pay the seller’s share of property taxes. nobody Thinks of this. So use it.

When you realize how to outbid the competition requires more than just the purchase price, you look for places where you can take advantage. No one thinks of this idea. If you use it, a seller will undoubtedly take notice. The Seller’s attention is what you want, and forcing all other buyers to beat you is the way you want the conversation to go.  

Property taxes that accrue from January 1 through December 31 get prorated at closing. Assume the annual property taxes for a house will be $7,000.00. The monthly proration is $583.33. To close on February 28 there will be $1,167.00 in taxes due. The standard language of your real estate purchase agreement might call for the Seller to pay taxes from January 1 to the day of closing. That’s a negotiable item. 

Buyers who have cash on hand advantage can consider changing the contract from Seller paying to buyer paying the two months of taxes. For the small price of $1,167.00, the return could make the difference. Remember, the price is where the attention is, until the Seller looks at selling expenses. An owner decides between one offer and another by comparing Net Equity and the commitment of the buyer. (Security of getting to closing). Increasing the Seller’s net equity this way has an exponential positive impact on the buyer.   

  1. Grabs the attention of the Seller because it’s unique
  2. Causes the Seller to see your offer beats the others on this point
  3. When you have what they don’t they don’t look as good as you
  4. You just gave the Seller a gift of $1,200 
  5. Let’s the owner feel they were clever negotiators shifting their bill to you
  6. If property taxes are deductible on your tax return, you get the write-off 

The difference between first and second place is most likely minimal. Any advantage might be enough to put you in first place.

Current Assessment X Current Mill Rate is only one of the choices for property tax prorating

The Offer to purchase provides 5 choices for the buyer and seller to select from to agree on how to prorate the property tax bill for the current year. Except for closings at the end of December, the actual amount the city is collecting from the owner will be unknown at the time of closing.

Each choice on under Closing Prorations is a simple word problem. One or more of the choices may provide a fair and simple way for the buyer and seller to split the bill. In certain situations, one or more of the options may provide a windfall to one party, or may leave the new owner significantly under compensated.  To know which options may be acceptable to both parties, we can plug the known numbers into the formulas.

A: Net General Real Estate Taxes for the Preceding year (or the current year if known):  Assume the current year bill is unknown. The previous year tax bill may be close to the current year bill. Tax bills tend to increase each year, but the increase when divided over the year is probably minor enough that no one cares.

B: Current assessment time current mill rate: This is a bad choice when the community is in reassessment or the property being sold is new construction.  A reassessment will result in property values increasing close to market value. In the fall to keep tax bills from going through the roof, the mill rate will be adjusted down. Close when you know the new assessment but not the current year mill rate and the seller will leave a large chunk of money with the buyer. New construction built in one year and closed  in the following late winter or early spring before the new assessment is known will leave the buyer with a very small credit compared to the actual amount owed for the days of the year prior to closing.

C: Sale price, multiplied by the muni area wide percent of FMV multiplied by current mill rate.  This one is unusually complicated when compared to the next choice.

D: __________________ Create your own method. I think this is safe. Based on the facts of each transaction, the parties may estimate a tax bill. If bill was $10,000 last year, assume the next bill will be $10,100 or $10,300 or some amount. You will most likely be close because tax bills rarely go down. If it’s new construction, you could multiply the sales price by the known mill rate or if the closing happens in the same year that (a) the lot was vacant on Jan 1, and (b) the construction began after Jan 1 and was completed and closed prior to December 31 of the same year, the value of the lot times the mill rate will give you a number that’s close.

E: Buyer and seller agree to reproprate after closing.  Sounds like a great way to be exact, provided the new owner can collect from the seller, or the seller can collect from the new owner if money is owed.   I don’t want to suggest this option and I don’t want to be asked to intercede at Christmas when one party fails to pay up.