Purchasers of recently constructed homes may encounter unexpected property tax increases. Several factors contribute to this phenomenon:

When purchasing newly built homes, buyers may face unexpected property tax hikes due to several factors, including increased property values, reassessments, and changes in tax rates. Such increases often occur as localities adjust taxes to reflect the home's market value and incorporate new developments.

‍KEY POINTS

• First-time homeowners often face sticker shock on their mortgage payments after the first year of ownership. 
• “All counties reassess a property’s taxes — it depends on when,” said Melissa Cohn, regional vice president at William Raveis Mortgage. While some places may differ on frequency, “if it’s new construction, they always reassess.”It's common for new homeowners to encounter unexpected financial challenges, but those purchasing newly constructed homes may be particularly susceptible to sticker shock when it comes to a crucial expense.

According to a 2023 survey conducted by Real Estate Witch, nearly 75% of recent homebuyers expressed regrets about their purchase, with property taxes being the most common concern, catching 33% of new owners off guard.

In the case of newly built homes, property tax assessments can undergo significant changes post-purchase because initial tax rates are often based on estimations. This can come as a surprise to homeowners who may have already stretched their budgets to afford a home in the current market.

Recent data from the National Association of Realtors indicates that newly constructed homes now represent 30% of the current market, a notable increase from the usual range of 10% to 20%. With more buyers opting for newly built properties, it's essential for potential homeowners to recognize the possibility of cost escalations, even within a year after purchase, experts advise.

“Buyers need to understand that real estate taxes ... are not static. They can change on an annual basis,” said Melissa Cohn, regional vice president at William Raveis Mortgage. “People don’t really have any control.”

Why property taxes can jump for new builds

When lenders evaluate someone for a home purchase, they consider various factors, including the principal, mortgage interest payments, homeowner's insurance, and property taxes. However, in the case of newly constructed homes, there may not be an existing tax bill since the house has yet to be assessed, experts note. Therefore, mortgage lenders often utilize an older tax rate from the area or an estimated tax rate to calculate the homeowner's monthly payment.

Brian Nevins, a sales manager at Bay Equity, a mortgage lender owned by Redfin, explains that the calculation can vary among lenders. Some lenders may use a percentage of the home's sales price, typically ranging from 1% to 2%, for property taxes, while others might multiply one-third of the sales price by the local tax rate to estimate taxes.

Initially, homeowners typically pay the estimated property tax rate into an escrow account. The county office will then assess the value of the new house based on the local tax assessment cycle to determine the actual property tax rate.

According to Cohn, while the frequency of reassessment may vary by location, new construction properties are typically reassessed. If there's a shortage in the escrow account once the reassessment occurs, indicating that the homeowner owes more in property taxes than initially estimated, the lender usually covers the shortfall. Subsequently, the homeowner repays the lender through an increased mortgage payment to make up the difference.

Tricks to gauge how property tax may change

Cohn emphasized the importance of thorough research for prospective buyers, especially those purchasing in unfamiliar areas. It's crucial to understand how frequently the county reassesses property taxes and the factors determining the reassessment formula. This information can help buyers anticipate potential changes in property taxes and make more informed decisions.

Nevins suggested seeking guidance from a local loan officer familiar with the area's real estate dynamics. Fuentes recommended researching similar newly built homes in the neighborhood, particularly those existing for about a year, to estimate potential property taxes. However, she advised caution, noting that online real estate tax listings reflect the current owner's payments, not necessarily what future owners will pay, as Cohn emphasized.

Correction: This story has been updated to reflect that some lenders estimate initial property tax rates for new builds based on one-third of the sales price multiplied by the local tax rate. An earlier version of this story misstated that formula.

Source: CNBC