PID and MUD Taxes
What are they and how do they affect you?
In recent years, many areas of the Dallas Fort Worth Metroplex have seen extraordinary growth. Many of the smaller suburbs are simply unable to keep up with the costs of the expansion. In order to provide necessities such as water and sewer, developers and cities pass the expense on to homeowners through an added tax.
Unfortunately, these taxes are not always clear to the home buyer. In fact, a recent article suggests that one local community had a majority of homeowners that were completely unaware of the added tax. You can read more HERE. It is not uncommon that the builder representative in the model home will glaze over this additional cost. It's easier to sell you a home if you're not focusing on the extra costs. These individuals represent the builder. While they typically have good intentions, you should have someone that represents you and is specifically looking out for your interests.
In What Areas are These Taxes Found?
Typically, these additional tax burdens are found in newer, growing areas. There's less need for them in more developed areas such as Plano or Dallas because the city is able to use the existing tax base to fund the needed utilities. That doesn't mean there are none in these areas, they are simply more common in areas such as Melissa, Princeton, and Aubrey.
A MUD is a Municipal Utility District. As the name describes, this expense can cover utilities such as water and sewer. This is shown on your property as an added tax percentage. For example, a typical property tax rate in DFW could be around 2.3%, but the MUD could add an additional 0.5% bringing the total tax bill to 2.8%. Because they are added this way, they are typically included in your escrow. Once the loans are paid off, the MUD tax will drop off. It could be anywhere from 5 to 30 years.
A PID is a Property Improvement District. This goes a bit deeper than a MUD because it can include sidewalks, parks and recreation areas in addition to utilities. This is not assessed as a percentage of property value. At the time of development, every lot is assigned a specified dollar amount toward these loans. A larger lot would carry a larger PID burden. Although this is paid as a tax, it typically is not included in the escrow account and can come back to you as a separate bill at the time that taxes are due.
This separate bill is exactly what caused the uproar in the article cited above. Buyers are told by the lender that their taxes are part of their escrow account. This is of course true. PIDs are commonly overlooked though. It should be additionally disclosed when a portion of taxes is not included in the escrow account, but often the lender, builder rep, and even many REALTORs may not understand the PID or even know that it exists.
Can You Pay These Costs Up Front?
MUDs can not be paid up front, but, because PIDs are a set cost, you can choose to pay this one at the time of purchase rather than paying it out over the set period. We would NOT recommend doing this in the vast majority of cases. If this is a home that you plan to live in for the rest of your life then it may make sense. If you have intentions to sell though then it will most likely make sense to pay the installments.
If we assume that the PID assessment is $30,000 then you'll likely have two choices. Pay $30,000 up front or pay $40,000 across 20+ years. For easy math, we will assume these numbers are accurate, but real life examples will of course vary. The $40,000 would include interest for paying over time. Many people stay in a home for five years or less. If you pay $2,000 a year for 5 years, you've paid $10,000. If it is now time to sell, you've saved $20,000 versus paying the $30,000 cost up front.
If you do choose to pay up front and then turn around and sell the home in 5 years, you have NOT created a $20,000 price increase for your home. While some home buyers may see the value you've added, they simply won't pay $20,000 more than comparable homes. A pool could add value to a home, nice granite or wood floors, but something intangible such as a paid off tax simply will not add the value necessary to recoup the expense that you covered.
How Do I Know if There's a MUD or PID?
First of all, ASK. If you've made it this far, you are more educated than 99% of the masses and probably more than 75% of people IN THE INDUSTRY. If you ask, you will typically get an accurate answer.
Second option is to look at the tax assessor website for the county you are looking in. Denton CAD and Collin CAD are the two most common that we are currently working with that have these taxes. This is not because Denton and Collin are evil counties, they have simply been growing at incredible rates and need help to keep up.
And of course, if you BUY WITH US we will help keep you informed on everything we can. Even the things you didn't know that you needed to know. We take real estate Serious.ly.