WEST FARGO – Josh Ochocki got a letter in the mail the other day that said the value of his home had gone up ... way up.
It wasn't from a real estate agent but from the city assessor, and Ochocki was shocked. This is West Fargo, which has some of the hottest real estate markets in the metro area, but a $95,400 increase, or 29 percent, in one year seemed too high to him.
"There's not one bell or whistle in my place whatsoever," Ochocki said Wednesday, March 30. "They're comparing me to people who have granite and people who have sprinkler systems. I got none of it. Mine is a basic house that feeds my family of seven."
Valuations are used to calculate property taxes and he said he's worried his family won't be able to afford the increase.
Letters like the one Ochocki received have gone out across West Fargo and Fargo to property owners whose valuations went up 10 percent or more. There are a lot of them this year, according to officials in both cities. Moorhead will be sending letters to all property owners, and many can also expect their valuations to go up significantly.
West Fargo Mayor Rich Mattern, whose home saw a valuation increase of $65,100, or 41 percent, said he was also shocked. He said the valuations are required by state law, but the city can adjust the tax rate to reduce the impact on property owners.
Fargo Mayor Tim Mahoney said he, too, would be looking to cut the tax rate.
The metro area's red hot real estate market is what's driving the valuations upward in Fargo and Moorhead. The average home in Fargo saw an increase of 10 percent, said City Assessor Ben Hushka, who added he hasn't seen a double-digit increase in years.
The most affordable homes in Moorhead are seeing increases of 10 to 20 percent, City Assessor Peter Doll said. Homes that cost more than $180,000 saw increases of 2 to 5 percent.
But West Fargo is a special case because the city's valuations have not been keeping up with the market, requiring a significant adjustment.
"We're playing catch-up," said City Assessor Nick Lee.
Under the previous city assessor, West Fargo had a system of physically assessing one section of town each year, said City Administrator Tina Fisk. That meant sending out assessors to visit homes individually to figure out their values. If a home hadn't been sold, its values wouldn't change until the assessors got to it. As the city grew, the time between visits got longer.
This is a problem because state law requires assessed values to be within 95 percent of actual sales. West Fargo's assessed values was 86 percent of actual sales, Lee said.
County tax records show Ochocki's valuation hadn't changed from 2014 going back to at least 2009. Mattern's hadn't changed for five years. In 2015, both saw valuations go up 7 percent. That was the year the city did an across-the-board increase as a temporary fix while it began studying every property in town prior to using a new software system to better track changes in the housing market. That study and the new software is what caused this year's massive spike in property valuations.
Lee said the city was probably able to follow state law under the old system when its real estate market was more tepid, with sale prices rising 3 to 5 percent a year.
But between 2013 and 2015, sale prices shot up 29 percent, Fisk said. Last year alone, they were up 9 percent.
Moorhead started using the same software system last year and saw the same kind of big adjustments that angered residents. The city was within 90 percent of actual sales, the minimum required by Minnesota state law, but wanted to get to a more comfortable 97 to 98 percent.
Mayors to lower mills
For taxpayers, the shocking valuations won't necessarily mean shocking tax bills.
The main function of valuations is to determine a property's share of property-tax revenues relative to other properties. If the mill levy, meaning the tax rate, doesn't change and valuations go up, tax bills will go up and government coffers will grow richer. But if the tax rate drops by enough, it could keep the tax bill the same.
"We're bringing in more money, a lot more money if this is correct, so we should be able to correspondingly bring down our mill levies," Mattern said.
In Fargo, Mahoney said he anticipates a 5 percent increase in the budget using revenue from properties that were recently developed. It could be a "net neutral" for owners of existing properties, he said.
More spikes ahead
Homeowners can likely expect valuations increases in 2016 as well.
The valuations they're seeing now are based on sales in 2015 and the real estate market in 2016 may be just as hot or hotter.
Last year, the supply of "entry-level homes" in the $150,000 to $230,000 range was low relative to demand, according to Ben Schroeder, president of the F-M Area Association of Realtors. This year, the supply is 20 percent lower than last year. "It's another crazy year in real estate."
The housing market in West Fargo and south Fargo have been hot for years, and Schroeder expects they'll remain hot, but demand is such that many homebuyers are branching out into markets that were less desirable such as north Moorhead, Dilworth and Horace. People are willing to sacrifice location to get the home they want, he said.
These rapid increases in housing values will probably require assessors to work harder to keep up.
Schroeder said that in his experience as a real estate agent, it seems like homes that were sold more recently tend to have valuations that match sale prices more closely. Assessors will have seen these transactions and adjusting valuations would be simple, he said. But homes that haven't been sold for a long time, say the homeowner lives in the home for 15 to 20 years, tend to have valuations that were lower than sale prices, Schroeder said.
In West Fargo, Ochocki said he has his own solution to the valuations, such as keeping the increases to the rate of inflation as determined by the consumer price index, because there's no way his income can keep up with assessed values. He said he plans to write a letter to the editor to see if others agree with him.
Ochocki's proposal would require state law to be rewritten, Lee said. The assessor said assessed values are based on the housing market, which does not follow CPI.