Property Tax Surprise
One of the common complaints voiced by home buyers results from a property tax surprise. These come in a few different flavors. However, the most common surprise results from a change in valuation by the taxing jurisdictions. This may occur in the year of purchase. But more commonly, it arises in the year after purchase.
Many real estate agents rely on the taxing jurisdictions to provide factual information about a home. When selling, the real estate agent wont want to make any forecasts or opinions. As a result, the property tax information provided to the buyer comes from the most recent tax bills. Those tax bills may not reflect the purchase price of the home or most recent valuation.
Lagging Valuations
Appraisal districts throughout the US rely on transaction data from past sales. They look to use the most recent relevant information when setting the valuation of each home for the current year. They use a mass appraisal technique. This technique has drawbacks in determining like kinds of houses and prices for comparison.
Let’s look at an example. Two homes of 2500 square feet each sit a block away from each other. Home 1 sold 3 months ago for $500,000. However, it had been updated with new bathrooms, a new kitchen, new appliances, and extensive landscaping. The upgrades did not require building permits from the city, so the city has no knowledge of any difference between this house and house number 2. Both homes are valued on the tax rolls at $400,000.
You are the buyer for house 2. You have a very knowledgeable real estate agent who knows about the condition of house number 1 because he or she works this area diligently. The selling agent shows that the last year’s tax bill was $8,000 based on the tax appraisal and the tax rate. You make an offer of $430,000 since the home is not updated compared to others in the neighborhood. The seller accepts. You move into the new home. When the next tax bill arrives, your house is valued at nearly $475,000. The appraisal district has picked up both sales and has made some adjustments based only on the information it has to value each house at $475,000. If your total tax rate is 2.000%, you may have expected a real estate tax bill of $8,000 (last years value) or even $8,600 (new value). Instead, you received a tax bill of $9,500.
Options
There are a number of options to consider when buying a home and when receiving a tax bill. Winning Mortgage, Winning Home reviews alternatives you may have and what to look out for.
A note about special taxing jurisdictions. These can create other surprises by themselves. The surprises may be complicated. If you are buying a home is a special taxing jurisdictions such as a MUD, LID, RD, Mello Roos, you need to do more research here and in Winning Mortgage, Winning Home to understand the purpose and consequences of these special taxing jurisdictions. A special taxing jurisdiction may hold a property tax surprise of its own.
What’s a Special Taxing Jurisdiction?