( Source: Samantha Marcus The Morning Call, Allentown, Pa. (MCT) — Michael Spencer has watched with interest any movement on the foreclosed property next to his in Fountain Hill, one community of many pockmarked by distressed sales.

It was sold for $117,550 in 2007 before being foreclosed on. It’s now bank-owned, has sat vacant for nearly a year and was listed for $115,000 and then $99,900 before dropping by $10,000 increments and bottoming out at $69,900 in February.

At roughly 2,100 square feet with two bathrooms, it’s quite similar to Spencer’s own. And so the acoustic engineer challenged why his Lehigh County property was reassessed for $186,900 when the house next door can’t sell for even half that.

“I’m having a hard time with the math,” Spencer said.

He was frustrated to learn new assessments for the county’s 110,000 residential properties are based on the homes sold through traditional methods, and not on foreclosure-related transactions where more than regular market pressures are at play in setting the price.

County officials aren’t without sympathy.

When it came time to pull the trigger on the county’s first reassessment in two decades, Executive Don Cunningham warned that a recession-ravaged economy wouldn’t provide the ideal backdrop for a snapshot of property values.

Last year foreclosures were 3.7 percent of sales in Lehigh County, Cunningham said, higher than the national average of 3.5 percent.

Properties sold in non-traditional ways, such as a foreclosure, are known as “invalid” sales. The higher the number of invalid sales, the lower the number of the valid sales there are to accurately determine what properties are worth.

Sixty-one percent of county properties sold in 2011 were considered invalid, up from 57 percent in 2010 and 55 percent in 2009, county records show. (Not all of those invalid sales were recession-related. Some occur in any year, such as $1 sales within business entities or among family members.)

A property sale is considered valid when it’s between an informed buyer and a willing seller, according to guidelines set by the state Tax Equalization Board and the International Association of Assessing Officers. That means neither party can be under any type of duress or influence to close the deal.

Reassessments do not use foreclosure-related sales, the so-called $1 sales or short sales (sales in which creditors agree to take a loss on a sale) because they aren’t true “arms length” transactions, said Tom Muller, Lehigh County director of administration.

Invalid sales, Muller said, do not provide a true measure of the market value of those properties.

Spencer would argue that doesn’t take into account the economic reality: Foreclosed values are becoming the market. Property owners like him will have to lower their asking prices if they want to compete in a market rife with these bank-owned properties.

He fears areas with higher rates of foreclosures and bank-owned properties excluded from the reassessment model has artificially inflated property values for homes like his own.

“If the property next door can’t sell for $69,000, how can our property be worth $186,900?” Spencer asked. “Excluding these bank-owned properties discriminates against those of us with bank-owned properties in our neighborhood.”

Nearly half of the 246 home sales in Fountain Hill in 2009, 2010 and 2011 — the years entered into the reassessment model — were tossed out. Yet Fountain Hill actually fared better than many, including Hanover, Heidelberg, Lowhill, Lynn, Upper Macungie and Washington townships, whose valid sales all accounted for less than 40 percent of total sales.

At the bottom is Heidelberg, where just 55 of 263 sales in those three years were not disqualified. On the opposite end of the spectrum, three quarters of home sales in Macungie were traditional purchases.

There’s merit to Spencer’s argument, particularly in areas saturated by bank-owned properties, Muller said, but he wouldn’t win an argument that the reassessment is so flawed it should be ignored.

“If there are a number of distressed sales or foreclosures, at some point those sales will set the market,” said Debbie Asbury, president of the International Association of Assessing Officials.

So in that sense, foreclosure-related sales are taken into account in a reassessment even if they’re excluded from the formula itself.

It’s relevant, too, Asbury said, that bank-owned properties aren’t spiffed up and presented for sale the same way a typical house on the market would be, and that’s certainly a factor in their reduced asking prices.

Her organization addressed this challenge in its 2009 Guide to Foreclosure-Related Sales and Verification Procedures, which states, “failure to recognize and consider these sales can cause overvaluation.” It explains how assessors can take into account foreclosure-related sales if they’re so commonplace that traditional sellers are lowering their prices to compete.

“When there are a significant number of foreclosure-related sales and few traditional sales, the need to consider foreclosure-related sales is more critical,” it explains. “Their impact can be evaluated by determining whether the following conditions apply: Are the foreclosure-related sales affecting the sale prices of typical sales in the area? Are the foreclosure-related sales the only properties selling in the area?”

While significant in this reassessment, sales under duress were still outpaced by traditional sales.

“We have an adequate number of valid sales to support a mass reassessment,” Muller said.

The number of foreclosure-related and short sales in these communities had a lot to do with the high number of appeals flooding into the county’s assessment office, Muller said.

Residents saw nearby properties being sold for a fraction of their own assessment — $16,000 for a row home, in some cases — and assumed they were overvalued.

“That’s what we saw in Allentown,” Muller said, noting nearly 40 percent of Allentown residents who applied for informal reviews were already slated for a tax cut. “You saw houses going for the price of cars.”

In Allentown, 3,520 of 6,891 — or 51.1 percent — of residential property sales were invalid.

Spencer sat down with an assessor to challenge his $186,000 assessment and $700 tax increase. That was the first he’d learned that bank-owned properties were excluded from the county’s picture of housing values.

He intends to follow through and file a formal appeal to argue that foreclosures and short sales are relevant to the market.

“When you’re throwing away such a large percentage of the market, how do you expect to be able to come up with a true picture?” he said.

samantha.marcus@mcall.com

610-820-658

Sales excluded per municipality

Municipality/ total sales for 2009, 2010, 2011/ invalid sales 2009,2010,2011

Alburtis/ 160/ 72

Allentown/ 6,891/ 3,520

Bethlehem/ 967/ 459

Catasauqua/ 362/ 168

Coopersburg/ 122/ 46

Coplay/ 226/ 120

Emmaus/ 689/ 291

Fountain Hill/ 246/ 116

Hanover/ 122/ 75

Heidelberg/ 263/ 208

Lowhill/ 156/ 208

Lower Macungie/ 2,357/ 1,164

Lower Milford/ 226/ 137

Lynn/ 464/ 350

Macungie/ 198/ 51

North Whitehall/ 909/ 558

Salisbury/, 723/ 376

Slatington/ 332/ 188

South Whitehall/ 1,267/ 594

Upper Macungie/ 2.221/ 1,693

Upper Milford/ 485/ 302

Upper Saucon/ 1,029/ 582

Washington/ 511/ 370

Weisenberg/ 335/ 204

Whitehall/ 1,424/ 742

Source: Lehigh County

 

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Source: Samantha Marcus The Morning Call, Allentown, Pa. (MCT)