New Homebuyer Here! Questions on FHA Loan, Property Tax Assessment, and More

[Kyle McShea]

Just signed on my first offer and I got a couple questions / thoughts

House Hacking ... Legality?
I understand when you sign an FHA loan you must state something on the lines that the house will not be registered under an LLC. Well then how am I going to rent the rooms out of the property while I live there? No shot I am going to trust my tenants to not sue me that's crazy. I am talking to a lawyer to outline our plan tomorrow so we execute legally, but there doesn't seem to be any information available explaining how people are pulling this off. So any insight on this would be greatly appreciated.

How are properties assessed for property tax?
Let's say I buy a property at $500,000. It was previously assessed @ $250,000 with a $1,500 yearly property tax payment. How would my purchase for the property affect that property tax? I see online its 0.45% of the assessed value, so how do we get assessed value? In a Ben Mallah YouTube video I heard him say 80% of buy price is the assessed value, so would that mean ...

$500,000 * 0.80                       = $400,000 Assessed Value
And then $400,000 * 0.0045 = $1,800      Property Tax

So $1.8k yearly property taxes is correct?

Requesting Buyer to assist on Closing Costs
We requested the seller to offer cash towards our closing costs. Is the reason why this is lucrative to the seller because it's money that is able to be written off as a loss? Why do people like to go that route does it cut down on capital gains? It makes sense from surface level but I feel like there's some deeper insights I can learn from understanding the value proposition.

REI is ****ing sick
I have learned so much in the past 24 hours after signing an offer I hope I crack a smile on one reader reflecting the beginning of their journey.

Appreciate all and any insight

[Patrick Roberts]

Youre not going to be able to take title in an LLC for an FHA loan. Govt loans are for primary residences only - the whole idea of househacking is to use the benefits of a primary residence to get started in investing. You could try leasing the rooms to an entity and then using the entity to lease to tenants to shield you from liability from operational issues, but I doubt this works. Talk to an attorney, but a good umbrella policy will probably be sufficient for what you're doing (and cheaper).

You can try quit-claiming to an LLC after you close, but you risk the triggering the Due on Sale clause that nearly every mortgage has now. This has been a subject of conversation recently in the lending world and I expect it to become more enforced in the near future. Also, if the title is held by an LLC when you apply for the legal residence exemption for property taxes, it will be denied (see below).

Property in South Carolina is taxed using a millage system, based on the assessed value of the property. The use of the property determines the assessment ratio. All real property is assessed at the ratio of 6%, unless the property is your legal residence, in which case the ratio is 4%. Sounds like a minor change, but this difference is basically a 3x difference in the effective tax bill for most properties. 

The math works like this: sale price X assessment ratio = assessed value. The assessed value is then multiplied by the millage for the county, city, and district that the property is in to determine the annual tax bill (divide the millage by 1000 to get 0.XXXXX, then multiply by the assessed value). You can find the tax district for the property youre buying on the 2023 tax record and then use that info on the county's tax estimator tool to figure our your new tax bill. Or just ask your lender - they should be doing all of this for payment and DTI purposes. Long story short - you cant just take the current effective tax rate and apply it linearly to the new price - there are fixed and variable components of property taxes so it wont scale like that.

For the closing cost part - there is no benefit to the seller other than helping the buyer close on the deal. You cant just straight up finance every single cent of a purchase transaction - there are typically downpayment requirements and closing costs than cant be rolled into the loan. If a buyer is short on cash to close but meets all of the other requirements, a seller can contribute a % of the purchase price toward paying these costs for the buyer in order to make the deal go through. In other words, if you have everything you need to buy the property but are short a couple thousand in cash to close, then the seller may sometimes pay this just to make the deal happen. This is not lucrative to the seller at all except in getting the property sold. It hot markets like Charleston, offers requesting this usually dont fly unless youre buying a property thats just sitting for some reason. 

Just an FYI - while this forum is a good place to ask questions like this, your lender and realtor should be answering/explaining all of this in detail for you.