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I live in Texas where there is no personal state income tax, but there is a significant tax on real estate.

I am considering buying a new home, built to my specifications (ehh, to an extent...) in a new neighborhood by a home builder.

I have significant equity in my current house and a large cash down payment. Thus, most of my monthly housing budget (half or more) is towards property taxes and not mortgage payments.

I'm having difficulty determining how much property tax I am likely to owe, and thus how much house I can afford.

I know:

  • A rough estimate of property tax rate for the area, as a sum of the districts that overlap in the general vicinity, although some of the districts don't exist yet.
  • What the purchase price of the house will be
  • An estimate of what the price per square foot is for comparable houses in the area

My issue is that I don't understand specifically how the property tax will be assessed. My understanding is that the assessor will estimate the value of the house, in an attempt to determine what it would sell for in an open market where neither party was under duress. I believe they tend to estimate this using the square footage of the property, times the going rate of dollars per square foot.

When I've bought houses in the past, I've overrode the assessor's valuation by bringing documentation from the sale. Since they're estimating a potential sale, and such a sale actually occurred, they're generally willing to adjust their valuation based on the sale information.

This would lead me to believe that the property tax valuation of the home should be the amount I pay the builder. However, it seems like I could "game" this system somewhat.

For instance, say I tell the builder to put in cheap flooring and fixtures, and then I buy the house less expensively than I would before. At some point (even before moving in), I replace the cheap items with more expensive ones. Or I could pay out-of-pocket for "custom" upgrades and (builder willing) have them install stuff I bought for me. The costs of these would (hopefully, builder willing) not show up in the purchase price of the house.

The property tax assessor doesn't know about these improvements, and if they were basing their valuation on the sale price, my property taxes would be lower, right?

The other side of that coin is that probably I will pay a premium to have my house built "my way." Like a new car, the value will decrease significantly as soon as I take ownership. If the assessor bases the valuation on the sale price of the house, aren't I getting screwed over in terms of the actual value? In terms of upgrade pricing, they are almost certainly charging way over market, but they have me over a barrel, which is probably technically "under duress" although I doubt anyone else sees it that way.

Or perhaps the assessor is going to look at the blueprint, disregard the sale price of the house, and estimate the value of the house based on the price per square foot of comparable houses in the area. Thus, the interior of the house is irrelevant, and I might as well get whatever I want.

I find it difficult to determine how much house I can afford, because I can't accurately estimate these property taxes. I could (and have) asked my Realtor, but he's a salesman with a stake in this game, and I can't implicitly trust him. Similarly, the builders are trying to sell houses and have no responsibility to truthfully inform me about property taxes, and I doubt that's an area of expertise as well. I've spoken to many people and gathered many data points, but I still feel like I don't have enough information. Thus, I am seeking additional advice...

  • The mortgage company should include an estimate of the taxes as part of the good faith estimate, especially if there will be an escrow account involved. Making sure you can afford all the required monthly fees is an important part of the approval process. A local lender should have a good understanding of that relationship between the price of a new home and an estimated initial assessment. – mhoran_psprep Apr 9 '14 at 21:01
  • @mhoran_psprep, the mortgage company includes estimates, but I found they were not at all educated guesses - they were just taking the house sale price and multiplying by a fixed percentage, which doesn't really represent the actual fees associated with such things. – agent86 Apr 15 '14 at 0:47
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The assessed value of a home virtually never matches the market value, especially for established neighborhoods (which is not your situation, I grant). It is virtually always lower, because if it's ever higher than the market value, the homeowner can hire an independent appraiser and contest the assessment, while if it's lower, the homeowner usually doesn't report the discrepancy. In Texas, there's also a law that limits the amount that the appraised value can rise (though currently it's still a very steep 10%).

In your situation, with a custom home being built in a new neighborhood, you probably have a Hobson's choice on the price; if that's the floorplan and these are the options you want, this is the price you'll pay, and you can take it or leave it. These prices are usually set by the homebuilder based on land value plus a price per square foot plus premium amenities, so that the average price per square foot will be relatively uniform across all houses in a development project, or at least that phase of the project. In such a case, the tax assessor's job is pretty easy; the initial purchase price of the home (which is a matter of public record in Texas) is the assessed value of the home, because they would appraise the home in much the same way it's being sold.

Given that value, the amount of your property taxes is the purchase price of your home minus your homestead exemption (if this is your "primary residence", and applicable only to school district taxes in most cases) times the sum of all applicable tax percentages.

You mentioned some of the authorities that would set tax rates for your home don't exist yet; that's highly unusual, as the two most common are the county and local school district. Every square foot in the State is already part of a county, and school districts aren't often created out of nothingness; the most likely scenario is that one of the nearby districts will annex your neighborhood, and this decision would have been made long before the foundation of any house was laid, because new development usually requires redrawing school attendance boundaries and often building new schools to accomodate the new neighborhood and balance attendance across schools at each level. Similarly, any existing special tax districts, usually created to fund public improvements that benefit a relatively small area, should already be set up long before you were picking out paint and flooring. All it should take is a call to the county clerk, or to the appraisal district office; give them your address, or if you know it your development's name, phase and lot number, and they'll tell you what tax districts cover you.

What might be true is that nobody knows the effects your development will have on the tax rates of those districts. More houses mean more total taxable value, but also more costs, so depending on the balance between those two at every level, tax rates could go up or down in response to a large residential development project. That's going to be something you'll deal with the whole time you own the home, along with fluctuations in home value. My taxes have routinely varied by $500+ every year; the first year, I didn't qualify for the homestead exemption but my lender was collecting escrow as if I were, so I ended up being short about $600. The next year the exemption kicked in but the lender was withholding at the higher rate based on the previous tax bill, so I got a $500 refund. Now, my home's assessed value has jumped by 10 grand in 2 years as the housing market has recovered in earnest, so this year's tax escrow was short by about $400 and next year's will likely be short as well.

  • In my county in Virginia for new construction they will use a local offset based on the sales price that is part of the public record. If the assesses value of house in other local neighborhoods is x% of the sales price, they will use that as a starting assessment for the first year. Buy a new house for 600K, in an area with a 80% ratio they will assess the house at 480K. They will adjust this as time goes by as more houses are resold. Note: the first year may only be a partial tax year. – mhoran_psprep Apr 9 '14 at 20:55
  • +1 for "Hobson's choice" and for using it correctly. – JoeTaxpayer Apr 11 '14 at 15:43
  • When I said I wasn't sure if all the taxing authorities were determined, I wasn't sure if there was a MUD that would be created in the area or not. I'm also probably lumping HOA in there although that's not technically a "tax." I'm unlikely to qualify for the homestead exemption my first year either, given the way that it works. The home sales company has given us a rate, but they haven't told us about exemptions - they're kind of infinitesimal in this area anyhow. At any rate, you're probably as right as one can be at this point in time :) – agent86 Apr 15 '14 at 0:41
  • My general value/appraisal strategy at this point has been to leave out any "easy to do after the fact" options. They want to charge out the wazoo for ceiling fans, "premium" paint, washer/dryer, etc. Then it ends up in the purchase price of the home for both tax and loan purposes, which means I end up paying several multiples of the actual cost of the "upgrade." – agent86 Apr 15 '14 at 0:45
  • @agent86 - If you live significantly outside the boundaries of a city, then yes, you could end up in a MUD (Municipal Utility District) instead of being on city utilities. That's more common in some areas than others. You will not qualify for the homestead exemption until the year for which you are the homeowner as of Jan 1, meaning you must close escrow and assume title just before that date to get maximum benefit. And while your strategy is valid, I question whether a washer/dryer would ever be an included option; most home builders and mortgage companies are not in the appliance business. – KeithS Apr 21 '14 at 23:15
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My assumption is to call the appraisers office and discuss with them. I am sure counties vary throughout the state, and more so across the nation.

It is a good assumption to assume that the home will be somewhat based on home price, and yes you could game the system by not including upgrades that require a permit to be pulled in order for them to be changed. Off the top of my head this might include:

  • Landscaping
  • Flooring (you could go with no flooring to save demolition)
  • Lighting (Changing fixtures, is generally pretty darn easy.)
  • Roughed in pluming rather then completed.
  • Appliances

Leaving out those things might be a moot point. If you leave out some things, and go from a $600K house to a 590K, and the appraiser bases the valuation on square footage, then you might not save all that much and have an increased headache.

Often times you get a bump in assessed value with amenities such as pools, porches, decks, and views. Pretty much nothing you can do about those, as you would should pull a permit to construct them.

  • Is 'no flooring' doable? My assessor was retiring, and wanted to add my finished basement a bit before I was finished. I told him the floor was a month away from installation. He said he'd just assume cheap $2/sq ft carpet if I let me sign off on the assessment. But in the normal course of events, they want to see the finished product. – JoeTaxpayer Apr 11 '14 at 15:41
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    @JoeTaxpayer, one person I know moving in this area asked to have no flooring installed, and the home builders refused. They compromised on "cut the carpet and lay it out, but don't tack it down" and the homeowners rolled up and sold the carpet right after closing. – agent86 Apr 21 '14 at 23:47
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i've built, bought and sold a number of houses. . . 1) you don't determine the assessed value of comparable houses and lot sizes in your neighborhood. that is 99% of what determines your tax. . . paying less property tax by installing a cheap floor is foolish talk.

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