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It's not unusual for new homeowners to experience financial surprises, but people who purchase a newly built home may be more likely to experience sticker shock on major expenses.
Nearly 75% of new homebuyers reported regretting their purchase, according to a 2023 survey by Real Estate Witch. Property taxes were the most common issue, surprising 33% of new owners.
With new buildings, property taxes can change significantly after purchase because initial rates are often based on estimates. This can be annoying for homeowners who have already stretched their budgets to purchase a home in the current market.
Newly built homes make up 30% of the current market, up from 10% to 20%, according to a recent report from the National Association of Realtors. As more buyers turn to builders, potential owners should be aware of how costs add up after just one year, experts say.
“Buyers need to understand that property taxes…are not fixed. They can change on an annual basis,” said Melissa Cohen, regional vice president for William Raveis Mortgage. “People don't really have any control.”
Why property taxes can jump on new buildings
When lenders qualify someone to buy a home, they take into account the principal, mortgage interest payment, homeowner's insurance, and property taxes.
But unlike previously owned homes, experts say new construction lacks a tax bill because there's no home to evaluate yet. Instead, mortgage lenders often use an older local tax rate or estimated tax rate to calculate the owner's monthly payment.
The calculation will vary by lender, said Brian Nevins, director of sales at Bay Equity, the mortgage lender owned by Redfin. Some take 1% to 2% of the home's sale price to cover property taxes, others may multiply 1% to 2% of the sale price by local tax rates.
Initially, the homeowner typically pays the estimated property tax rate into escrow. Depending on the local tax assessment cycle, the county office will ultimately assess the value of the new home to determine the effective property tax rate.
“All counties are reassessing property taxes, it depends on when,” Cohn said.
While some places may vary in frequency, “if it's new construction, they always reevaluate,” she explained.
At that point, if the homeowner has an escrow account, they may learn they have a deficiency, meaning they owe more in property taxes than they expected. If a homeowner cannot pay the taxes owed in a lump sum, the lender will usually pay what is due and the owner will repay the lender through a higher monthly mortgage payment.
In this case, the owner repays the lender by increasing the mortgage payment to make up for the difference
Tricks to measure how your property tax will change
“People who are buying today assuming they qualify based on current property taxes or current insurance need to do a little more homework to understand where they could really be in a year,” Cohn said.
If you're looking to buy in an area you're not familiar with, find out how often the county reassesses property taxes and what the reassessment formula is based on, Cohen said.
Additionally, you may want to consult with a local loan officer who understands the nature of the area you're buying in, Nevin says.
If some newly built homes in your area with similar square footage have been around for a year, you can check the property's address on a real estate website and get a rough estimate of what the taxes might be, says Veronica Fuentes, a certified financial planner. At Northwestern Mutual.
However, tread with caution: When you look at property taxes listed online, those are the taxes the current owner is paying, not what you would pay, Cohn says.
