#2 of 14 Things Buyers Should Know About Property Taxes: Expect a Supplemental Tax Bill

So here's part II of the 14 Things a Buyer Should Know About Property taxes. Click here to link back to the summary list of the 14 items.

2. Expect a supplemental tax bill

A large portion, if not all, of your property tax amount is calculated on the property’s “assessed value”. The seller’s assessed value started as his purchase price. Thanks to Howard Jarvis and Proposition 13, there are restrictions on how much the county assessor can estimate the property’s appreciation for the purpose of tax assessment (another good reason not to sell properties if you don’t have to when buying up). So while the seller’s property may have appreciated 25% while he owned it, his assessed value may only be 7% above what he paid. In real numbers, maybe the seller bought the property for $500,000 and now it’s worth $625,000, but the tax collector calculates the property tax based on $530,450.

When you come along and buy the property for $625k, it takes the tax assessor’s office quite some time – sometimes six months or more – to get around to reassessing your property at the new value. In the meantime, the tax collector doesn’t realize the property has changed hands and does not realize he can “restart” the property’s value at your purchase price (once again subject to the Proposition 13 restrictions going forward). Until the reassessment, the taxes will be calculated based on the OLD and thus WRONG value.

No matter what, not even if it takes the government 10 years to get around to assessing your property, you owe the amount based on the new value. The difference that accumulates is called a “supplemental” amount, and you will get a bill for that amount shortly after the reassessment. The bill will come with its own deadline, completely unrelated to the regular April 10 and December 10 deadlines, and you must pay the supplement by the deadline. Period.

Don’t be surprised when the bill comes. Don’t be surprised that the amount is calculated based on the new value. Consider yourself lucky that your property is not in New Jersey, where the property tax rates are roughly FOUR TIMES what they are in OC (see rule #12), and just pay it. Try to stay positive. Keep in mind how much interest you are writing off on your income taxes and - with any luck - how much your property is appreciating, and just realize taxes are a cost of your investment. (See your CPA about whether or not your property tax amount is another deduction against your taxable income.) Remember to vote (see rule #13)… y’know, YOU are “the rich” now, you wealthy property owner!

14 Rules Buyers Need to Know About Property Taxes - Part I

14 Rules Buyers Need to Know About Property Taxes
(references are to Orange County California websites)

Here is a summary of 14 things Buyers need to know about (Orange County California) property taxes as well as a full explanation of Number 1. As I post each subsequent item from this numbered list, I will return here and add links to the full information on each number.

As always, I welcome your comments and questions!!

1. Don’t assume your first tax bill will be paid in escrow
2. Expect a supplemental tax bill
3. Property taxes are late after April 10 and December 10
4. Property taxes are due whether or not you get a bill
5. Your tax amounts cannot be known to the penny at closing
6. You should take steps to estimate your tax amount and prepare for it
7. Taxes are made up of a base amount plus special taxes
8. Some special taxes are a percentage of value and some are fixed
9. Mello Roos taxes are not the only special taxes we see in OC
10. There are plusses and minuses of impounding your taxes with your payment
11. It’s free to file a homeowners exemption (and to file a homestead)
12. It’s amazing how much more house you can afford if you choose a lower tax area.
13. OC taxes are among the lowest in the US
14. Vote – many ballot propositions are linked to property taxes

1. 

1. Don’t assume your first tax bill will be paid in escrow
   
   There are so many costs associated with purchasing a home that it’s easy to assume that property taxes must be in there somewhere. (and there are costs of selling, too. Incidentally, these are two reasons it is rarely profitable to “flip” – that is, buy and quickly resell – a property. Capital gains taxes are another reason.) Buyers’ costs can be divided into non-reoccurring and reoccurring. Non-reoccurring costs are costs that can be linked to the purchase and are not ongoing. Some examples of non-reoccurring costs are a physical inspector, title insurance, escrow company fees, and lender’s fees. Reoccurring costs are those costs of which a certain time period’s share are prepaid at the closing and then will continue during your ownership. Examples of reoccurring costs are prepaid mortgage interest, prepaid HOA dues (sometimes for multiple associations), prepaid fire insurance premiums, and property taxes MAY be prepaid.
   
   But usually not! Let’s look at a timeline…
   
   January 1 – beginning of second half of property tax fiscal year
   February 1 – tax bills usually are mailed out by today (*see rule #4!)
   March 10 – one month until tax payment is late
   April 10 – pay property tax by today or be penalized
   July 1 – beginning of first half of property tax fiscal year
   August 1 – bills usually are mailed out by today (*see rule #4!)
   November 10 – one month until tax payment is late
   December 10 – pay property tax by today or be penalized
   
   If your purchase closes between January 1 and February 1 (or between July 1 and August 1), the seller’s share of the property tax for the period is going to be very small. Unless the seller can provide evidence that he has already paid the taxes (unlikely since they are not late until April 11 / December 11), the escrow company will most likely charge the seller for the number of days he owned the property and take the amount they charged him and “pay” it to you the Buyer, that is, put it in your debit column. You probably won’t “feel” it. It will be a small inflow of cash in a statement containing lots of outflows. But the idea is that you now have the seller’s share of the payment in your wallet. If you move into the property before February 1 (or August 1), it is likely you will receive the bill, which will probably still be addressed to the seller. So when the bill comes (and even if it doesn’t - see rule #4!), you must pay THE WHOLE THING.
   
   Of course, there are exceptions, such as when the seller is an overzealous taxpayer and has paid the whole thing already. If he can prove that to the escrow company, then they will charge you the large amount for your share as a closing cost and pay it to the seller who has already shelled out the payment. In that case, you will not need to pay the regular bill. But you should still go online (see how in rule #6) to verify the OC tax collector shows the regular bill as paid, and you should still expect a supplemental bill (see rule #2). If your purchase closes between February 1 and March 10 (or between August 1 and November 10), it is likely the seller has already received the bill, so you will most likely not see one. Nevertheless, the escrow company will probably handle the charges and credits the same way they would’ve handled it if you had closed between 1/1 and 2/1 (or 7/1 and 8/1), charging the seller and debiting you, and thus expecting you to pay the whole thing, just as in the previous paragraph. You are responsible to pay it even though you most likely won’t get a bill. If your taxes are impounded with (included as part of) your monthly loan payment, the bank should take care of it… but you should call them to be sure!!
   
   If you close between March 10 and April 10 (or between November 10 and December 10), the escrow company is likely to charge both you and the seller and send the whole payment to the county, unless the seller can prove he has already paid it. If the seller can’t provide proof, but claims he did pay it, the escrow company will most likely still charge everyone and pay, but then refund the overage to the seller if it turns out after the fact that it really had already been paid. Point is, you will likely see a CHARGE (a minus) for taxes on your closing statement rather than a DEBIT (a plus). NEVERTHELESS!!! You should still go online to verify on April 8 (or Dec 8) that the amount has been paid and prepare to pay it if it shows unpaid unless you can definitively know beyond a shadow of a doubt that escrow has paid it (asking escrow never hurts). Penalties for paying late are just too hefty. Better to pay twice and get a refund than pay late.
   
   If you close between April 10 and July 1 (or between December 10 and Jan 1), then the Seller should have paid the most recent property tax due before the close of escrow. You can go online to verify the bill has been paid.

So stay tuned for the full explanation of #2: Expect a Supplemental Tax Bill.

What Does “Offer Subject to Interior Inspection” Mean?

There are a small percentage of available listings that are listed in the MLS as "subject to interior inspection". That means the seller doesn't want to be bothered with showings, because perhaps the property is occupied by a tenant who doesn't yet know the property is for sale, or perhaps the owner lives there and has a health issue, or there is a divorce going on or .. there could be a thousand reasons. Maybe the seller just doesn't want to have to keep his house clean enough for showing all the time! So you must get your estimation of whether or not you want it and how much you think it's worth by driving by, looking at the MLS photos and description (from now or perhaps from previous times the home was sold), aerial views such as google earth or google maps, and looking at the statistics in the area.

When a buyer writes an offer "subject to interior inspection", he is admitting he hasn't seen the inside of the property yet, and he is making his offer just based on the front facade and the comparable sales. Upon agreeing to the fundamentals of the offer, the owner will then offer the buyer an opportunity to see inside, but until then, he doesn't want his family or his tenant bothered with "lookie-loos" who aren't really qualified to buy under acceptable terms. Then, after the viewing, if there were any surprises, the buyer can propose revisions to his offered price or terms (within an agreed-upon time period), and if the seller doesn't agree, he can walk away, usually with his whole deposit refunded.

Before you offer, the listing agent may do his best to describe the interior, and you will see photos and things on the MLS listing, and the rules of "good faith" deem that you should do your best to use the available information to make an offer you think suits the property. What I mean by that is that it would be unethical to make an offer on the house based on its size and location but high for the neighborhood as if it was all fixed up and remodeled if you already have seen a description and pictures that indicate the property is a fixer-upper.

"Why," you may be asking yourself, "would someone make a too-high offer like that?" Because an offer subject to interior inspection is sometimes the only way you can get an appointment to see a property inside (especially on properties currently occupied by the seller's tenant, because he normally doesn't want the tenant to know the property is even for sale before he has the foundations of a good offer on the table, lest the tenant freak out, give notice and vacate). So you don't want to offer $525k on a property whose condition indicates it is worth more like $450k just so you can get an appointment to see it with the plan to reduce your offer to $440k after the showing. You could be in trouble if the tenant leaves and it becomes clear that you never had any intention of honoring the $525k offer, because you could be found responsible for the now-vacant state of the yet-unsold property, and the vacancy could be costing the owner money!

One thing about an offer subject to interior inspection that is true for most offers but doubly true for this type is that you must be prepared to prove, and include paperwork to the effect, that you are qualified for the offer you are making. This means you must include your preapproval letter. (Check this article out regarding 4 levels of loan approval for more details on specifically what I’m talking about here.) And you must provide bank or securities statements or other verifiable proof that you have the cash you are proposing to put as a down payment and closing costs. Without this important documentation of your qualifications, your offer subject to interior inspection is unlikely to be substantial enough to merit disturbing the occupants for a showing. In other words, nobody is going to take it seriously. But if you really do want to buy something, and you really are considering this property you are offering on, then the need to include that information should not preclude you from offering. In the chance that your offer is accepted, you’re going to have to get the ball rolling on your financing right away, and it will be easiest to get that to happen if you have already done the preliminary preparation.

The bottom line on offers subject to interior inspection is that a smart and gutsy buyer should be open to making them. Properties that only hear these kinds of offers usually sell for less because so few buyers are willing to put up with a requirement to be so bold. But we just do the best research we can, make a real offer in good faith, and then adjust our offer if you are surprised by anything you discover when you get your showing. The seller may agree to any adjustment you propose, they may counter-offer, and they may reject your adjustment. As long as all this is done within the Buyer's Contingency Period (usually 17 days from the original offer's acceptance but frequently negotiated to fewer days), you can cancel the transaction. As long as no costs have been incurred on the escrow (such as an appraisal on behalf of your lender, etc.), it is likely you will be entitled to a full refund of your deposit. (Although, I’m not an attorney and each individual offer to purchase has its own minutia of rules, so please don’t take what I’m saying as any kind of guarantee that you will get your deposit back no matter what if you cancel.)

We at the Etheridge Team are experienced in helping you properly evaluate a property for a possible offer subject to interior inspection. And we prepare a complete package to submit with such offers that tips the odds of acceptance in our favor. Give us a call or comment with any questions!