Avoid the Trap of Unimproved vs Improved Property Taxes
If you are purchasing or building a home on a property that was unimproved, meaning a vacant lot, you need to pay close attention to how your lender sets up y0ur escrow account.
All property is taxed at its assessed value less any exemptions, such as a homestead exemption or over 65 exemption. All property is valued or assessed by your local county tax assessor. Each year around January 1st, the county tax assessor sends out an appraiser that assigns a value to your property. This value is established by using recent sales within the six month period prior to his assessment. If the lot on which your home was built did not have any construction improvements, your property value would be assessed as unimproved property. If your home was partially complete when the appraiser assessed your property, your home would be assigned a value proportionate to the lot plus the value of construction improvements as of the date he viewed the property.
Let’s take a look at an example that might create a tax or escrow problem if you do not prepare ahead of time.
Let’s assume a local builder began construction of a new home in February of 2006 and you purchased the home for $200,000 in August of 2006. At the time the tax assessor valued the lot, there were no improvements on the property. So let’s assume the value established on the lot when the tax assessor reviewed the property on January 1st was $30,000. Let’s also assume the tax rate for your property is 3%. The taxes due on the property at the end of the year would be $855.00.
Now here is where you could get into trouble if you have an escrow account and if you don’t have a savvy lender. When you closed on your property in August your lender established your payments as follows;
Principal and interest 1,200
Homeowner insurance 80
Taxes 71.25 (based on $855/12)
At closing you would also have to deposit approximately 3 months of taxes into your escrow account as reserves. 71.25 x 3 = $213.75
On January 1st of 2007 the tax assessor sees your home is complete and now assigns a value of $200,000. Your new tax bill is now $6,000 instead of $855. Your reserve account now must be $1,500 ($500 x 3 months) instead of $213.75. The annual deposits into your escrow account by the end of 2007 must equal your total projected taxes plus reserves which is $7,500 ($6,000 + $1,500). You currently are on target to have $1068.75 in your escrow account for the year ($855 plus $213.75) so you have a shortage of $6,431.25 your payment will jump from $1,351.25 to $1,887.15.
There are two ways to avoid this problem. The first and simplest way is to ask your lender to escrow at the full value of the property, even if your property taxes are based on an unimproved value. Your lender may or may not be able to do this because by law, they cannot hold more than the maximum required number of months of reserves in your account.
The second way to avoid the problem is to ask your Loan Advisor to calculate for you the amount you should be depositing and place that money in your personal savings until you are notified by your lender you have an escrow shortage. If you then mail a check for the shortage amount to be deposited into your escrow account it will greatly minimize the effects of the large tax increase. Keep in mind, you can only estimate since no one really knows what your property will be assessed for but with proper planning your can avoid the large escrow shortages that you so often hear about.
If you have questions, please feel free to contact Gray Buffington, with Buffington Mortgage. 512-672-4729.