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Posted by on Mar 25, 2011 in Bubbleinfo TV, Market Conditions, Mello-Roos, Thinking of Buying? | 30 comments | Print Print

Mello-Roos Impact

The Mello-Roos payments in some of the newer tracts seem outrageous.  But is it the compromise some will make to conveniently buy a house? 

After all, there are some great benefits:

  • For those less-handy, a new house offers the least-likely to have physical problems.
  • You get the house you want, when you want it.
  • You get to dress it up to your satisfaction.

Compared to the frustration of chasing around imperfect resales, it doesn’t sound that bad – of course, after you’ve had your head kicked in a few times, anything sounds better!

But what about resale? 

Will future buyers shrug off the Mello-Roos, knowing that it is part of the package if you want a newer home, and to live in these areas?  It is temporary, ranging from 25 to 40 years, so once you get close to the end, the math is a little easier. But in the meantime, it could become the compromise that some homebuyers make just to get a house.

Here’s an example:


  1. 25 to 40 years is only mildly temporary.

  2. 600 a month… wow! My entire property tax bill, including Mello-Roos, is less than 800 a month for my home in Carmel Valley.

  3. LOL…Jack and Jill and Judy?

  4. Very nice tract house, but that MR is un-friggin-believable. I would hope that any prospective buyers are figuring in the TOC and proceeding accordingly.

  5. Aren’t rising mello-roos payments on new tracts a fallout from Prop 13?

    I was told once, but didn’t do any follow up on it, that it was possible to go down to the local tax office and pay off the mello roos early, in one lump sum. The idea was that you could avoid the interest on the bonds behind it, and possibly bundle the cost of paying it off into the loan on the house. I’m wondering if there are discounts for paying it early, especially with local governments being so hard up for money.

  6. People who worry about the Mello Roos really won’t like the *extra* costs of buying a new house:
    $100,000+ for options
    $50,000+ for flooring
    $50,000-$200,000 for landscaping
    $10,000+ for window coverings

  7. I heard that Santaluz offered an option on paying the mello-roos in advance. I am also curious as to whether it is possible to and whether people think it is a good idea or not to pay off Mello-roos in advance.

  8. Ronald – yes it can be paid off early under the terms of the bond. Mentally think of it as prepaying a loan as that is really all it is…an infrastructure loan. There is a formula embedded in the docs which is essentially a NPV calculation so the bondholders get compensated appropriately for fronting the infrastructure cash.

    Typically there is a mathematical benefit as your loan funds are likely at a slightly lower interest rate to the bond so some arbitrage can come into play. However, since buyers don’t really seem to price in a full price reduction for the fee in their purchase, you wont get much extra sale price pop on the back side as one would theoretically expect.

    Thus, if you plan to be there for a long time and have significant cash earning 1% then it may be with paying off. If you are not going to be a 20 yr owner or don’t have a million laying around as a life cushion then probably easier to keep the cash and pay the freight like everyone else in case your circumstances change.

    Peanut gallery out

  9. Oops, I meant I wanted to know whether it is possible to pay off Mello-roos in other communities in advance and whether it’s a good idea.

  10. Same logic applies…Mr/CFDs are just loans which can be prepaid per the recorded terms.

  11. In the 90’s you would sometimes see offers where buyers required the seller to pay off the Mello Roos bond as a condition of sale. There was even a box on the CAR form for this.

    In this market though? the seller would be on the floor laughing.

  12. Another factor to consider in Del Sur is the .25% fee a new buyer has to pay on a resale. I believe it has something to do with sewers but not 100% sure what the fee “covers”. Just one more hurdle you’ll need to clear if you need/want to move from DS in the future.

  13. Kathy,

    Your numbers don’t match my experience, though of course it can vary quite a bit according to the tastes of the buyer and the size of the house and lot.

    My wife and I bought a new 4br/2.5ba house in Carmel Valley last year, and here’s what we paid (approximately)

    Options: $15k (this is a vary rough estimate, since we bought late enough that didn’t get to choose options)
    Flooring: $16k
    Landscaping: $16k
    Window coverings: $6k
    Washer/dryer/refrigerator: $2k

    That’s not counting the incentive we negotiated with the builder that covered the flooring plus a good portion of the landscaping.

    We could, of course, have spent a lot more, but we could have spent a lot less, too. (For instance, the house came with carpet/tile standard, so we could have saved 16k there.)

  14. When I was house shopping in 2008, I was dead-set against a home with HOA and MR payments. It took a while, but I did end up in a nice 1995 tract home with none of those extras. I couldn’t be happier!

  15. 4s – cannot speak directly to the .25% del sur fee, however, in adjacent santaluz there was a “community enhancement fee” of some similar number upon each subsequent sale into the future.

    Effectively, this ‘fee’ is similar to the MR bond fees. The developer puts this perpetual fee into the docs and then can estimate a future cash flow from future sales (1,000 homes x x% sell/yr x .25% x $SP).

    they then sell this future income stream for some PV $$ amount and get more equity for their project. This lowers outside capital and leaves more profit for them. It also gives them a lifetime of revenue from their project which typically has only provided a one time profit when the homes/lots are sold.

    This is a nationwide financing ‘scheme/plan’ that caught fire during this latest cycle. its pretty genius if you think about it. who is not going to buy a house if you have to pay 1/4 of 1% 10 years from now….when compared to your 6% cost of sale its pretty paltry.

    There is some backlash from this in the political arena, but they would regulate/tax your shadow if they could figure out a way…

  16. Ronald – as a follow up, the MR is NOT government money. its investor/wall street money. Its a fee, NOT a tax. Simply repaying the investor who provided the developer some money to drag sewer, etc.

    As for prop 13, no relation. The MR simply allows the developer to transfer costs of the project from his responsibility (i.e. lower his equity requirement to develop a project) to the homeowners.

    The land owner makes more money as they developer can afford to pay more for the land since his deal is uber financed. Developer makes more money and lowers his risk since there is less equity capital in the deal. the homeowner pays up and is hosed.

  17. “It is temporary, ranging from 25 to 40 years”

    ahahahahhahaha…..temporary my arse.

    Anyway, I think HOAs are virtually unavoidable. There are very few places (excluding the rurarl areas) in San Diego county that do not have HOAs. Regardless, HOAs are not a deal breaker for me. Mello-Roos are a completely different beast. Homes that were built around the 90’s have lower Mello-Roos and those will end in a relatively short amount of time. Unfortunately, newly developed areas like Bressi and San Elijo are completely out of the question for us because the combined HOAs and Mello-Roos means a significant percentage of my monthly payment is eating up by a fixed, non-deductible cost that will remain for decades. In those areas, the combined Mello-Roos/HOA payment is close to $400/mo.

  18. Didn’t realize MR isn’t deductible. Heck, I didn’t like the idea before…

    Kathy, those extra costs are discretionary and get you something tangible in return. No one considers MR a desirable upgrade.

  19. Just remember that when you opt for $100k in options, you pay $1,000/year in additional property taxes yearly. Just a nice gift to the government. I believe it is beneficial to buy the base package and upgrade later. It’s probably cheaper up front, too.

  20. there’s mello roos and then there’s mello roos.

    Del Sur has the highest rates out there, 0.9%. 4S north of Camino Del Norte gets really outrageous at 0.7%. At that rate, you are essentially paying double the property tax rate.

    I would not completely write off mello roos communities, but realize there is really bad places like Del Sur and then there’s not so bad places like earlier phase 4S and earlier phase SEH.

    There are nice 3000+ SFR in earlier phase 4S that went for 500k back in 2002-2003 that go for say 700k these days. mello roos were pegged at 0.5% back in those days. That’s $200 per month. A far cry to $600/month these Del Sur homes are asking.

    As for new home options: absolutely say no to everything. most of the options are quite overpriced as well. So when the developer dangle that “$100k in option” incentive, realize you can probably get all of that done for less than $50k with outside contractors and chances are it probably cost the builder less than $20k.

  21. went to sdlookup and got a few examples:

    older 4S:
    3400 sqft home on Lone Bluff, sold for $723k, MR $195/mo, HOA $86/mo.

    newer 4S:
    4100 sqft home on Paseo De Linda, sold for $725k, MR $535/mo, HOA $89/mo

    Del Sur:
    2480 sqft home on New Park Terrace, sold for $665, MR $512/mo, HOA $175/mo

  22. How much more purchasing power does $500-600/month afford you? 50K-70K?

  23. Mark, I am very envious of your figures! I’ve purchased 2 brand new homes in Carmel Valley and my figures represent the costs of my neighbors and I. To get a home that looks anything like the model in this video, the numbers would look more like mine. I realize upgrading is “a choice”, but when selling, buyers will expect the upgrades (nicer cabinets, bathrooms not with white tile, fancier staircases, nice landscaping, etc). But your strategy of keeping the cost low means you can sell for less too and is very wise (plus not having a ton more money locked into your house cost). Next time I buy, I need to hire you as a consultant!!!

  24. I’m possibly naive of the typical costs of a new home. The homes in our tract (Carriage Run) are smaller and cheaper than the tracts surrounding us. And I agree that it would have cost us more to make it look like the model, but I think we could get close with just staging.

  25. the cost of landscaping and interior upgrades for a brand new home can vary widely depending on the type of homes and the size of the lot the home sits on. therefore it is very hard to make apple to apple comparisons.

    it also depends on how savvy the homebuyer in question is.

    Kathy’s numbers is realistic, for the average 3-4000 sqft home on standard 7000 sqft lots. I know some folks that match those numbers quite well. these numbers reflect contractors with fancy brochures that’s well established in a said neighborhood. but if you are willing to put up with some headaches and work with smaller contractors (still with license), you can get very similar results for a lot less.

  26. We disqualified any home with M-R when we moved down here in 2007. No way we’d even look at a home with it now.

  27. It’s irrational to disqualify a home simply because it has Mello-Roos. The purchase price of the house might be low enough to make up for it. What makes sense is to figure out the true cost of the home (purchase price, Mello-Roos, taxes, improvements, etc.) and disqualify it because the whole thing is too expensive.

  28. $600/month for Mello roos and $176/month for HOA’s? *Gulp* I doubt I could stomach paying that every month.

    When I moved to Boise from CA, nearly all the homes I looked at had HOA’s; especially new construction. But I’m happy with what I chose: $25/month (for street lights) which is only $300/year.

    I talked to a friend who bought a new home here about two years ago. It’s located only about two miles from my home. She pays $300/month HOA’s. I asked her what she got for that. Her answer? “Absolutely nothing!”.

    There are some subdivisions around here with two huge pools and a large clubhouse, but I wasn’t interested in paying for that.

  29. Jim, I think your upgrade numbers are very optimistic. Given how much profit the builder figures into the upgrades, there could easily be $300,000 in that model home. I calculated that for our home in Stonebridge (Scripps Ranch), it would have cost us $500,000 to hire the builder to do the same upgrades as the model home. And that was just the inside! One upgrade, putting faux planks and beams in the LR, DR and entry was $43,000 with the builder. I hired a 3rd party to do it after COE and paid $18,000.

  30. MR is a tough pill to swallow if you have never lived elsewhere but other nice areas in other states have equally high tax rates. Northern VA is about 1% and main line PA (where i grew up) has somewhat high prop taxes as well as municipality assessments, which creep the taxes up to close to our MR or special assessment levels.

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