Should you buy a home for under tax value?

I am sitting here scratching my head.  I have had two deals fall out this month because the homes were being purchased for UNDER tax value.  You would think that buying a home for under what the county thinks it is worth is a GOOD thing; this should be the goal of every home shopper.  We all want proof that we got a bargain.  Think again.  There is an insidious aspect of a bargain home.  When you purchase a home for under tax value, the taxes will be proportionally higher than the taxes of a home purchased at tax value.

Well, no duh.  When a home valued at $150,000 is purchased for $100,000, the taxes still reflect a $150,000 home.  So, even though the taxes on a $100,000 home (now this is an average figure) would be say, $2,500 a year, the taxes on a $150,000 home are $3,750 a year!  This increases the PITI payment by $104 a month.  Small price to pay for $50,000 in built in equity you say.  Think again.  For many homebuyers this is an insurmountable emotional barrier.

Both borrowers in the deals that died last month were well qualified for the higher payment.  Their debt ratios were fine and they had underwriting approval.  The increased payment did not cause a hardship for their families.  So WHY did they pull out?  For two reasons: 1)  The payment for the property was higher than the estimated payment for that purchase price that we calculated during the preapproval process,  2)  They thought it was not “fair” that they pay higher taxes than the purchase price supported.

Talked to one borrower at length and tried to explain WHY the taxes were higher.  She told me that she was going to go find a home where the taxes were reasonable and not based on more than she paid for the house.  In other words, she did not want a bargain.  Go figure.

Buying a home for under tax value is ALWAYS a good thing.  It means you have done your due diligence and really searched for the optimal deal.  It is always possible to go back to the Appraisal District armed with your new appraisal and purchase price after closing and try to get the value reduced.  But, the fact remains, 6 months ago the home was worth more than you are paying for it.  It is most likely STILL worth more than you are paying for it.  Don’t let tax values keep you from finding a home with built-in equity.  After all, homes are investments, make a good one.