How are property taxes estimated when escrowed?

Question

At closing, when a mortgage company estimates the amount of funds needed in escrow to cover future property taxes, do they base that off the county tax % and the purchase price/appraisal, or solely off the prior year's tax bill?

So for example, if a property is BRRRR'd and bought at a discount initially, when the owner refi's it, does the bank estimate future property taxes off the new appraised amount, or the prior years tax amount (when the property was worth significantly less)?

Just trying to understand if BRRRR properties generally take a big property tax hit once the county reassess them in the future...or if the banks already account for the reassessments based on the purchase price/appraisal.

Account Closed · Answer

@Jessica Zolotorofe

Thanks Jess,

What you mentioned is exactly what I assumed, however in thinking about it more, I still question it for a few reasons (although my questioning is probably wrong lol)

1. To me it makes sense that a mortgage company base taxes on the purchase price/appraisal since they are put into escrow before they become due (i.e. they are planning ahead more accurately).

2. I own a property that I purchased for $60K more than the seller paid. My taxes haven't gone up in 2 years (actually they decreased $5/mo. each year)

3. With all the BRRRR discussions, I've yet to hear anyone mention the topic of prepping for a tax increase when running their numbers. I would think that if someone bought a property for say $25K, rehabbed it, then refi'd it for say $100K, their taxes would change significantly and they'd want to account for that increase in advance as it would effect future cash flow.

Maybe I'm overthinking this, and more folks with years' of BRRRR experience can chime in if...and how their taxes changed?

Jessica Zolotorofe · Answer

They will likely use the last year's taxes and then when you get an added assessment or a new assessment they will up your escrow requirements. Depending on the state the property is in, as soon as you close permits on the house they may re-assess and send your lender the new amount. Initially the banks will not account for the higher price.