Mello-Roos and Why You Should Know About It

Summary

A Mello-Roos is a tax district created in California by a city, county, or school district for financing specific projects. In many cases, homes in Mello-Roos districts have lower purchase prices than similar homes in other areas. This can be deceiving because what someone may initially save due to a lower purchase price may be lost over time through the additional taxes. For example, an extra $250 to $580 in Mello-Roos tax payments per month can be roughly related to the monthly costs of adding $60,000 to $130,000 to a mortgage loan to buy a more expensive house. In other words, one could buy a home for a significantly higher price than a house with Mello-Roos taxes and end up paying about the same or even less depending on the circumstances. So next time, two similar homes in similar areas of CA have a price difference, remember to check for Mello-Roos taxes.

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What is Mello-Roos?

A Mello-Roos is a tax district created in California by a city, county, or school district for financing specific projects. These projects typically invest in police and fire services, infrastructure, parks, and childcare facilities. Mello-Roos is essentially a loophole to Proposition 13, passed in 1978 that put a cap on property taxes in CA at 1% of assessed property value. Mello-Roos is technically a tax on land and not property, allowing it not to violate Proposition 13. However, failure to pay the Mello-Roos taxes often can lead to an accelerated foreclosure of the property on the land. For a Mello-Roos to be created, it must receive approval from 2/3rds of voters. Since the cash flows from the taxes are used by the issuing entity to sell bonds to bring in large amounts of money for projects, the Mello-Roos tax will remain in place for the time needed to service and pay off the bonds. This means someone buying a house in a previously created Mello-Roos district will have to pay the extra taxes regardless of their opinion on it. No matter one’s support for or disagreement with Mello-Roos and the projects they are used to fund, it would be wise to understand their relation to the purchase price of a home.

Mello-Roos and Home Prices

In many cases, homes in Mello-Roos districts have lower purchase prices than similar homes in other areas. This can be deceiving because what someone may initially save due to a lower purchase price may be lost over time through the additional taxes. On a property tax bill in CA, any charge that has CFD in its name relates to Mello-Roos taxes (CFD =Mello-Roos Community Facilities District).

For example, Mello-Roos taxes in Ladera Ranch can range from $3,000 to $7,000 annually, depending on the appraised value of the property. Thus, these Mello-Roos taxes can cost around $250 to $580 per month.

Using an average 30-year fixed mortgage rate of 3.12% (Bankrate, August 28th) and a mortgage calculator from Bankrate, it is easy to see that an additional $100,000 on a loan amount relates to about $428 dollars in extra monthly payments.

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Therefore, an extra $250 to $580 in Mello-Roos tax payments per month can be roughly related to the monthly costs of adding $60,000 to $130,000 to a mortgage loan to buy a more expensive house. In other words, one could buy a home for a significantly higher price than a house with Mello-Roos taxes and end up paying about the same or even less depending on the circumstances. So next time, two similar homes in similar areas of CA have a price difference, remember to check for Mello-Roos taxes.

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