Sunday, May 21st, 2006 at 3:48 AM
Mello-Roos, and other extra monthly costs
MANmom commented on the excessive fees that add to the cost of homeownership. How much are we talking about?
Let’s look at a sample of the current fees in some of the first Mello-Roos communities, built 1998-2002:
Tract HOA monthly fee Mello-Roos
Santa Fe Trails $60 $400/year
The Ranch $140 $400/year
La Costa Valley $96 $800/year
Now let’s look at tracts built in the last two years:
La Costa Oaks $227 $1,200/year
La Costa Greens $250 $2,000-3,100/year
Bressi Ranch $205 $936-$2,570/year
Arrowood $110 $2,611-$4,629/year
It used to be civil.
In Santa Fe Trails the fees are less than $100 per month, not bad.
But now in the newer tracts it’s $300 to $500 per month, or more!
Mello-Roos is the biggest rip-off in real estate, and that’s saying a lot. Knowing that it was a bill passed in the state legislature by our politicians Mr. Mello and Mr. Roos doesn’t make it any easier to swallow – they should have been bound by Proposition 13, instead they devised this loophole. They allow the builders to sell bonds to pay for the costs of schools, streets, sewers, all the extra costs of building that used to be figured into the new home prices. Then the new homeowners pay the bonds off, usually over 25 to 30 years.
When it first came out, a tract salesman told me that Mello-Roos allows for the builder to sell the homes cheaper, because they don’t incorporate all the extra costs. Really? I’ve never seen any of these builders sell homes at a discount. In fact, it allows the builder to pass along a ton of costs and still sell the houses for full retail price – that’s a huge rip-off.
Now many cities have added "assessment districts" to tack on another $800 or so per year.
Let’s buy a new million-dollar home, shall we?
$1,000,000 – 10% down payment ($100K) =
$900,000 in mortgages
$800K first TD @ 6.75% 30-year fixed, P&I $5,188.78
$100K second mortgage, IO at prime plus 1% $ 750.00
Property taxes (1.1%) $ 916.67
Property insurance $ 150.00
HOA fee $ 250.00
Mello-Roos (at $2,500/year) $ 208.33
Special assessment district $ 66.67
County fees (vector, etc.) $ 41.67
Total monthly payment $7,572.12
You’d have to have a salary of approximately $22,000 per month to qualify for this loan program. Any wonder how exotic ARMS got so popular? Any wonder the market has stalled out? Heck, just the interest rate going up 1% added $728.53 each month to this example, that’s about $100,000 in lost buying power.
As MANmom pointed out, many tracts have fees higher than this example.
Did the bubble start with the builders? Their greed has burdened their tracts with excessive fees that will weigh on the homeowners for a long time, plus make their homes less marketable.
Many buyers are insulted by the extra costs and won’t buy one of these tract homes at any cost. They’re pushed into older resales where buyers were happy just to pay a little less and save the monthly fees, in exchange for the aggravation of having to search for the right home.
Pricing in the resale market has just followed behind new home sales.
The builders’ arrogance is astonishing. They think the buyers will buy anything, at any price.
The buyers who sign up for these houses, I’m convinced, are so driven to get a new home that they don’t even think about the ramifications. The euphoria blinds them from questioning whether or not they can afford it, or whether these excess fees could diminish the value of the home, and their ability to sell it.
I’m also convinced that many of the decisions to buy these homes are made in a split-second with no thought at all, let alone shopping around to make sure it’s a good decision.
Posted on Sunday, May 21st, 2006 at 3:48 AM in Uncategorized | 10 Comments » | 
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Those Mello Roos jumped roughly 3x within 5 years. Has the cost of building roads increased over the last 5 years? Is there a shortage of asphalt I didn’t know about? Perhaps all of them road pavers got a 300% pay raise.
Jim, excellent post, as always. I look at the number and think with all of the MR payments at Bressie, I can buy a non-Bressie $700,000 home for the same monthly as a Bressie $600,000 home. In a down market that difference may be an extra 600 sqft of home.
ocrenter | May 21st, 2006 at 2:19 pmhere’s a question some readers brought up before at my blog. if the mello roos is listed at 0.5% on top of the property tax of 1% and if the property sell for $1 million (a $500,000 increase from the original sale from the builder), does the mello roos increase from $2,500/year to $5,000/year?
ocrenter | May 21st, 2006 at 2:22 pmoc, the mello-roos cost is fixed, it’s just added to the tax bill for convenience in billing and collection. (that’s how I understand it. Every MR I’ve seen is listed as a dollar amount, not percentage, on a tax bill.)
Jim the Realtor | May 21st, 2006 at 2:47 pmThanks, again, Jim for the answers to my questions…I can’t imagine where the builders are getting these kind of idiots that can’t do the math and discover all the hidden fees for these ‘so close to my neighbor I can hear their alarm clock’ houses. We will save our money and buy in an older established nieghborhood!
MANmom | May 21st, 2006 at 8:02 pmIn your example you left out the opportunity cost (lost investment income) on the down payment — or at current rates, $5k to $6k a year or an additional $500 payment per month……so its even more expensive for the $1.0 million home purchase…..its real lost cash flow from a buyer’s perspective so it should be treated as an additional payment….
Bob | May 21st, 2006 at 10:16 pmYes, the opportunity cost on the $100K should be added in ($500 or so a month). But, in all fairness, the mortgage tax break has to be taken into account as well. This depends on a lot of factors (income level, AMT liability, etc), but should be about -$2K/month for the typical buyer. BTW, are Mello-Roos fees tax-deductible? I always assumed they would be, but I never bothered to check.
Daniel | May 21st, 2006 at 11:09 pmI’d figure the tax benefit as neutral because you’d have it on any house you buy. It would apply if we’re comparing buying vs. renting, of course, but in this example, I think ocrenter is on the money. You can buy $100,000 more house if you buy where there are no fees, and have the same payment.
I’ve been told mello-roos is NOT tax deductible, but I doubt if there are a lot of CPAs out there asking their clients to subtract mello-roos before doing their taxes.
Jim the Realtor | May 22nd, 2006 at 11:06 amHey Jim, we went to Del Sur yesterday, check this out: There’s a one time charge of 1/8 of 1% of the total sales amount that need to go to a Social Event fund to plan various activities in the future within Del Sur, ie. Wine and Cheese club, Hiking club, Saturday picnics… and that charge goes up to 1/4 of 1% for people that buy resale homes there.
how very high school…
ocrenter | May 22nd, 2006 at 1:53 pmThese costs are astoundingly high.
Given the preponderance of $1M houses in CA these numbers are even more mind boggling.
A household in CA only needs to make just over $200k per year to be in the top 5% of all earners. That’s $16.7k per month. This house would take 45% of gross earnings of the top 5% of households. Using the old rule of thumb whereby PITI should remain under 30% of gross a household income of approximately $300k is required to buy it.
While I haven’t seen that part of the curve, I doubt more than 1 or 2% of CA households (between 1 in 50 and 1 in 100) can genuilnely ‘afford’ this property using the old, tried and tested rules.
During the current EZ credit madness it’s probably more like 20% of the population would qualify.
If this correction takes us back to any kind of historical norm with respect to qualifying for a mortgage it will be truly brutal.
SMB | May 23rd, 2006 at 4:14 amJim,
This is why I’ve never understood why new homes don’t sell at a discount to older homes, especially in CA. The newer homes are less practical, uglier (my opinion), have smaller lots, poorer construction quality and Nazi HOAs. It’s not like you even own your house with all these entities having the right to tell you what to do and be able to place liens on your house if you have issues with them.
Mello-Roos should definitely be repealed, and these infrastructure costs should be included in the up-front prices of the newer homes. Let the builders compete on the "free market".
CA renter | May 23rd, 2006 at 6:41 am