Buyer beware of confusion over property taxes for newly built homes By Ilyce Glink and Samuel J. Tamkin Friday, February 11, 2011; 3:34 PM Q. Do builders get a tax break before they sell their houses? In a recent column, you wrote, "Are you accusing your builder of deliberately misleading you on how much your property taxes would be? That's a serious charge. Well, I live in Maryland, and I picked up a brochure for a "newly built" 3,075-square-foot home. The home is valued at $624,900 and the taxes are listed as $1,092. Wow! Is that misleading, a mistake, deception or what? For comparison, my taxes on a 40-year-old 2,200 square-foot home on 1.5 acres are almost $4,728. And my home is just down the road from this new home. I hope you take a look at this situation and alert new homeowners that their taxes may truly be higher than what the builder is currently paying. A. Builders will frequently pay lower property taxes on undeveloped property, and in many instances, the real taxes on a newly built home won't take effect until the home receives a certificate of occupancy from the municipality, until a buyer closes on that home or until some other local requirement occurs that causes the local taxing body to raise the taxes to the level they should be. But that doesn't mean that that the builder has misled the buyer. How property is assessed and billed is an important process for any buyer to understand. In my mind, bad behavior on the part of a builder would include deliberately providing misleading information about taxes or outright lying about how much a buyer would pay or how much other homeowners are already paying. Often, a builder will know what the true taxes are going to be and simply won't provide that information, even if asked directly. It's the kind of bad behavior that makes everyone in the new-construction industry look bad, because it sows the seeds of mistrust. However, it's possible that the current taxes on the home in question are $1,092 for the time being. In some parts of the country, developers are required to disclose an estimate of what taxes are expected to be once the home is sold. However, that requirement does not cover all areas, nor does it cover all types of new construction. You are correct, however, that buyers should be aware that if real estate taxes seem too low, they probably are too low. If a buyer is working with a real estate agent to buy a home, the agent will often be able to alert them to the actual tax they should expect to pay on new homes. Buyers who shop on their own may not be aware of the real estate taxes they should expect to pay on a newly built home. They may miss out on other information as well. Frequently, these buyers find out from their lenders that the taxes on a new home will be much higher than what the builder was paying, but they may not really understand that information in the context of the loan application or the total costs of owning and maintaining the property. The buyer may sit down with the lender, who explains that he or she needs to pay a monthly real estate tax and insurance escrow to the lender computed using an estimate of what the taxes will be. But the buyer might not connect that monthly estimated payment with the information from the builder. In some parts of the country, buyers expect that they could pay up to 3percent of the value of the home yearly in real estate taxes. Certainly that amount varies by location, and in some places it's considerably lower, while in states that do not have an annual real estate tax, the amount is zero. Q. For the sale of our house, we were advised not to disclose an experience we had with water in our basement when the drain backed up. We were told that since the problem had been fixed and had happened seven years prior to sale of the house and never happened again, we didn't have to disclose it. Was this the correct advice? The present owner said we failed to disclose this event and is asking for money. A. If the problem has been completely fixed and happened seven years prior to the sale of the home, it's hard for the new buyer to prove that it is a material defect, particularly if the problem hasn't happened again. Most seller disclosure laws require sellers to disclose to buyers known problems that still exist with a home but that aren't readily apparent. If the law required sellers to disclose all known problems they have had with their homes (whether fixed or not), you could imagine the list a buyer could receive from a seller who lived in a home for 10 years: new roofs, repair of plumbing issues, repair of broken stove parts, a host of electrical or mechanical problems that were fixed. Frankly, if the seller hasn't had any problems with the drain in the basement and now simply wants money because he found out you had a problem there seven years ago, that seems to be out of line. However, if the problem has come up again due to a fix you made on the cheap, the buyer may have a point. The one thing you have on your side is that you made the repair seven years ago. We once knew some buyers who purchased an expensive home and the disclosures they received seemed all in order. But a week after buying the home, the water main burst and flooded the basement, causing $20,000 in damage. The owners called a plumbing company and, in a twist of fate, the plumber that had previously repaired the water main told these buyers that he had made a bubble gum repair job on the water line at the direction of the sellers because they refused to spend the money that was really needed to get the job done. Needless to say, the sellers in that story ended up having to pay for the repairs and for the damage done to the house. Just remember that you could be sued and that it could cost you a lot of money even if you win. Please consult with a lawyer with seller disclosure experience for a review of your options. Q. We have a 5.25 percent interest rate on our mortgage and we still owe about $80,000. Our house is probably worth about $500,000. One mortgage broker told me that no one would be interested in refinancing our mortgage at today's lower rates unless we took cash out. That is, that $80,000 would not be worth anyone's trouble. Does this sound right? A. Yes. Unfortunately, it costs some lenders too much to do smaller loans. In some markets, $80,000 is a fine size for a loan, but in a major metro area, $80,000 isn't much. You could take out a new loan for $100,000 or more and then immediately pay off the difference to get you back to the balance you had. But if you have to pay points or fees based on the size of the loan, you would have wasted some of your money. There are lenders who might help you out; you just have to look a little harder for them. Another option is to consider a home equity line of credit, which could be a far cheaper way to get the cash. The big red flag here is that typically these loans are priced with a variable interest rate based on the prime rate. But you might be able to pay a lot less than you are with your current loan. Remember that if you're far down the path with your current loan, you've already paid off most of the interest. Refinancing might not save you any real money, especially if you're adding years to the term of the loan. If you only have eight years left on the loan, for example, you'd want to come up with a solution that would allow you to pay off the loan in eight years or less, and pay less each month. If you can't do it with a reasonable home equity loan or home equity line of credit, then you should keep the loan you have and simply focus on paying it off as quickly as possible. Finally, consider that your interest rate is already relatively low. If you refinance now and pay all of the costs and fees associated with a new loan, you could wind up spending several thousand dollars. At the amount you're borrowing, it could take you years to recover the costs associated with your refinance. If you do decide to refinance, don't think that you've gotten a great deal if you only look at your monthly payment. If you're eight years into your existing loan and then refinance into a new 15-year mortgage, you'll have essentially added eight years of payments and thousands of extra dollars in interest. Your best bet is to sit down with a mortgage lender and work out whether there's any benefit to refinancing your loan balance. After you go over the numbers, you might find out that your current loan is a better deal for you in the long term.