A lot of people enter the real estate market without understanding all of the costs involved in a deal: a building inspection, land transfer tax, notary costs, adjustment costs at the signing, insurance, immediate renovation costs…
Last but not least on this list is the municipal tax — a major expense you’ll have to pay each year. This expense will likely go up suddenly when you buy your property and it could be much more than you think.
How is your municipal tax rate assessed?
The municipal tax is based on your municipal evaluation. The city evaluates your home and land based on recent sales, renovations, and annual appreciation. City assessors may even visit the property to complete their evaluation. Your municipal taxes are based on their findings.
There are two other ways your property value can be assessed:
Real estate brokers normally do a comparative market analysis that puts a market value on your property by comparing it to recent sales in your area. This is normally done just before you put your house up for sale or when you are planning on buying and want to verify that you are paying market value.
Banks may want an evaluation done to make sure they are not lending beyond the house’s value and will hire a professional appraiser to do the job. Their analysis is a lot more intensive than a real estate broker’s or a mere city assessment. These reports are not made public.
Municipal assessments don’t always correlate with market value
The important thing for real estate investors to know is that municipal assessments don’t always correlate with market value.
There is no real pattern or consistency. The one factor that does seem consistent is that after a property changes ownership, the municipal assessment of its value will probably go up.
The largest municipal tax hike normally happens when there’s a house flip — a contractor or investor buys at a low price and increases the property’s value. The contractor has probably taken the time to get a permit, which will flag the city that a new evaluation needs to be done.
Even if the contractor didn’t get a permit, the higher purchase price alone will trigger the city to re-assess the property’s value and taxes.
Buyers are seldom aware of this factor when budgeting. It is in your best interest to compare the municipal evaluation with the property’s market value as assessed by a broker or the bank. Then call the city and find out what your new approximate cost will be before you buy. This is particularly important if you have a tight budget.
As a seller, you may not be responsible for this information; however the last thing you want is for this issue to become a problem when you are in the process of signing the act of sale at the notary.
Whether you are a buyer or a seller, it’s always best to do your due diligence ahead of time.
Jennifer Lynn Walker has been active in Montreal Real Estate since 2003. She founded the Montreal Real Estate Investor’s Group, which has more than 1,110 members. She specializes in buying and selling, eco-friendly homes and helping real estate investors. For more articles and e-books and to sign up to her newsletter, visit her online at: www.montreal-realestate.ca