With record-low housing prices and the record number of foreclosures and short sales that are available these days, potential homebuyers are coming out in droves for the right properties at the right prices.
This is especially true with first-time homebuyers.
First-time homebuyers are getting deals one homes that even a year or two ago might have been out of reach.
But there is a drawback.
When looking at short sales and foreclosures or other distressed properties, it’s important to keep in mind that the taxes might be higher than you think.
This is an issue that needs to be addressed when you go to get pre-qualified.
Prior to being distressed, the properties had some assessed values that either the county or other taxing authority had placed on them.
When a property’s price was dropped by the seller, the tax or assessed value most likely remained the same.
Let’s say you are a first-time homebuyer who can afford $1,400 per month for mortgage, taxes, property insurance, etc., each month. When you get qualified, your lender might assume, for example, a tax rate of 2.5% per year on any property you look at.
If your total payment comes to $1,400 per month, and then you go and look at a property where the assessed value is double the contract price then your effective tax rate is now 5%, doubling the tax component of your payment.
This can easily lead to frustration for all involved.
Homebuyers must know how much of the payment quoted by the lender is for taxes.
If you’re looking at distressed properties, then your effective tax rate will be the same as if you had purchased it at a pre-foreclosure or pre-short sale price.