This post first appeared in the October edition of Cirios Trends: Getting to the Bottom of the Housing Market

Property taxes should not be over-looked.

Most first time homebuyers don’t consider property taxes when looking for their first home. With all the excitement (and at times confusion) of buying a new home, it’s one of those details that can easily get lost in the shuffle. And while property taxes are a small fraction of the value of the home (less than 2% in most parts of CA), they are not insignificant when first time homebuyers are trying to determine if they can afford a home.

Let’s look at an example to get a better understanding of how property taxes work in California:

Purchase Price: $500,000
Down Payment: $100,000 (20%)
Monthly Mortgage Payment: $2,208.81 (5.25% interest rate, 30 year fixed rate loan)
Tax Rate: 1.2% (including city, county and state)
First Year Tax Bill: $500,000 x 1.2% = $6,000

Property taxes are paid twice per year in California, so that means you will have to make two payments of $3,000. However, most expenses when it comes to owning a home are broken down by month, which makes it easier to include the cost of home ownership in your monthly budget.

In our example, this buyer should allocate $500 per month ($6,000 / 12 months) for property taxes. $500 is not an insignificant amount, and could tip the scales for someone deciding whether to move from renting to buying, or in determining their price range for the home buying search.

In addition to just the expense, first time homebuyers should also understand the importance of paying property taxes on time. Failure to pay can result in a lien on your home which is the first item to be paid off when you sell your home — even before your mortgage. So: Pay your property taxes!

Back to our example, adding the monthly property tax expense to the mortgage payment, the total comes to $2,708.81. This represents a 22.6% increase in your monthly housing expense compared to your mortgage payment alone.

Unlike the fixed monthly payment of the mortgage in our example, property taxes typically increase every year.

Here is an example of what second year property taxes would be (in California, property taxes increase approximately 2% every year until you sell your home):

Purchase Price: $500,000
Annual tax increase: 2%

Year Two Tax Base: $500,000 x 1.02 = $510,000
Year Two Tax Bill: $510,000 x 1.2% = $6,120

Property taxes are more than just annoying. They can make a material difference in what a home buyer can afford. Buyers should also note that most mortgage calculators do not include property taxes in their estimations. Further, most lenders ignore property taxes when using your income to determine how big a loan you qualify for.

Always include property taxes when forecasting your monthly housing expenses — or you could end up with a surprise every six months.

Below is an actual job posting from a brokerage whose stated goal is to “to provide Bay Area home buyers a unique and comprehensive resource for your home purchase process.”

The question you have to ask yourself is this: Is the person who meets these qualifications really who you want advising you on one of the biggest financial decisions in your life and helping you find the home you will live in for at least 5 years?

JOB REQUIREMENTS

• The drive, desire and effort necessary to succeed in real estate sales.
• Aggressive and consistent follow through with clients.
• An effective system to develop your own clients in addition to the clients provided by the company.
• Representation of buyers throughout the Bay Area.
• Willingness to follow company protocol and standards.
• Ethical real estate practices.

COMPENSATION:

Commissioned sales position.

—

Not a single requirement mentions looking out for the home buyer’s best interests or a willingness to put in the extra effort to ensure clients make the best home buying decision possible. In fact, if the posting were for a used-car salesman, would the requirements be any different?

What if the posting looked like this:

JOB REQUIREMENTS

• Ability and desire to offer customized advice based on an individual’s situation, enabling them to make an informed real estate decision (not necessarily a purchase).
• A background in property valuations, mortgages and real estate so you can provide assistance from loan pre-qualification through post –purchase home ownership assistance.
• Defined negotiating skills so you can help your clients get the right home at the right price.
• High personal integrity that allows you to inform clients when buying a home is not their best financial option, because our clients trust us to give them sound financial and life advice – not a sales pitch.
• Ethical real estate practices.

COMPENSATION

Fixed compensation and bonuses based on the team’s ability to help buyers find the homes that works the best for them.

Isn’t it about time we required more from real estate agents?