First time buyers - Assessment obligations

First time buyers and assessment obligations

Question - The seller has specified in his counter offer that he wants me to assume the assessment for the sewer hookup (or road repairs). Do I have to do that?

Answer – No, you don’t HAVE to do that. You may wish to, if that’s the only way that you can get the house of your dreams. Many local governments allow homeowners to spread special assessments for things such as water and sewer hook-ups over many years. Some specify that the assessment must be paid off if the property is sold and some allow for a new owner to assume the unpaid obligation. When the original obligation was incurred, the owner at the time committed to pay to it off, so you would be well within your rights to refuse the seller’s request that you assume the obligation.

Remember, however, that the seller is going to take the payoff of that obligation into consideration when evaluating your offer and it may well tip the balance against accepting your offer; especially if you have asked for concessions as from the seller to begin with. The seller will be looking at his “net” after all costs and paying off this debt.

Another factor to consider is the impact that accepting the assessment obligation may have on your ability to get a mortgage on the place. This will be another debt on your debt to earnings ratio and could tip things against you. Discuss this with your lender before making a decision.

In situations where a special assessment for things like road replacement is in place, you should view this as a red flag about the Homeowners Association. They obviously were not managing things well and had not collected enough to maintain the neighborhood roads. Look to see if this is likely to reoccur while you are there or if the HOA is now doing a better job of planning and collecting for future neighborhood needs.

You may also want to do some research into the plans of the local governmental bodies in the area that you like, to see if they have plans for big projects like sewers and water that will eventually result in big assessments against your property. Usually there is a master plan in zoned communities, but a quick talk with the planning and building officials will give you a glimpse of the probable future for that area.  

Assessments get real…

For the past year or so I’ve been using a SEV multiplier range of 1.4 – 1.8 to get a gauge on home values, because that’s about what sold homes in the area were running. Now the multiplier is back close to 2.0 (about 1.7 to 2.0) not because values went up, but because the assessors finally caught up with the devaluation trend and marked down the SEV’s in this year’s assessments. In many cases that also meant that the SEV value and the Taxable Value of homes have re-sync’ed and now both are going down.

The other rule-of-thumb gauge that I’ve been using is still headed down – the cost per Sq. Ft. for homes. I had been using $85 – 125/Sq Ft, depending upon size, quality and condition. Now that is down to about $50 – 115/Sq Ft.(and even lower in some hard hit areas like Pontiac). It may be counterintuitive, but, the smaller the house the higher that number generally is – there is less Sq Footage to spread the cost of the infrastructure (heater, water heater, etc.) over, so small houses cost more per Sq Ft.

As I look at what has happened to assessments over the last two years, it is obvious that the assessors are only grudgingly making the changes. Assesses values are still 10—20% higher than current market values. Perhaps that is because the assessed values are only adjusted once a year and the current market-driven devaluation continues at about .75 to 1.0% per month.

The drop in assessed values and the subsequent drops in taxes and tax revenues are what is driving the crisis in local governments. Many local governments are stuck with bad union contracts that they wrote when times were good, many making promises of retirement benefits that the governments can no longer afford. There is a day of reckoning coming on that. Right now the local governments are doing everything that they can to keep their workers, which means sacrificing road repairs and delaying other projects. Eventually one would have to wonder; if there’s no money left for these people to do anything, what do we need them for?

For now I just make the adjustment to my home valuation rules-of-thumb. I’m even starting to see sales with SEV multipliers over 2.0, thought those are mostly waterfront homes, which have always been high. I’m still seeing lots of foreclosed homes sell for less than their SEV value, which I take to mean that they were in pretty poor shape or they were a part of some scam being pulled off by unscrupulous realtors and investor partners.
It’s interesting, too, that many homeowners welcome the reduced SEV and taxes, but continue to insist that their homes are really worth more than the SEV would indicate. You can’t have it both ways. The assessments went down because the assessors reevaluated the market value of the house in the current market environment. Your house isn’t somehow the only $300,000 house left in your otherwise $250,000 neighborhood.