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By Jeri Creson | Broker in Studio City, CA
  • Understanding Mello Roos and other Hidden Costs

    Posted Under: Home Buying in Santa Clarita  |  May 1, 2010 10:05 AM  |  755 views  |  1 comment

    Since the passage of Prop 13 in California, there has been a limit on the ability of local public agencies to raise "ad valorem" taxes - meaning the base tax rate that affects each property in the jurisdiction.   This was a great way of stopping run away taxation, but it created another problem for development and expansion.   How shall we raise the money for new schools, parks, streets, etc. to serve the new subdivisions?    One solution began in 1982 with the passage of the Mello-Roos Community Facilities Act.   This new law allowed local jurisdictions to levy a tax attached only to the new lots in a development that would benefit from the new improvements, versus levying an equal, across the board tax to the property owners in the entire jurisdiction. 

    A handy link to more info on Mello-Roos is located here:  http://www.mello-roos.com/pdf/mrpdf.pdf

    When shopping for a home, especially in areas with widely varying degrees of Mello-Roos taxation, it can be exceptionally confusing, and often misleading as to a property's true value.   For example, one will wonder why a 3 year old 2000 sq. foot home in the "Meadows" subdivision is $350,000 - while an almost identical home less than 1/2 a mile away in the "Lakes" subdivision is $425,000.  

    Very likely, the "Meadows" developer opted for Mello-Roos Community Facilities financing versus using private financing more heavily, and capitalizing the cost into the cost of the homes developed initially.   Many large home builders have adopted a business practice that, imho, is border-line deceptive regarding these taxes.    By and large, potential buyers are attracted by full page ads and banners stating:  "Home Prices Starting in the High 200's", where the median price for a new home is well into the high 300's.  Of course throngs of potential buyers flock to these model homes.   Who wouldn't want a bargain price for a new home?  

    Once inside, the luxury and amenities nearly overwhelm you and take your breath away.   Small, discreet labels proclaim, "some upgrades not included" - but nevermind the warning, the home is just soooo lovely!    Skip ahead, 3 hours later on a Sunday afternoon, one finds themselves in contract, much like buying a new car, with an attractive base price - and lesser emphasized items added on later of $75,000 in upgrades and $525.00 per month in additional taxes that exceed the area's average.    Pushed to the bleeding edge on one's affordability, the home is just too wonderful to pass up, so one starts to mentally justify the new raise anticipated, the overtime hours possible and the Starbucks coffee's that can be foregone.  

    But stop there - and realize this formula:   at a 5.5% interest rate: $100,000 financed equals approximately $696.00 PITI - therefore that additional $525.00 in Mello-Roos assessments equals $70,000 worth of home you could have purchased elsewhere.    So you aren't really buying a $330,000 home - you should be comparing it's value with a $400,000 home that doesn't include Mello Roos Bonds-

    All of this gets very complicated, and lost in the fine details when shopping, especially for resale homes.   Resale homes are on the MLS, not contained in large subdivisions with obvious model homes and brochures handed out - It is hard to separate the Mello-Roos implications when comparing very similar homes in different subdivisions on the MLS.   3 years after development, pretty much, all of the developments and amenities of an area blend into one combined impression of an area - yet some properties offer more value due to a lack of built-in costs. So how can you keep this straight while shopping?   One solution I offer my clients is that whenever we look at homes, I bring not only the MLS print out, but also attach the current tax print out.   This is easily done by a real estate agent using the MLS with just one additional click of a key.   That way a quick calculation between the current taxes and the current assessed value can reveal an effective tax rate.   If you keep the formula above in mind, you can mentally add the "real" cost of the home to the asking price so that you can compare "apples with apples" - and not end up with a lemon : )

    Happy Shopping!

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