Underwrote the seller's tax bill. Cost me 3,200 a year.

Four small multifamily buildings in and I thought a single house would be the easy one. It closed 14 months ago and it has not cleared its own expenses once.

House was 231k, 4/2, 1,600 square feet, built 1994, in a decent school zone in a growing county. Rent 1,975, which held up, tenant is still there and pays on the first. That part is fine.

The hole is on the expense side and I put it there. The seller had owned since 2003 and had a homestead cap on the assessment, so the tax line on the last bill was 2,640. I typed 2,640 into my model, added 4 percent for growth, and moved on. The county reassessed at sale price the following January and removed the cap. New bill 5,410. That's 2,770 a year I didn't budget.

Second piece, smaller and dumber. My insurance quote was bound on a roof the inspector called "7 to 10 years remaining." At renewal the carrier's aerial imagery flagged granule loss and they non-renewed. Replacement policy came in 480 dollars higher and the new carrier wants the roof done within 24 months. So call it 3,250 a year of expense that wasn't in the pro forma, against an NOI I had at roughly 11,900. It turned a 4.9 percent unlevered yield into 3.5, and after debt service the house is 60 to 90 dollars a month negative depending on whether anything breaks.

What I do differently: I now pull the assessor's page myself and reunderwrite taxes at full sale price under the non-owner-occupied rate before I make an offer, and I call the assessor's office to ask exactly how they handle a change of ownership, because the reassessment mechanics vary by state and county and I had assumed my multifamily experience transferred. It didn't. On the roof, if remaining life is under 10 years I price the replacement into year one instead of a reserve.

I still own it. It's not a disaster, it's dead money in a year where I could have used the down payment somewhere else.

4 replies

1wendy_park48CapitalPRO7

The tax thing is in the documents most people skim past. The seller's closing statement prorates the current year at the current bill, which nudges you into thinking that number is the number, and the title company has no obligation to tell you what next January looks like. Some states also have a separate assessment ratio for non-homestead property, so you can get hit twice, once on value and once on rate, and how that works differs state to state.

The insurance non-renewal is the part I'd have missed too. Carriers running aerial imagery on renewal is fairly standard now. If your inspector says 7 to 10 years on a roof, the underwriter may say 0.

1tylerbrooks9PassivePRO5

So the boring lesson is that the two expense lines nobody thinks are variable are the two that moved. I have been telling myself SFR is the simple version of this and you've just shown me the simple version has the same teeth.

2tashaford30PB2APRO7

Question, because I'm about to make this exact mistake. When you say reunderwrite at full sale price, do you mean take your offer price times the county's millage rate? Or is there a step where they only get partway to market value in the first year? I've seen both described and I don't know which applies where I'm looking.

1paulgrant17PassivePRO5

@quill I asked my county the same thing and got a real answer in one phone call, which is a bigger deal than it sounds because the answer was specific to how they phase in increases there. Worth just calling.

@cairn the tenant paying on the first for 14 months through all of this is worth naming. You bought a house that a good tenant wants to stay in. That is the part people spend years failing at, and you got it while getting the tax line wrong.

Underwrote the seller's tax bill. Cost me 3,200 a year.

4 replies