Do Your Property Taxes Equal Your Loan Payment?
Do your property taxes equal your loan payment for principal and interest? Do they exceed the loan payment? That’s question wasn’t even on the radar earlier. One of the major considerations in buying the right house is the total monthly payment. Obviously a buyer is looking for the right house – architecture, location, number of bedrooms, yard or not, and many other factors which make it THE right house.
In our prior posts about mortgage calculators, we note how the total mortgage payment includes more than the money to pack back the mortgage loan. After all, the loan is just the principal and interest. The rest of the monthly payment is property taxes, property insurance, private mortgage insurance, flood insurance (if required), home owners association dues (if required), and other special assessments (if any). This excludes the normal costs of repairs and upkeep which we detail in Winning Mortgage, Winning Home.
Components of the Total Loan Payment Can Be Burdensome
The cost of PMI for the borrowers with the lowest credit scores and highest LTVs may exceed the level of property taxes in some locations. But property taxes generally are the next largest expense after the loan payment itself. We covered some generalized state level taxes in our post discussing relocation State Level Tax Comparison. But state level isn’t the answer a buyer really needs. Since rates are set at the local level (county, city, and school district, etc), taxes will vary substantially by the exact address of the home. Many areas may have Special Taxing Jurisdictions. As result, in some counties or locations, a home owner may face tax rates above 6.00%! In a later post we’ll cover a series of articles about how this has blighted Detroit and continues to do so. Abnormally high property tax rates contribute heavily to out migration.
One of the factors in moving across states can be a failure to drill down to the specific tax for the property under consideration. Most listings now include some information in that regard. However, there are a couple of issues of which to be aware.
Valuation and Revaluation
The first issue is the value and likely REVALUATION. Many taxing jurisdictions will revalue a property at the time of a sale to reflect the full sales price. The taxes, which may be displayed on a listing, might be based on a prior value and not a current value. In some states, that value for tax purposes can only be increased at a specific rate/percentage each year. A home owned by a seller for 35 years could be valued at less than 1/3 of the actual current value. A sale will trigger revaluation. Make sure you understand the value placed on the house by the taxing authorities compared to the purchase price. Or you may be surprised when your property taxes equal your loan payment.
Exemptions and Discounts
The second issue is EXEMPTIONS and DISCOUNTS. A house may be valued at a market price but also carry discounts for special circumstances of the owner. For example, many jurisdictions use a homestead exemption. This discounts the value by a certain dollar amount of percentage and is a method to attempt to shift the tax burden to commercial properties. There may be a senior citizen exemption/discount.
Property values in areas closer in to cities frequently rise in value faster than farther out suburbs. When this happens property taxes on the house may rise substantially. Many of these owners have owned the home for a long time. They may live on fixed incomes. In addition, senior citizens are unlikely to have children in schools. They already paid a school tax burden for a long number of years. Some jurisdictions provide small consideration to an elderly home owner. Those owners paid a “fair share” of school taxes and no longer have any school age children. Should that home owner now enjoy a somewhat lesser burden, but not a free ride?
Discounts, Exemptions and Unjust Valuations
There are also discounts/exemptions for disabled, veterans, and other groups meeting strict standards. Understand how the Valuation and Exemptions/Discounts affect you and whether you might qualify for one or more.
Now a note on a third factor which is generally unspoken. Over many years, our team worked on ownership and management of billions of dollars of properties across the US. In doing so, we have employed a variety of property tax consultants, both local as well as national firms. Property tax consultants work to lower property taxes for a property by providing a support case or a lower valuation.
As an example, we bought an apartment complex for about $26 million in a state where sales prices are not required to be made public. The local taxing jurisdiction then valued the property for that year at $31.25 million. Needless to say, we felt that to be an unjust value and hired a local consultant who understood the workings of the tax jurisdiction to get a correct valuation. Although it took more than 9 months to dispute, the taxing jurisdiction lowered the valuation to less than $23 million! Each $1 million of valuation cost $25,000 per year in taxes. So fighting the unjust valuation lowered the tax bill about $200,000 per year.
Corruption
It is quite acceptable to fight unjust valuations. But the third factor isn’t fighting unjust valuations; it’s CORRUPTION. Our consultants remarked that they could represent us everywhere except Dade County (Miami, Florida) and Cook County (Chicago, Illinois). The stated reason noted these jurisdictions were so corrupt that only hiring a politically connected attorney or tax firm worked. The backstory claimed these firms paid kickbacks to politicians and individuals of the taxing authorities. These jurisdictions were noted to routinely over value property. This provided more work to the politically connected and hence, more political donations and kickbacks.
In talking with others, we found how easy it was to hire a specific firm and have property taxes cut in half. It required little or no effort. Just share the tax savings with the tax consulting firm or attorney (this is typically how the firms are paid anyway). No one has insight into how much of that tax savings is shared, donated, or kicked back. We have no specific allegations to raise here against anyone. We did have first-hand knowledge and experience dealing with the politically connected firm. The take-away is that the system can lend itself to corruption and favoritism quite easily. You, as a homeowner, may be paying for the corruption by receiving more of the burden.
Are Dade County and Cook County still the only counties which certain firms refuse to work? Do they still steer clear of those counties? Has the corruption been lessened or was it there to start with? Our team has its opinions and leaves it to you to form your own opinion. Let us know a city if your property taxes equal your loan payment.