to the property owner and consultant
based on a hypothetical situation:
|
Assessment Before the
Appeal |
$2,000,000 |
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Assessment After the
Appeal |
$1,400,000 |
|
Assessment Savings |
$ 600,000 |
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Local Millage Rate (tax
rate) |
$20.00 per 1000 |
|
One Year Tax Savings |
$12,000 |
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Consultants Percentage/Fee |
50% |
|
1st year fee |
$6,000 |
|
2nd year fee |
$6,000 |
|
3rd year fee |
$6,000 |
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Total Consultant’s Fee |
$18,000 |
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Property Owner’s Net 3 Years Tax Savings |
$18,000 |
Under
a flat fee arrangement, the consultant is paid based on its expected time and
expense in a project; much like a real estate appraiser, accountant, or doctor
is paid. The chart below offers this
example:
|
Assessment Before the
Appeal |
$2,000,000 |
|
Assessment After the
Appeal |
$1,400,000 |
|
Assessment Savings |
$ 600,000 |
|
|
|
|
Local Millage Rate (tax
rate) |
$20.00 per 1000 |
|
One Year Tax Savings |
$12,000 |
|
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Consultants Percentage/Fee |
Flat Rate |
|
1st year fee |
$7,500 |
|
2nd year fee |
$ 0 |
|
3rd year fee |
$ 0 |
|
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Total Consultant’s Fee |
$7,500 |
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Property Owner’s Net 3 Years Tax Savings |
$28,500 |
Of
course, flat fees vary according to the difficulty of the property appraisal, complexity
of the assignment and data availability.
The
property owner has to ask: “How much money am I really saving? How much money is the consultant making
versus the real risk of the appeal?”
Whose money is it anyway, the property owner’s or the consultant’s?
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he
property owner needs to weigh the risk and reward relationship in any property
tax consulting case. How much will they
spend? How much risk of achieving
results? The property owner has to
remember how the consultant came to
them in the first place – by research and understanding of property
values.
Ask
the consultant how many cases they have actually lost – in which there has been
NO reduction in property tax, at the Board level, at Court of Common Pleas, or
in a settlement scenario. The true
answer is very very few!
There
are no guarantees in this business – only promises. Even contingent fee property tax appeals lose
from time to time. However, the client
needs to understand how much money is at stake and who is reaping the rewards
of this service. Is it truly the
property owner? Or is it the tax
consultant?
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any of these consulting firms are primarily focused on sales and contracts and not the
valuation or testimony in support of the appeal. They tend to charge a large contingency fee
for coordinating the appeal service, not for performing the actual appraisal
work since these appraisers cannot by law do the appraisals on a contingent
basis. Some of these consulting firms
are merely focused on writing contracts, not for providing any technical
service.
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o, what is a property owner to do to protect him/herself
from an unscrupulous property tax consulting firm? Here are several key steps:
Know the
reputation of the firm you are dealing with.
Are they knowledgeable about the local appeals process? Have they done significant work in this area? Do they have a good track record of
successful appeals at the County Appeals Board and in Court?
Why has
the consulting firm contacted you? Find
out. Do they know something about the
local real estate market that affects your underlying value? Do they truly know your property, or are you
merely another listing on a “contact” sheet?
What are
the terms of the service contract? Are
they going to charge you as high as 50% of tax savings for each of three
years? Or, is a 25% to 50% commission
fee for one year sufficient to accept your engagement? Are you willing to pay a flat fee for the
appraisal and representation and take the risk that there will be no
savings? Whose money is being saved anyway?
What special service is the consultant offering which entitles him/her
to a three-year 50% contract? Does the
concept of “spend a dollar to save a dollar” really make good business sense,
especially over a three-year period?
Who is
actually going to write the appraisal and give the testimony? Real estate appraisals cannot be completed in
many states on a contingency fee arrangement.
Who will the consultant contract with to do the appraisal? Remember that the appraisal is the key to
success or failure since the burden of proof is on the taxpayer to show the
value is not in-line with the market.
When a
property owner contracts with the consultant, the contract should specifically
detail which appraisal firm will be doing the appraisal. The property owner should receive a complete
disclosure of the experience and background of the appraiser before the contract is signed.
If the
appeal to the County Assessment Appeals Board is unsuccessful, who will be
paying the bills for an appeal to court since, at the court level, there needs
to be an attorney involved as well as an appraiser?
If the
consultant submits something other than
an appraisal to the Board, the property owner should know what that will
entail prior to the contract being signed.
The property owner should have the opportunity (they should demand) to review any materials the
consultant is submitting to the Board.
Rate the real risk of a flat fee vs. a contingent
fee-consulting project. For the extra
dollars you spend for a contingent assessment appeal, are you really getting
your money’s worth?
Ask hard
questions to the consultant. It’s your
money at stake!
Skolnik Real Estate Consulting Services