Buyers of Newly Built Homes Can Face a Property Tax Surprise

Published by | April 9, 2024

First-time homeowners often face sticker shock on their mortgage payments after the first year of ownership

It’s not unusual for new homeowners to face financial surprises, but people buying a newly built home may be more likely to encounter sticker shock on a key expense.

Almost 75% of recent homebuyers had regrets about their purchase, according to a 2023 survey from Real Estate Witch. Property taxes were the most common gripe, surprising 33% of new owners.

With new builds, property taxes can change dramatically after purchase because initial rates are often based on estimates. That can be jarring for homeowners who already stretched their budgets to afford a home in the current market.

Newly built homes comprise 30% of the current market, up from the typical 10% to 20%, according to a recent report by the National Association of Realtors. As more buyers turn to builders, potential owners need to be aware of how costs might increase after even just a year, experts say.

“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 qualify someone for a home purchase, they factor in the principal, the interest payment on the mortgage, homeowner’s insurance and property taxes.

But unlike previously owned homes, new builds lack a tax bill because there’s no house to assess yet, experts say. Instead, mortgage lenders will often use an older tax rate from the area or an estimated tax rate to calculate the owner’s monthly payment.

Initially, the homeowner will typically pay the estimated property tax rate into escrow. Depending on the local tax assessment cycle, the county office will eventually assess the value of the new house to determine the actual property tax rate.

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