A real estate purchase can be a large commitment. To make an informed decision, it’s crucial to understand what the property will cost and how much you will need to pay for it.
The purchase contract details key information regarding the property and all parties involved. This includes the property’s legal description, financing terms, insurance requirements, inspection contingencies and more.
1. Property Taxes
Property taxes are an unavoidable part of owning a home. They are based on a percentage of the property’s assessed value, which is determined through an appraisal process that varies by area.
Local governments use this assessment to generate revenue for a variety of community initiatives and services. These include law enforcement, fire protection and libraries.
Typically, homeowners can deduct property taxes on their federal income tax returns. In addition to property taxes, there are often other charges that you will have to pay as a homeowner, such as transfer taxes, which reduce the amount you realize on the sale of your home.
2. Monthly Utility Bills
Unless you rent your property or are part of a homeowner’s association, you’ll have to pay utilities to keep water and electricity on. “It’s very important that home buyers do their research to understand a home’s utility costs,” says Camp. Your real estate agent can help you estimate a home’s monthly utilities by requesting a year’s worth of bills from the seller.
While year-to-year climate changes and energy use patterns by a new household will lead to variations in a home’s energy costs, the records should give you an accurate picture of what to expect for carrying costs. Your realtor should also be able to provide you with the name of the company that provides these services at the property.
3. Property Insurance
When it comes to property insurance, knowing the difference between actual cash value (ACV) and replacement cost coverage is important. In basic terms, ACV covers the amount that a policy will pay in the event of a loss less depreciation; replacement coverage reimburses you to rebuild your home with similar materials and quality without any deduction for depreciation.
An in-depth insurance quote is a must; it can help you uncover potential issues such as the property’s track record of prior claims, priceless components that might be excluded from coverage and other hidden costs. Your real estate agent can usually recommend a local independent insurance agent that will provide a thorough, individualized review.
4. Property Taxes vs. Property Taxes vs. Property Insurance
Property taxes are fees paid to state, county and local municipalities that fund services such as schools, road upkeep, police and fire. Almost all real estate in America is taxed. Only movable items like cars, boats and airplanes are exempt.
Typically, buyers and sellers will pay prorated property taxes at closing. These are calculated by figuring the number of days in the property tax year that the buyer and seller have each owned the space. This information will be detailed in the purchase and sale agreement.
5. Property Value
Whether you’re a homeowner, first-time homebuyer, or investor, understanding property value is essential. A property’s value determines what you can sell or buy a property for, qualifies you for a mortgage, and helps you determine how much you pay in property taxes.
The value of a property is based on several factors, including location, size and improvements. The price of the property and its demand are also important factors. There are three types of property valuation: the assessed value for tax purposes, the appraised value for loan purposes, and the fair market value for sale purposes. Each has different methods and calculations.