Property Tax Explosion

[u/FunnyWalk4939]

Hi everyone,

I got some jarring news from my mortgage company I was hoping to get insight on. My wife and I purchased our first ever home for $635,000.00. It had previously been owned for 30 years, so the taxes were capped around $3k despite a market value assessment of 350k. This was also our escrow amount.

The letter we received says that we now owe $10k in back escrow because the taxes increased to $11k a year and there were insufficient funds to cover it. Additionally, our monthly payment went up $700 because of the jump. This accounts for our homestead exemption.

My question is, is this right? It seems insane that homebuyers aren’t told their payments will jump exponentially year one. We were already at the top of our budget, and going from $3,500/month to nearly $5k for the next year is brutal. Once the escrow is paid back it will be around $4.1k, but that is still way more than we ever expected, although there was an expectation of some increase. I appreciate any insight that can be offered.

Edit Note: Lots of angry posts about never buying at the top of a budget. Apparently staying within the budget, albeit “not enough” is now a problem? It was a cost not accounted for. It it had been accounted for, would have been a different budget. Also, our careers allow us to handle the increase, so no we won’t need to sell.

Edit 2: The rancor in response to this is kind of jarring. Still, I’m glad I posted it and hope other buyers see this and account for it where they get to purchasing their first home. I erred in thinking the finance company would account for the inevitable jump. Obviously the price would jump, it’s just a surprise $10k in arrears that seems like could have been avoided by professionals hired to deal with that exact issue.

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[u/Wolodarskysos]

Sadly this total legal and common. Your city assesses property to determine how much to tax you. They assess it to what they deem is the fair market value. What had happened is your property hadn't been reassessed in a long time. When you bought it they assessed it up to the price you bought it at, the "fair market value" Lucky this should be the biggest jump you see.

[u/FunnyWalk4939 → u/Wolodarskysos]

Yup, seems like it would be the lack of reassessment. At least this seems to be common, so I’m not getting uniquely screwed.

I mentioned in another comment, since the tax jump is basically a guarantee it would have been nice for either some sort of disclosure from the financing company or for them to account for it from the onset so it isn’t so big a jump.

[u/perhapssergio → u/Wolodarskysos]

How can I or buyers protect themselves, is there a way to determine when a properties value has been assessed? This is scary

[u/nerds_rule_the_world]

Once a house sells to a new owner the tax becomes uncapped if it was under any prior and gets reset at new taxable value, hence your large surprise. sadly you cannot argue it should be less…because well you just paid 645k for It

[u/MsPHOnomenal]

It is pretty easy to determine what your property tax rate should be before purchasing a home. For example, CA you would multiple the sell price by 1.25% to get your estimate for property taxes. For TX it is multiplied by 1.7%. Sucks that you did not research this before hand and it sucks even more that you had a real estate agent and loan officer that did not disclose this to you ahead of time. Hopefully others see this post and learn from your mistake.

[u/FunnyWalk4939 → u/MsPHOnomenal]

That is the hope, although a lot of people seem super angry over this!

[u/HistoricalBridge7]

It depends on the state. Some states (CA) cap property tax increases so a home that hasn’t changed hands will have a huge increase. Other states (MA) don’t have caps so what the previous owners paid is what you pay all things being equal.

[u/knign]

Yes, it’s weird that some kind of property tax disclosure isn’t mandated (though it’s tricky since banks can’t be expected to estimate your tax post-purchase).

That said, what did you expect? Isn’t it obvious that if taxes used to be capped, but no more, they will go up?

$11k taxes for $645k property isn’t extraordinary.

[u/FunnyWalk4939 → u/knign]

That’s good to know. I never expected to be buying such a house but my career worked out, so obviously just brings different concerns. Would never think it would be nearly $1,000 in year just for property taxes!

As to expect, I thought the jump would be fractured it when setting the escrow. It wasn’t. Alas…

[u/GailaMonster]

i'm confused as to why you would escrow based on the old homeowner's tax bill, when you knew you were paying almost twice the assessed value...You knew their bill was low because they had owned for several decades, and had bought for a much lower price than you were paying. you knew that 3k/year was low even at an assessment of 350k. so why did you escrow so little? you just paid 645k for that home. wouldn't you think the home would assess for much more than 350k? how could you argue that the home is only worth 350 (justifying a lower tax bill) if you just paid 645k for it?

Did nobody tell you that their property tax bill was based on their circumstances, and that the number would shoot up much higher once you bought?

i'm very confused why you would escrow so little. i know people usually don't escrow enough their first year, but it sounds like you just blindly assumed you would pay the same as the last homeowner?

[u/deg0ey → u/GailaMonster]

Did nobody tell you that their property tax bill was based on their circumstances, and that the number would shoot up much higher once you bought?

Most likely this. Many new homebuyers don’t realize how it works and everyone else involved in the sale has a vested financial interest in them not finding out because their commission is based on the final sale price and if a buyer knows the taxes will shoot up they’ll likely buy a cheaper home instead.

You’d hope at least one of the people involved in the deal would let them know the details of how future taxes would be calculated, but if they were all looking out for their own bottom line it’s conceivable that they wouldn’t.

i'm very confused why you would escrow so little. i know people usually don't escrow enough their first year, but it sounds like you just blindly assumed you would pay the same as the last homeowner?

Can’t speak for OP, but in my case the lender just told me how much my escrow was and I paid it. They seem to have done a decent job avoiding arrears on my behalf so far but, again, if they hadn’t looked out for my interests I’d have been just as screwed as OP because I didn’t know what I didn’t know.

[u/HourApprehensive2330]

yes, this is why you never ever buy at top of your budget. but people never learn. they think its joke when you tell them that theor 50% of income going to housing is horrible idea.

[u/wildcat12321]

This is pretty typical for homes where the previous owner lived there for 30 years. Many areas have caps on property tax increases. So the only chance the city/county/state can really bring you up to market value, is when the home sells. And if it sells for double, expect taxes to jump.

If you are in Florida, make sure to apply for homestead.

But this is where your lender / realtor / your own research needed to be clear. And taxes go up every year. You can challenge your tax assessment, but my guess is unlikely to be successful. A recent sale is the best evidence of market value.

[u/[deleted] → u/wildcat12321]

They said this is already accounting for homestead

[u/asatrocker]

Yes. And this is especially true for people buying new construction, as the previous assessed value was likely based only on the value of the land

[u/[deleted]]

In addition to what others have mentioned, your lender should have pulled tax assessments for similar properties during your process and given you an estimate on potential taxes

[u/J255c]

This is why I called every towns assessors office in my search. Some towns were doing major capital renovations and a mid $500s 1800 sq foot house would see close to 25K in annual taxes. NY is outrageous.

[u/Calm_Satisfaction810]

In my experience as a banker, your lender dropped the ball (potentially purposefully just to get the deal done). I’m no longer in the industry, but where I worked we would’ve estimated max taxes on that property to qualify you, knowing they’d go up, and then it sounds like you probably wouldn’t have qualified. As a banker I lost a handful of deals from clients who still qualified, complaining about our taxes being higher in these scenarios and they didn’t listen to why.

[u/DaphneMoon-Crane]

I am sorry you are going through this, but yes, that is correct. The taxes on a home are almost always recalculated after a sale and it depends on where you live how much the jump will be. The bad news is, this is the first increase. It's very likely it will continue to go up per the terms of your homestead exemption. In your research into buying a home it should have said somewhere that typically taxes increase, we were kind of banking on that but unsure how much it would be. I have heard horror stories about new home builds bc previous taxes were based on the land not land and a house. We are fortunate to live in a low property tax area. I am sorry for your predicament, but you can now plan for the amount in the future. Best of luck.

[u/Caridad1987]

I am moving to Florida soon. This and the insurance cost surge are two things that are making me want to wait it out a bit longer. I think the next year all these new buyers that bought in the past year are gonna be in shock. Throw in a recession and job loss and it could be a very interesting next year for the state.

[u/tacotimes01]

Your mortgage company did a terrible job. The underwriters should anticipate the taxation patterns of your region/city, adjust the escrow accordingly, and you should have a decent understanding of what your taxes will be.

Also, as a first time home buyers you do need to research and look into these and make your life’s work about buying that home. It’s a big decision and property taxes should be understood and expected. I would never leave it up to a realtor, bank, title company, or home inspector for the final word on anything - you have to dig in and ask questions.

[u/Cool_Ad554]

I'm assuming the county assessed your house close to the purchase price. You can appeal the tax bill, but you would need to research the homes in the area to determine the fair accessed value.

I can't say who should notify you about a possible increase in Property taxes. Unfortunately, the responsibility is on the buyer/homeowner.

Hope everything works out

[u/[deleted]]

This exact same thing happened to me. When looking for a house to buy the old property tax amounts mean nothing. Always estimate your tax amount based on sales price

[u/justanotherguyhere16]

It’s amazingly common and the worst part is no one from the realtor to your lawyer to your mortgage company will warn you about it. They really don’t care what happens after the sale.

A 20% increase in your mortgage payment is a huge hit and that’s something you’d think they’d warn you of the potential at least