Tuesday, January 15, 2008

Making Apples to Apples Price Comparisons

Many of the new developments in the foothill communities tack on additional monthly fees for HOA and have special tax assessments (Mello Roos). These can add up very quickly. Here in Serrano for instance, according to their website, the two fees typically come to $296 a month.

I believe this is why we are seeing so many home priced “below market” in this Serrano now. Once you include the present value of these additional fees and taxes, the homes are at or slightly above market value.

Below is a quick chart I use help determine the tradeoff between extra fees and home purchase prices. The monthly fee/tax value is on the left, and the present value of those fees/taxes over 30 years is at the intersection with the interest rate. So for example in Serrano, the $296 a month at 6% interest could have bought you around $50,000 more home elsewhere, or adds $50,000 to the home price if you are looking at in Serrano. Of course you do get something for the HOA, like front yard maintenance, so you might want to use a slightly lower figure, but this may be offset by future increases in the HOA.

If you use excel you can estimate this easily using the PV function (but don’t forget to divide the interest rate by 12 or multiply your payments by 12 so that your interest rate and your payments are in the same increment).
On a side note, recently spoke with a mom who lives in Serrano. She actually works in an RE related field, but the developer was not upfront with them, and they didn't find out about all the extra fees unitl it was too late. Developers hold all the cards and all the information.....so be very very carful when purchasing a new home!


Tyger said...

You certainly should ensure that you're well informed about any appplicable HOA and Mello Roos assessments before purchasing. However, the logic behind your calculation is faulty (and you've alluded to it in your post). The cost of HOA and Mello Roos assessments is not an expense such as interest, where you receive nothing in return (after you've borrowed the principal). If you're going to account for it on the expense side of the ledger (and you should), then you also need to account for it on the other side of the ledger. With respect to the HOA, yes, going forward your front yard maintenance is covered (only in the production homes; my understanding is that in the custom home area, it isn't covered), the security guards are covered (at least in the custom area; unsure about the production home areas), and the CC&Rs etc. will spell out the balance. Additionally, there are benefits of a common-interest development in terms of neighborhood upkeep and the like (on the other hand, some people dislike the restrictive nature of HOAs in general). If you're going to try to establish an apples to apples comparison, then you cannot ignore the tangible and intangible benefits that flow from the expense; they must be taken into account in your 'formula' somehow.

With respect to Mello Roos, you have to evaluate what facilities are being funded with the assessments. The high-rated schools? Street upkeep and maintenance? How are those factored into your formula? Also, using 30 years for your amortization likely is inaccurate, since the bonds surely were issued years ago with an -original- maturity of 30 years. How many years remain, at present, until they are repaid?

Buying Time said...

Tyger -

While your points are valid....I don't see them as any different than the many other tradeoffs you make when evaluating what you get for the price of your home.....lots size, home size, school district, hardwood floors etc.

Everyone makes those tradeoffs differently.

I value yard maintanence, schools and transportation infrastructure, but acutally have a negative value for security gates and CC&Rs.

Gwynster said...

HOAs and Mello Roos are the kiss of death >; )

Tyger said...

Yes, agreed that everyone weights such things differently. My point is that it's too simplisitc to state that "$X of monthly HOA/MR costs translates to $Y of additional house purchase if applied elsewhere"; you have to take into account what you -aren't- getting elsewhere that you -are- getting by paying those costs. Only through such a balancing (again, which will be different for everyone based on how they weight such things) can a valid comparison be made.

And Gwynster, considering the cuts that are coming in State spending (which will be pushed down to the counties and cities, etc.), together with declining property tax revenues, I'd say that HOA/MR-funded services are going to start comparing (even more) favorably with county-funded services. HOAs and MR aren't necessarily the kiss of death at all; they actually can be quite the opposite. As with many things, however, it all depends on the terms applicable to any particular circumstances.

D said...

Funny, I was just speaking about this issue with my brother the other day, 5021 MORRILL CT. The HOAs are $160/month and the M/R are $95/month - $255/month. I immediately translated that monthly cost into an equivalent price or equivalent loan amount. That changed my potential low ball bid and this home fell off my list.

We could discuss the costs vs the benefits of HOA/MR/CCRs etc ad infinitum. Whatever category or account you put the costs of HOA/MR there is a monthly cost that must be paid, without speculation, out of my pocket each month. Bottom line.

PS Husman is now Husmanen, I have a google account now.

Gwynster said...

The cost is out of pocket with zero tax break no matter which column you put the expense in.
Plus you always have the delightful possiblity of special assessments as the economy declines. LOL ya thats a winner.

Tyger said...

D, for many of such things, you're going to pay one way or another. But sure, you can defer it some, for what that's worth.

Gwynster, what possibility is that? Landowners going to vote to approve the formation of a new CFD and imposition of a special assessment? Yeah, right. Not.

MR going to increase over time? Like everything else, it could -- at a maximum rate of 2% per year over a 25 year period. Hardly anything to warrant your smugness. /shrug

Paul said...

And without joining the debate, I want to remind everyone of the importance of (1) obtaining the preliminary title report; (2) reading the preliminary title report; (3) having the title company provide you a copy of each and every exception to the prelininary title report; (4) reading and understanding each and every exception; and (5) if you don't understand it, ask someone not affiliated with the seller or its real estate agent, to give you an opinion as to what it means. (I could add the same comments regarding loan documents, but then Countywide would go out of business, woundn't it?) All of the HOA fees, Mello Roos, 1911 bond financing, 1913 bond financing, special assessments and the like, should all be covered by those documents. (Some special assessments will be in the tax bill, so visit the assessor.) Caveat emptor.

And I will say from experience that when I ask the title company to provide me with a legible copy of each exception so I can read it, they look at me like I'm from another galaxy, but eventually they do provide it.

And lastly, I require the title company to provide me with a copy of all of the closing documents, at least one day before the "signing appointment," so I can actually read them (yea, I do, as boring and crazy as it sounds!), before I come in to sign. The 30 minute signing appointment is not enough time to read 30-40 pages (or more) of documents, understand them, or have time to ask a disinterested third party what they mean.

See, now you got me started, BT!

Jacob said...

I would be more worried about HOA increasing a lot than anything else.

Sippn said...

G - thanks for bringing up the non deductability of those fees! True. But there is some bene's from them. Mellow Roos is often how large road projects are funded like freeway interchanges, etc. You should compare the total payment.

SOmetimes paid for lawn maintenance is good. I drove through the tracts last year in Plumas Lake (soccer game return) and it was obvious which subdivision had the paid for maintenance . . . it was the green one with mowed lawns!

Dues and fees are common in almost every large project to offset the demands for improvements off site.

Or come into north east Sac county (95864/95608/95628) where such a thing is rare as a quiet night at the Brittny Spears home.

I wouldn't mind paying fees here if the schools facilities would be improved to close the level of the new areas.

Gwynster said...

We'd love the foothill but as long as UCD is down here, we aren't budging. The cost of gas alone makes it unattractive, never how much of life you loose commuting.

Oz said...

Heh, I just posted in a thread below about commuting!

I don't think commuting is such a bad thing. As I mentioned below, I like keeping a home that's insulated (away) from the workplace, using a cell phone (hands-free one!) makes the time productive, and it's nice for me to be able to transition and gear up on the way in or unwind and start relaxing so I'm ready for fun by the time I arrive home. There's no lost life for me, and being originally from the bay area I'll say that in terms of commutes this isn't bad here.

It's funny how we each have different preferences. I'm a UCD grad, and you couldn't pay me enough to live in Davis now. Blech, hehe!

Tyger, I hear you about the HOA & Mello Roos thing. You have to account for it, but it's not money down a rat hole. You actually do get something in return. It works for me & I don't mind.

Gwynster said...


The hubbie and I work for UCD. The only reason we stay here is because we can bike to work. If another major Univ offered us comparable jobs, we'd be off like a prom dress.

I'm also from OC, school was in LA and SF. The hubbie is from Chicago. Neither of us is a stranger to real traffic, just not something we want to do again.

sacramentia said...

Kind of off the topic - but plug in the cost of driving new cars to your calculator and it is crazy! Two new cars in the driveway can cost as much as the house.

Buying Time said...

If I had to commute downtown as well, there is no way we would live in the foothills. Mr. BT is based out of Folsom but ends up downtown quite a bit (takes light rail).

I hate commuting (Mr. BT doesn't mind it). And yes, Sac is way better than D.C. anyday (at least most people know how to drive around here).

Time commuting is time away from my little ones, and I don't know of any neighborhods that are worth that price (I don't care how good the schools).

If both of us were commuting, we would probably be looking more at Gold River, Greenhaven or Land Park.

anon1137 said...

Re: the deductibility of Mello-Roos fees on income tax returns, when I was a homeowner, I deducted the total amount of the property tax bill, Mello-Roos and all. Hey, there were usually 10 separate items listed there. Do you think I'm going to try to figure out what each one is and whether it's deductible? I would bet that's very common.