What Is Mello-Roos in Real Estate?

What is Mello-Roos? For those who have never heard of this real estate term, Mello-roos is an additional tax or special assessment on a property at purchase, aside from the property tax. Who is subject to Mello-Roos?  What are the taxes used for? How is it beneficial to homeowners? Let’s explore this fascinating tax and how it affects the way you interact with clients.

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Who is Subject to Mello-Roos?

Some communities are brand new or rather new. We can consider a community new if it’s been in existence for 5-10 years. These communities might have Mello-Roos or that additional tax or special assessment.

When these little districts were first built, they needed their own fire stations, schools, roadways, and other services. They would need people in these new communities to help pay for them. How? They would pay for them as a bond. This bond would usually last anywhere between 20-40 years. Although, not all taxes have an expiration date.

Paying more taxes to live in a neighborhood might sound like a turn off but this could be a preferred feature for some people.

Benefits of Mello-Roos

On the surface, you wouldn’t think that people would want to pay more in taxes or on anything else for that matter. But in a way, Mello-Roos comes with some advantages and benefits.  

Think of Mello-Roos as investing in a seat upgrade on a plane flight. Everyone on the flight will get to the destination but your upgrade to 1st class just made everything a little better. A larger seat, more legroom, better food, and free drinks make it worth spending a little more on the ticket.

Now, let’s think about what that means in the new community you just moved into. Mello-Roos allows for better schools, new roads, perhaps more police and other government services. That being said, as a buyer you have to ask yourself if you are willing to pay that extra Mello-Roos to live in a district where you’ll get those benefits.

Is Mello-Roos Worth it?

The answer to the question “Is Mello-Roos Worth it?” lies with the individual buyer and what’s most important to them in their new home.

In some cases, buyers are more than willing to pay the Mello-Roos tax for that perfect property. Especially if it gets them in a community that may be more modern, well maintained, or in an exclusive area. They could see the benefits that a Mello-Roos brings to the community and see it as a worthy investment for themselves or–potentially–their family.

For some, the answer is clearly no. For example, let’s say the buyer is single and a new school district is not the driving force for where they would like to purchase a home. Perhaps for them, the overall benefits of Mello-Roos aren’t enough to justify paying the extra taxes. In this case, the homebuyer would be interested in a different neighborhood that meets their wants.  

Informing Your Clients

How does Mello-Roos affect you as a REALTOR®️? Let’s say you have a buyer with a budget of one million dollars. The lender has approved your buyer and the maximum monthly payment your buyer can afford is $5,000. You’re able to find the perfect property within the budget and your client is excited. But then you find out the house has Mello-Roos.

So now your client’s payment has gone from their maximum $5,000 to–let’s say–$6,000. Now we’re beyond what they can afford. So they no longer qualify for this house because Mello-Roos has tipped the scale over their maximum allowed by the lender.

As a Real Estate Agent, it’s important to understand what Mello-Roos is so that you can better serve your clients and prevent any unnecessary drama. Before showing properties to your buyer, find out ahead of time if any of your listings are subjected to the neighborhood tax.  You can easily check by contacting a local title representative. If they are, your buyer may not qualify, and you will know that going in.

Final Thoughts

Taxing is an effective method for newly formed communities or districts to finance improvements to create an appealing area for homebuyers. Oftentimes, the money goes to fund schools, hospitals, police stations, road construction, and sewer maintenance. As a result, these amenities help attract families or individuals who can not only afford to pay the Mello-Roos but actively seek out these characteristics.

A Mello-Roos tax can pose a potential issue for some home buyers. If the additional tax is high enough, it could make the property unaffordable for the buyer. That’s why it’s important to know what your homebuyer wants in a property. The last thing you want to do is to pull the rug from under their feet with the Mello-Roos tax when they find their dream home but can’t afford the tax.

Overall, it’s important to know the pros and cons of this tax before searching for a home. This will allow the buyer to make the best decision for their lifestyle and finances.

So, now that you have more of the facts, what do you think about Mello-Roos?