Overview

There are many financial aspects of a home purchase that should be understood by potential homebuyers. The purchase price of a property is what most initially focus on, but out-of-pocket closing costs and annual carrying costs are also very important to understand when evaluating a possible real estate purchase. In this chapter I provide an overview of all the financial considerations that will ideally be made by any potential Naples homebuyer.

Purchase Price

For some buyers of Naples real estate, the purchase price of a home falls well behind all other priorities, financial or otherwise. These buyers can buy whatever they want and will do so with little or no consequence. For everyone else, the purchase price of real estate usually matters quite a bit.

When considering purchase price, three key questions need to be answered:

1. How much do you have to spend and/or want to spend on real estate?

Before investing much time in examining real estate for potential purchase, if you are uncertain what you can afford to spend, gaining clarity on this issue will be of benefit to you. If you have a trustworthy and capable financial advisor, please speak with them. If you have a tax advisor and/or accountant, I suggest you discuss your interests with them. If you have an attorney that is involved with financial aspects of your business, estate, a trust or otherwise, I suggest you contact them to discuss your intention or hope to buy Naples real estate.

If you would like to finance a purchase or need to do so to buy, I suggest speaking with at least two potential lenders to help evaluate your ability to borrow and the amount that might be available to you to buy a Naples home. Ideally, you will obtain a pre-approval from a reputable lender that lends within the State of Florida.

Tip: Being pre-approved means that you have provided all required documentation to a lender and have been processed through their underwriter. A pre-approval carries significantly more weight in a purchase negotiation than a pre-qualification should a buyer want to ask for or require a financing contingency.

Tip: Lenders that are familiar with Florida real estate will know that community fees are applicable in many home purchases. If you do not provide a monthly amount for them to use in their calculation, they might assign a default amount that is inaccurate. It is understood that you might not yet have a specific amount, but you should have a general idea as to what you might be willing to pay. This is an important detail that you and your lender must be aligned on.

Tip: If you are not yet retired, but plan on being so soon, you might want or need to secure a loan and close on a purchase beforehand. One of the key determinant factors in lending is the ability of a homebuyer to repay. Lenders look very closely at monthly income vs. debt. Should your income decrease, it could be problematic. Some buyers with considerable investments and savings cannot secure a home loan due to lack of monthly income. (Creating an income stream from investments/savings is one solution to this problem but might not be favorable to your long-term financial plans or needs.)

2. At what price point will your needs and interests be met?

You must determine whether there is real estate in the Naples area that you would be happy to buy within the price range you must remain within or choose. For the online research portion of this determination Naples Abodes provides our Advanced Naples Real Estate Search and Naples Communities Search. These highly capable search tools will help you search, filter and sort listings and communities in every which way you might care to do so. (The ability to search Naples communities is not available on any other Naples real estate website.) Additionally, all information contained throughout this guide, as well as our About Site posts should be beneficial to you. And I am here to assist you. Let’s talk about Naples real estate alongside your interests, needs and price target. I would be happy to assist you.

3. Is a home of interest worth the price asked or negotiated?

From a personal perspective the potential “worth” of a home is certainly something that only you can decide. The “value proposition” that a home provides can be very personal. It can be based upon many things. And it can have highly meaningful impact across many facets of life. Some homes are worth much more to a buyer than a price point could ever define. Being close to a family member or having room for grandchildren on the way. Having ideal proximity to a destination of high interest or need: beach, grocer, airport, hospital. Living within a home that brings you happiness. Some things can’t be valued by price alone. For many buyers, the aspects of a home that increase one’s overall quality of life trump all else.

If we remove the personal side of the equation here and focus solely on the transactional nature of a potential purchase, we must look at what is called current fair market value. This is something that should be determined at the time an offer is made. Real estate valuations can change daily based upon all going on within what is usually a very fluid and dynamic Naples real estate market. Timing is important. Your real estate agent will hopefully be highly skilled at making this determination. And I hope they will be acting in your very best interests alone when doing so. Once current fair market value is determined you will decide worth to you, and regardless of all, you will determine what you might be willing to pay.

Tip: Do not rely on the various “guesstimates” that some national sites use to provide current fair market value of real estate. These are marketing tools and no more. They are based off algorithms and are often far off the mark. Only a real estate agent with local area expertise and a strong property valuation skillset should be relied upon to make this important determination.

Closing Costs

Closing costs are all expenses associated with a real estate purchase beyond the downpayment provided at the time a purchase contract was executed. Closing costs are sometimes referred to as settlement costs.

One useful way to examine the specific closing costs you might need to pay is to separate those that are one-time from all others that are ongoing.

One-time Closing Costs

These are the costs associated with all professional services providers involved with your transaction and include fees for documents that might be needed to conduct due diligence and/or are required by law. One-time costs also include those associated with buying within some communities, getting a mortgage to buy and otherwise. As you will note, there is ample opportunity to incur one-time closing costs. These one-time expenses might include, but are not limited to:

Ongoing Costs

These are expenses associated with your closing that will also be incurred on an ongoing basis after it. Some annual expenses might be paid in full at closing. Others will be prorated at that time. Regardless, these are annual carrying costs and might include, but are not limited to:

Please note, any costs associated with living within a Community Development District (CDD) or Municipal Service Taxing Unit (MSTU) are covered under Taxes, below.

Community Fees

Should you choose to purchase a home within a community that has an association (HOA, COA, etc.), there could be one-time fees associated with purchasing within the community. There is also likely to be ongoing annual fees due to live within it.

One-time Community Fees

Below are examples of one-time community-related fees that you might incur and would be due at closing. (Purchase application fees are often required well before closing.)

Purchase Application

Used by the community to vet potential buyers, communicate important community details – rules, regulations, etc. – gather new resident contact details and otherwise.

Transfer Fee

Used by the community to offset any costs associated with onboarding a new resident

Capital Contribution

Monies used to fund capital improvements to the community

Membership Initiation

The cost to join a private club within a community that has mandatory membership

Annual Community Fees

Most communities have annual fees that are paid in quarterly installments. They might include, but are not limited to:

Community Association (HOA, COA, etc.)

Usually paid quarterly, the annual community association fees cover amenities and maintenance. Please note that each listing page on this site states specifically what is included.

Private Club Memberships

Should a private club exist within a community that a resident must be a member of the annual fee requirement will be separate from community association fees.

Food & Beverage Minimums

Many communities that have onsite restaurants and bars require a minimum spend every year. This helps onsite food and beverage budget management and profitability.

Recreational Fees (Internet, TV)

Some communities will include internet and TV services. The HOA has negotiated rates on behalf of the entire community to get better pricing for all. If the case, these fees will be separate from community association fees.

Special Assessment

Communities can have unforeseen maintenance expenses requiring funding. They can also choose to spend on large projects aimed at community improvements. If costs are high many communities will require funding via a special assessment that could last for several years.

Fees in General

If you have used Naples Abodes to search for listings and/or communities in Naples, you know that we place an emphasize on fees. They can be used as search criteria and every listing and community page states clearly the fees associated with them respectively. We know that annual carrying costs, including required community-related fees are very important to most buyers. We built these tools to aid your online home search and hope you benefit from them.

There are three things I think are worthwhile to consider when examining the fees of a community alongside your interests, needs and budget.

1. What is important to you?

Community fees should be in line with community offerings. A community with very low fees will likely have few amenities. And the quality of what exists might be lackluster. A community with very high fees should have most of what anyone could ever hope for. And the quality should be top-notch. Deciding what is important to you in a community will go a long way to helping you locate the best community for you.

Tip: Our one-of-a-kind Naples Communities Search allows you to search every community in Naples by not only community fees, but onsite amenities and our exclusive amenity score. We hope you will utilize this tool, and it will benefit your home search.

2. Fee Alternatives

The fees you might pay to live within a Naples community will cover items that you might very well have to pay for directly should you not live within a fee-based community. As an example, if you purchase a house within a gated community, it is likely that the community fee covers landscaping and irrigation. These are things you will likely need to pay for directly if your house is not within such a community. Another example is fitness related. Most gated communities have fitness facilities. The cost of a gym membership will be required should you want/need a gym, and your community does not have one. Also, social activities are a part of many fee-based communities. If you want or feel the need to be social, living outside this style community might require higher levels of spending out-of-pocket to go out and be social. Community Fees are relative to your alternatives for those things that you want and/or need.

3. Fee Increases

The most important thing to know about fees from a budget analysis perspective is that they head in one direction over time, up. It is very rare for fees to go down in any given year. How much can you expect them to increase? Every community differs, but if we assume a community is currently financially fit, with strong financials overall and an approved budget that adequately accounts for current and future community needs, a safe assumption is annual increases in line with annual cost of living expense increases or inflation.

Operation Costs

Operation costs are the typical costs associated with the services needed to have a livable and happy home environment. They will or might include:

Please note that some communities include expenses for water and/or cable/internet in the HOA/COA fee.

Property Taxes

Property taxes are another key financial consideration that should be made when evaluating a potential purchase in Naples. The good news on this topic is that Collier County has relatively low property taxes as compared to many other areas throughout the country.

Many homeowners, as well as real estate agents do not fully understand local property taxes. They have no idea how they are determined. They just pay what they owe. This can be problematic. Every homeowner should know what they are paying, why and how they might be able to reduce their property taxes. Sometimes calculations are incorrect and/or can be challenged. In some scenarios a tax exemption might be warranted. And when it comes to election season, your vote matters. It can mean the difference between upward trajectories and downward tax “savings.” As for real estate agents, there is no excuse for inaccurate information given to potential buyers, but it often is.

Let’s learn a little about property taxes within the State of Florida, as well as Collier County more specifically.

Ad Valorem Taxes & Non-Ad Valorem Assessments

The property tax bill you will receive should you purchase Florida real estate will have two sections, each listing various “taxable” items and having separate amounts due. These are known as ad-valorem taxes and non-ad valorem assessments.

Non-Ad Valorem Assessments

These are items that you are responsible to pay for through the tax system that are not based on the assessed value of your property. Instead, they are levied by non-ad valorem taxing authorities. These are usually community and/or property specific charges related to water, sewer and garbage collection. Also, if you purchase real estate within a Community Development District (CDD) or Municipal Service Taxing Unit (MSTU) the annual payments to that taxing authority will be present here. This latter point is important to know when reviewing tax information on any given listing.

Ad Valorem Taxes

“Ad valorem” means “according to the value of.” The assessed value of your property is a key determinant used to calculate the property taxes owed.

Here’s a breakdown of the ad valorem tax system within the State of Florida.

Who is Involved?

Property Appraiser

Abe Skinner is our duly elected Collier County Property Appraiser. Good ol’ Abe has been around for a long time now serving the residents of Collier County well.

Taxing Authorities

A taxing authority is a government entity that adopts a budget and then levies millage rates to fund them. Examples of taxing authorities are counties, school boards, water management districts, special districts and municipalities within a county.

Tax Collector

Responsible for the collection of all taxes owed by everyone who owes them.

Value Adjustment Board (VAB)

Each county within the state has a value adjustment board consisting of five members: 2 from the board of county commissioners, 1 from the county school board and 2 citizens. The VAB fields inquiries and challenges to property taxes.

How is property tax calculated?

Market Value – Assessment Differential = Assessed Value

Assessed Value – Exemptions = Taxable Value

Taxable Value X Millage Rates = Ad Valorem Taxes

Ad Valorem Taxes + Non-Ad Valorem Assessments = Annual Tax Bill

How are these items defined?

Market Value

The Property Appraiser determines the value of real estate. Unlike some states that use in-person appraisals, the Collier County Property Appraiser does not. Their assessment is based upon market activity prior to the annual assessment date. They consider replacement cost, capitalization of income and direct sales comparisons.

Assessment Differential

Any annual value caps, established in the Florida Constitution, that are applied to the Market Value by the Property Appraiser. An example is the Homestead Tax Exemption cap limiting increases of residential real estate value to no more than 3% per year.

Exemptions

Reductions in property tax owed based on applying and qualifying for the exemption. Homestead, Military/Veteran and Disability are examples of Exemptions available to Florida homeowners.

Millage Rate

A “mill” is 1/1000. One mill is equal to $1 in property tax levied per $1,000 of the tax assessed value of real estate. Property taxes are calculated by multiplying the tax assessed value of property by the mill rate. Then, dividing that sum by 1,000. If a home has a tax assessed value of $1M and a total millage rate of 10 the property tax will be $10,000. Millage rates or mill rates are determined by Taxing Authorities.

Homestead Tax Exemption

As noted, there are multiple exemptions that might be available to you should you purchase Naples real estate. The applicability of military and disability exemptions are clear. The homestead tax exemption requires a bit more detail.

This exemption is reserved for property owners who are fulltime or permanent residents of the State of Florida. This is defined as “that place where a person has his or her true, fixed, and permanent home and principal establishment to which, whenever absent, he or she has the intention of returning. A person may have only one permanent residence at a time; and, once a permanent residence is established in a foreign state or country, it is presumed to continue until the person shows that a change has occurred.”

Two Notable Benefits

1. A reduction in the tax assessed value of a home up to $50k. This typically equates to a property tax savings of approximately $400 – $600 every year. (This varies due to varying mill rates.)

2. A limit on the annual increase of tax assessed value to 3% or the Consumer Price Index (CPI) whichever is less. This is also called Save Our Homes.

Becoming a Florida resident not only means no state income tax, but a reduction in property taxes overall and a cap on increases over time. Not too shabby.

Please note, property taxes here are paid in arrears. This means that they are paid after they are accrued. Property tax notices are sent every November for taxes owed for the same year, January – December.

Please know that Collier County offers a property tax discount should payment be made before the due date stated on the bill you will receive. (Should a loan be secured to purchase, property taxes are often paid directly by lenders and usually do take advantage of the discount.)

Other Possible Taxes

Documentary Stamp Taxes

A documentary stamp tax is an excise tax that is levied on documents that transfer interest in real estate within the State of Florida. These typically include warranty deeds and quit claim deeds. Additionally, notes, other written obligations, mortgages and liens are subject to this tax, as well as a nonrecurring intangible tax when an obligation is secured by a mortgage deed or other lien.

What does this mean to you?

The documentary stamp tax when real estate transfers from a seller to a buyer is $0.70 per $100 of consideration. If a home is purchased for $1M, $7,000 will be owed. In Collier County this is typically paid by the seller at closing. I mention this here because this can be a negotiable item when buying real estate. A seller could demand payment by the buyer. Or, a buyer could offer payment should the offered deal terms in whole be accepted.

Additionally, should a buyer use a mortgage to purchase, a documentary stamp tax will be levied on the amount borrowed. The rate is $0.35 per $100. If a buyer borrows $1M, $3,500 will be owed by the buyer. Lenders typically handle payment to the state at closing.

City Taxes

If you own real estate within one of the three cities within Collier County – Naples, Marco Island or Everglades – you will incur an additional city-levied tax. The mill rate for the City of Naples specifically is currently 1.17.

What Will You Pay in Taxes?

It is very important to know that a new homeowner of a resale property will not likely pay the same amount in property taxes that the seller paid. The new homeowner will likely pay more. And the difference could be substantial. This is because the current owner/seller:

1.) Might have had their tax increases capped for many years via the Save Our Home program in Florida.

2.) May have benefitted from Homestead, Veteran, Disability or other tax exemptions

3.) The property value will be reassessed after every sale.

An exact property tax figure will not be available until the county has reassessed the taxable value of the property after a sale. This said, should we work together I will provide an estimate to you that should get you close enough to be comfortable in understanding this before buying.

Property Insurance

Before the scheduled closing of a real estate purchase, an insurance provider will need to be selected, and an insurance binder signed. Some properties will require hazard, windstorm and/or flood coverage. Policy types, as well as coverage amounts will differ based upon your choices and the requirements of your lender should you finance your purchase. Whether required or not, property insurance is obtained by most property owners. Should a buyer finance a purchase it will be required.

Please know that should you purchase anything other than a legally defined single family home it is likely that any community fees due will include some level of property insurance coverage. As an example, when buying a condominium there will be a “master policy” for the building the property is within. A portion of the HOA/COA fee you pay goes to this. Should you finance a purchase the lender will review the policy the building/HOA holds and then require some level of additional coverage for the interior of the unit you purchase. So, when examining single family homes to buy it must be understood that all insurance costs are separate from/in addition to HOA fees. When buying a condominium, some insurance is already included in the HOA fee required. Additional expenses associated with insurance premiums are generally less as separate cost for condominiums.

Property insurance is a hot topic throughout the country. Like all things nowadays, costs have been on the rise. In Florida specifically, due to recent hurricanes and tropical storms many claims have been made and are ongoing. This has pushed some insurance providers out of the state. Others have seen steady coverage pricing increases.

Should a buyer have a keen interest in keeping property insurance costs down, I can/will provide additional guidance should we have a buyer representation relationship.

Ongoing Maintenance

After all is said and done, and you own your very own home in Naples, eventually you will need to turn some attention to maintaining the property. While many communities provide various levels of care, it is usually limited. There is always some upkeep a homeowner will be directly responsible for. It makes sense to have an annual budget reserve available for annual maintenance needs. These might include:

Big Surprises

Finally, nobody wants to be surprised by an unexpected and required financial expenditure, but they can/do occur. Below, pleased find the two main items that might require an unforeseen payment.

Special Assessments

A special assessment is a required fee levied by a community association or taxing authority for an unusual or unordinary need. These can be small amounts requiring one-time payment or large expenses that are paid on a quarterly basis over several years. Special assessments can be anything from sidewalk repair to lake erosion solutions to roof replacements of gatehouses to full renovations to a clubhouse…

Major Home Repair Needs

Well looked after real estate tends to help prevent major repairs needs, but sometimes things are missed, or a force majeure event occurs. A small spot on a ceiling could reveal a major roof issue, an inground pool could crack and spring a leak, a small kitchen fire could do serious interior damage. These are all examples of major events occurring that would require immediate and potentially costly repairs.

Financial Considerations in Summary

Once a purchase decision is made and a purchase agreement executed by both parties a buyer will have an immediate out-of-pocket cash requirement to pay the initial, agreed upon down payment. A second escrow payment might also be due within a set period should the purchase agreement stipulate it. And there will be a handful of short-term miscellaneous costs associated with due diligence efforts, purchase application and lender application if applicable.

Closing costs are primarily one-time, near-term expenses due at the closing and include any purchase price balance due if a cash/no financing deal, professional services fees, initial one-time community fees, the first annual insurance payment due and more. As noted, closing costs are typically 2% – 3% of the purchase price, sans any purchase price balance due or required payment to a real estate brokerage.

Ongoing, annual expenses to own and maintain real estate include property insurance, annual HOA/COA fees, property taxes, operation costs, maintenance needs and potentially more. Should a buyer use a mortgage to purchase real estate a typical loan will require monthly installments for the term of the loan. Together, these are defined as annual carrying costs.

So, we have immediate or very short-term out-of-pocket cash needs. We have near-term expenses associated with closing on a purchase. And there are numerous annual budget considerations that should be made to own and maintain a home. All together we see the full financial landscape of purchasing and owning Naples, FL real estate.

To be ready to purchase requires a good understanding of the cash needed to go under contract to buy, close on the property and then own and maintain it over time.

In Closing

I have represented buyers with seemingly limitless fund availability. I have also worked for buyers with highly limited purchase power. Some buyers dive deep into short-term cash needs and expected annual monthly expenses. And they squeeze every penny to be able to buy their forever home, place to vacation, invest in or otherwise. Others are much more casual in analyzing and managing their personal finances overall.

My advice is to always know what you are getting yourself into financially. No matter your financial wherewithal, attitude or education concerning personal finances, please understand the financial implications of a purchase before proceeding with one. There are many professional services providers that can be tapped for information and guidance. You might have many at your immediate disposal should you already use them. No matter the case, a financially savvy real estate agent that cares about their clients will know how to guide a potential buyer as needed and provide solid advice should they be open to it.