What happens when an owner pays off Mello Roos early? Does that mean the property can sell for more? Let’s talk about that. If you’re not in California, just know Mello Roos are taxes imposed on newly constructed communities to help pay for infrastructure like streets, schools, and parks. So over a period of usually 20 years, the owner might have an extra $1,000 or so in taxes to pay each year.
Scenario: Imagine an owner has $20,000 in Mello Roos taxes over the next 20 years and decides to pay them off right now instead of waiting. Is the house now worth $20,000 more?
Things to consider about value & paying off Mello Roos:
1) Expecting the full $20,000: When sellers do something to their property, they often expect buyers to pick up the tab of whatever the price was. This is true for kitchen remodels, landscaping, bathrooms, and even Mello Roos. In this case the seller would expect a buyer to pay $20,000, but that’s probably not realistic.
2) Logic & 20 years of payments: Buyers often stay in homes for less than 10 years, so it’s unrealistic to think most buyers are going to pay for the future savings of 20 years worth of tax payments in one instant. That’s disappointing to sellers, but doesn’t it make sense? It’s just not logical for someone to fully reimburse the seller for a bill they might not actually be paying for the next 20 years. Side note: This reminds us of solar a bit because buyers probably aren’t going to pay the full cost of the system in one instant either.
3) Comps & adjustments: A property with no Mello Roos payments is going to have a marketing edge at the least because it’s essentially less expensive to buy the house compared to others. At best there could be some value there too, though it’s going to be hard for an appraiser to support a Mello Roos adjustment because it’s not easy to find comps where sellers have paid them off. In an ideal world we’d have three model match sales without Mello Roos so we can analyze whether these homes really sold for more or not. If we don’t have sales, but it seems clear the market is willing to pay more based on the number of offers, price level of offers, feedback from agents, logic, data from other neighborhoods, etc…, we can always look at the range of value in the neighborhood for similar homes and choose to reconcile the subject at a higher tier of value. Thus it’s important to realize appraisers might not always give a specific adjustment, but they can still recognize an asset by reconciling the final value to a higher level (if there is support to do that). It would be nice if there was one quick formula we could apply to spit out a perfect adjustment here, but formulas wouldn’t work in every neighborhood, price range, or market. Like all things in real estate, we have to know how to think through issues and then look to the market for the answers.
I hope this was interesting or helpful.
Questions: Would you recommend paying off Mello Roos? Have you seen a value increase because of Mello Roos being paid off? Anything to add to the conversation?
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Builders try to sell homes without Mello Roos for higher prices, essentially by the buying power of the loan constant for a fixed rate mortgage.
A test for an appraiser is to find a similar tract without MR and do some Pairings with sales in the subject tract, and see if there is a difference.
Not hard to do, no advanced degree required. The problem as always, it it takes time. And, no one will pay the appraiser to take the time, at least not in a loan origination situation.
Thanks Steve. I always appreciate your take and your insight. I’m glad you brought that up. Builders do try to sell at a premium. Can they really get the full cost of the fees? What does the market say? You are right it takes time.
REAL ESTATE AGENTS: I hope a few agents chime in to share their experience with any sales. Was the full cost of Mello-Roos paid for by the buyer? Or was it just part of the cost? Or was there no real difference in price between homes with and without Mello-Roos? Just because there is a cost doesn’t mean it adds anything to value. Sometimes it’s just about having a more marketable property that is going to get into contract more quickly. I hope to hear some stories…
Good info! Thanks Ryan!
Thanks so much DeeDee. 🙂
During the housing boom in 2004-2006 there was an area (Santa Clarita) in SoCal with quite a bit of new townhouse construction. I had several examples of very similar new construction units separated by nothing more than a PUD boundary (cement block wall) where one was subject to Mello Roos bond tax (per unit) and the other where the developer paid off the Bond Tax for the entire PUD prior to selling the units. It made it easy to see the market’s reaction, which was remarkably large. (I seem to recall more than a 10% difference in value)
Wow, Mike. That’s a great example. It would be great if every time we appraised something there was something otherwise similar next door without one feature. Let’s make that the norm. 🙂
So did the units with the paid off bond sell higher than the MR units? I wasn’t sure based on your comment.
There is a local example in my market in the City of Lincoln where some units have Mello Roos and others don’t. To me it’s important to just be aware of that when choosing comps.
hmmm… give the buyers a free tax bill concession or $20,000 worth of gas, grocery and coffee shop gift cards? Maybe I’d rather the cards because they’re more tangible than credit for a bill you never saw (and plus you can usually buy $20K worth of store cards on sale so probably cost $18,000 to purchase)
I doubt if that’d get a $20K return on the sale price though either way because paying a $1,000 tax bill say 15 years from now costs less than paying $1,000 today due to inflation
Thanks Anne. I always appreciate your take. We really have to think through this stuff. Builders are so good about trying to control their prices too, so just because they say value is at a certain level does not mean that is the case. Personally I’m not a huge fan of doing new construction appraisals in tract subdivisions because I feel at times like I’m at the mercy of the builder to get accurate information if the properties are not listed on MLS. Custom new construction is much better in this regard.
Yeah, you’re right – its a bear with those new builders.
New construction has so many concessions and upgrades we don’t know about – like one place in Plumas Lake was giving $5,000 store credit at RC Willey’s only to military buyers but they never note it on the MLS – and another condo assn in Roseville was counting the size of the garage in the total SF amount they were selling and another in Antelope had detached garages for some but not for others and of course, none of which were noted in the tax records. Makes valuating a 20yr tract home a joy and a pleasure lol 🙂
There you go. Case-in-point. Sometimes builders put information on MLS too and don’t really monitor it. So the DOM will say 120, but it hasn’t really been listed for that long. It’s just the status was not changed to “pending”. That can make it look like the homes are less appealing when in fact the sales office just isn’t updating their information.
This is very interesting topic and I would be interested in knowing if seller pays off Mello Roos what return are they going to get. I know more buyers would be interested in this home because of manageable monthly mortgage payments. But what about when these Mello Roos gets renewed, I have read this can also happen, so there is no guarantee to the buyer.
Thanks Raj. I appreciate it. It seems like most owners do not do this, but sometimes they do for whatever reason. I’d love to hear some stories too from sellers who pre-paid their Mello Roos. Personally, my advice would be for sellers NOT to do this because it seems like an easy way to lose money, but that’s just me.
I agree with you Ryan.
My comment got deleted because I wrote the wrong captcha code, but here it goes again.
If I don’t have data from sales that show an adjustment I would imagine myself as a typical buyer. Most buyers plan to stay at least five years. If I was in that scenario I would make a bet that I would stay at least five years and would pay at least $5000 additional for a home without the Mello Roos burden. Seems like a smart move as a buyer. $10k additional? I dont’ know about that.
Hey Braden. Sorry about the deleted comment. I wish WordPress wouldn’t do that. Thanks for commenting again.
I really like your logic here. I think sometimes when appraisers don’t readily see some comps with the same feature, it’s easy to just say, “Well, I’m not giving any value then.” But we have to think like buyers though and employ some logic too. Hopefully we can have some sort of support in addition to our logical thinking and conclusions, but let’s not forget how important the logic is. Kudos to you.
This is an interesting post as I have never heard of Mello Roos. I think I agree with Braden though because most buyers would look at the money saved over the length of time they’re most likely going to be there. Is there a way to interview a variety of builders who have done this to find out their mindset on pricing their homes considering this scenario. You could then reconcile their answers into an adjustment amount.
Here in California the government loves to tax us. I hope you don’t have as much of an issue in your area Tom. 🙂
I think you’re on to something. This just goes to show we have to think through the issues and we have to know our local market. For any real estate agents, I would definitely encourage clear communication about whether Mello Roos exist or not for the subject property. That’s one thing the appraiser definitely has to consider.
When I was doing new tract development appraisals, surveying many competitive projects, I recall builders without MR raising their prices to the point that they were at par with the monthly costs of those that did have them.
Example, at todays’ fixed rate loan constant of say, $4.66/$1000, divided into the Mello Roos montly payment of $83.33 ($1000/12), indicates $17,882 in loan amount.
Imagine a non MR tract raising their prices, say $18,000 to be a par with one with MR.
It would be interesting to revisit the tracts in Victorville where I first saw this marketing strategy, to see how prices between the two tracts compare over time.
That’s wild Steve. I completely understand why builders would do that because they are about making as much money as possible. I would guess it’s easier to get away with this stuff during the building phase when prices are padded with so many things. But there could be a difference seen in the resale market. The same thing goes for those lofty “elevation premiums” or “lot premiums” that buyers pay big bucks for during construction, but the resale market might pay far less or nothing at all.
Builders do not put things into the MLS unless and until sales volumes slow to the point that their giving of concessions will not stop the slide.
When they do put inventory into the MLS, it may be one of each floor plan, not an indicator of how many they have.
There are merchant builders that have been sued in class action cases in the Sacto market for including the garage size in their brochure price of living area. This is not a new problem, it is historic, Richman America and Toll Bros come to mind.
Concessions are withheld or under reported by builders. Even when a direct call to the sales office is made to confirm the amount of $$ given up to the buyer as incentives or sweeteners, they have a hard time telling the truth.
It is similar, when the market softens and we call agents on resales, where there were concessions. they do not want to cough up the info, for fear we will come in low on someone elses sales. They do not want to cough it up in the subject sale most of the time either.
It’s true about the market slowing and builders listing. Properties were NEVER on MLS during the construction boom from 2003 to 2005 in Sacramento, but they started to show up when the market began fading. Right now it doesn’t seem like the bulk of listings hit the market for new construction (maybe just a sample as you are saying).
We need the truth. It’s too bad when people don’t tell it. I don’t want to rely on information I get from a sales office or agents if it is bad. I don’t want “alternative real estate facts” to shape my opinion of value. I would rather have someone tell me they cannot disclose confidential information (or whatever they want to say) rather than spew lies that might end up shaping the way I see things. The thing real estate professionals have to remember too is that it is not our responsibility to protect values or make the market move a certain way. Agents cannot control the market and neither can appraisers. We have to let the market do its thing rather than think it always has to be positive or always has to be increasing.
In Oregon, we don’t have Mello-Roos, we have Systems Development Charges (SDCs) that are charged to the builder as one-time fees at the time of construction in addition to the other development costs for sidewalks, permits, inspections, streets, etc… Mello-Roos might be a good thing for us to copy because some in Portland say that the high cost of SDCs are driving up the price of homes with more of an effect on the lower priced homes.
Thanks Gary. It’s interesting to hear about your market. The price of new construction is a problem here too and it’s one reason why building is not as robust as it could be. I think many people hope for affordable new construction for entry-level buyers too, but the thing is it’s expensive to build new homes because of all the fees associated with building. The truth is newly constructed homes usually sell with a hefty price premium because they are brand new (just like a brand new car has a premium). When we think about it that way, the most affordable homes are actually existing older homes instead. The thing is when a market increases and people start to look around at what they can afford at the lowest prices in town, they aren’t pleased with the neighborhood choices. That’s not an easy thing on many local buyers and I’d guess it’s similar in your market in Portland.
Hello Ryan, right now I don’t think there is any difference due to the shortage of inventory. Heck buyers right now are looking past backing to a freeway. I do see some pricing differences between those with $3000 to 4000 per year assessment versus those that don’t have Mello roos. I think the threshold of $1000 per year may be low enough that buyers don’t know the difference. Again back to inventory and pricing. Ryan as usual great topic
Regards Brad Bassi
Fantastic point Brad. We cannot come up with a logical or theoretical adjustment and apply it to every market. I think you’re right about what low inventory can due to buyers. Moreover, we have to consider Mello Roos are a bigger deal lower price ranges where buyers are struggling to afford the market instead of higher price ranges. This makes me think of a busy street location. That adverse location is probably going to look a whole lot worse when we have a 10-month supply of inventory compared to a 1-month supply. Thanks for bringing this idea into the mix. What does the market say? That’s a question we always have to ask because the market might react differently depending on inventory levels.
I am working with a client currently who had upgrades done using the Ygrene Energy Fund Special Tax program. Basically, they increased the Mello Roos for the next 20 years. They could pay it off early with a 5% prepayment fee on the remaining portion. They are choosing not to pay it off and sell for a slightly reduced price and have the buyers assume the tax bill. There is full disclosure from the beginning and the buyer’s lender is aware of the tax increase expected to happen. The special tax is fully transferable and is just a more expensive house to buy if compared directly to comparable homes in the area.
Thanks Nate. It’s interesting to hear the creative ways these upgrades are financed. I always wonder how much these extra payments really impact marketability. Some of it really comes down to the neighborhood as some areas buyers are strapped for money and others they aren’t. Thus we might see a strong market reaction in some prices ranges compared to others. Thanks again Nate for an added layer to the conversation.