How come the government can value a home more than was paid for the house?
"When a house is sold at a foreclosure auction, the selling bank usually does not provide the guarantees that a normal house seller provides.  Furthermore, the previous owner may have neglected the property, and/or spitefully damaged the property.  Bank-owned properties are often neglected and/or vandalized.  Banks are usually too short-sighted to properly market the real estate they own, and do a poor job of making it easy to buy the property. Thus, foreclosure sales usually happen at a price that is significantly below the ""fair market value"" of sales between competent households.  It is common for a house that is worth $ 125,000 (even in a depressed market) to sell for only $ 100,000 in a short sale or foreclosure. It is possible that this property sold for an even larger discount.  It is also possible that the tax assessor is (inadvertently) comparing a run-down property with well-maintained properties that have extra expensive features, without fully adjusting for the properties' conditions and features.  In the latter scenario, the property owner can ask the tax assessor to re-consider the assessment.  Usually this request is called an ""appeal""." "The real answer why the government is ""allowed"" to do something is because they are the government and they make the rules. There are lots of laws that I think make no sense. I ran into a similar situation to yours. I bought a house during a time when the market in my area was way down. The previous owner had paid $140,000 but I got it for only $80,000. The government appraised it for, I forget the exact number, but over $100,000. I appealed, and the argument I made to the appeal board was that the law says it is supposed to be appraised for ""fair market value"". The definition of ""fair market value"" is the amount that a willing buyer would pay to a willing seller, absent special conditions like a sweetheart sale to a relative. The house had been advertised for a higher price and the seller had to drop the price several times before getting an offer, and finally accepting mine. This is pretty much the definition of ""fair market value"". The appeals board replied that it was not FMV because the market was bad at this particular time and so I got a good deal. I said that that's the definition of market value: it goes up and down as market conditions change. If the market happened to be up when someone bought a house and they had to pay a high price, would the government assess the house at a lower value because that was an unusually high price? I doubt it. They ended up reducing the assessed value, but not to what I actually paid. All that said, arguably a foreclosure sale might be considered special conditions. Prices at a foreclosure sale tend to be lower than ""ordinary"" sales. In a foreclosure, the bank is usually trying to get rid of the property quickly because they don't want to be in the property-management business, they want to be in the money lending and management business. Of course you could say that sort of thing about conditions surrounding many sales. Maybe the price is low because the seller needed cash now to start a business. Maybe the price is high because the buyer was too lazy to shop around. Maybe the price is low because the buyer is a very skilled negotiator. Etc etc.  My watch just broke and while I was shopping for a new one I found two listings for the exact same watch, I mean exact same manufacturer and model number, identical picture, on the same web site, one giving the price as $24 and the other as $99. What is the market value of that watch? I presume anyone who saw both listings would pick the $24 one, but I presume some number of people pay the higher price because they never see the lower price. In real life there isn't really one, exact, fair market value. That's an abstraction." "The property tax valuation and the fair market price are NOT one and the same.  They track each other, correlate to each other, but are almost NEVER the same number. In some parts of the USA, a municipality has to re-assess property tax values every ten years.  In these places, the tax value of a property is on something like a 10-year moving average, NOT on the volatile daily market price. EDIT:  It is easy to fall into the ""trap"" of thinking that property tax valuation is intended to represent fair market value.  It's INTENT is to provide an accurate (or, as accurate as possible) RELATIVE VALUATION of your property compared to the other properties in the municipality. The sum of all the property values is the tax base of the municipality.  When the town budget (which is paid in part via property taxes) is set, the town simply divides the tax base into the budget total to arrive at the ratio of tax-to-collect, to the tax base, also called the ""tax rate per thousand dollars of valuation.""  i.e. if the town tax base is US$10,000,000, and the town budget is US$500,000, then the ratio is 0.05, or $50 per thousand dollars of valuation.  If your property is assessed at US$100,000, then you would pay 100 x $50, or $5000 in property taxes that year. Since this is the goal of the property tax valuation, NOT deciding what your house is worth on the open market, then we are left with the question of ""why use the market value of a house for property assessment?"" and the answer is that of all the various schemes and algorithms you can try, ""fair market value"" is the easiest and most accurate...IF TIME FLUCUTATIONS ARE TAKEN OUT.  For example, if I buy a house in a development for $250,000 today, and next summer the housing market crashes, and you buy the identical house next door to me for $150,000, it does NOT stand to reason that you should pay less taxes than me, because your house is ""worth"" $100,000 less.  In fact, BOTH our houses are worth $100,000 less. What matters most in property tax valuation isn't the actual number, but rather, is YOUR valuation the same as other essentially similar properties in your tax base?  Getting the RELATIVE ratio of value between you and your neighbors correct is the goal of property tax valuation." Keep in mind, there are times that house is in such bad shape that it's going to need 6 months of renovations, in which case you might ask the town if they are willing to reappraise a lower value until the work is completed. Keep in mind, you'll get a new appraisal when permitted (I mean pulling a permit from the town) work is done. I finished my basement and the town was eager to send the appraiser over even before work was fully complete. From my perspective I suspect that if the government use the paid price, people will start to buy at very low nominal prices in order to pay less taxes, and will repay the seller by other means.
Of course, I know nothing about real estate or owning a home. I would love to hear people's thoughts on why this would or would not be a good idea. Are there any costs I am neglecting? I want the house to be primarily an investment. Is there any reason that it would be a poor investment?  I live and work in a college town, but not your college town. You, like many students convinced to buy, are missing a great many costs. There are benefits of course. There's a healthy supply of renters, and you get to live right next to campus. But the stuff next to campus tends to be the oldest, and therefore most repair prone, property around, which is where the 'bad neighborhood' vibe comes from. Futhermore, a lot of the value of your property would be riding on government policy. Defunding unis could involve drastic cuts to their size in the near future, and student loan reform could backfire and become even less available. Even city politics comes into play: when property developers lobby city council to rezone your neighborhood for apartments, you could end up either surrounded with cheaper units or possibly eminent domain'd. I've seen both happen in my college town. If you refuse to sell you could find yourself facing an oddly high number of rental inspections, for example. So on to the general advice: Firstly, real estate in general doesn't reliably increase in value, at best it tends to track inflation. Most of the 'flipping' and such you saw over the past decade was a prolonged bubble, which is slowly and reliably tanking.   Beyond that, property taxes, insurance, PMI and repairs need to be factored in, as well as income tax from your renters. And, if you leave the home and continue to rent it out, it's not a owner-occupied property anymore, which is part of the agreement you sign and determines your interest rate. There's also risks. If one of your buddies loses their job, wrecks their car, or loses financial aid, you may find yourself having to eat the loss or evict a good friend. Or if they injure themselves (just for an example: alcohol poisoning), it could land on your homeowners insurance. Or maybe the plumbing breaks and you're out an expensive repair. Finally, there are significant costs to transacting in real estate. You can expect to pay like 5-6 percent of the price of the home to the agents, and various fees to inspections. It will be exceedingly difficult to recoup the cost of that transaction before you graduate. You'll also be anchored into managing this asset when you could be pursuing career opportunities elsewhere in the nation. Take a quick look at three houses you would consider buying and see how long they've been on the market. That's months of your life dealing with this house in a bad neighborhood. A simple and low-interest loan is probably the least likely to cause acrimony, aside from a direct gift. You seem to be describing an equity stake in their house, where some portion of the appreciation in value accrues to you (relative to your initial investment).  An equity stake in their house probably doesn't make much sense.  You sound as though you're not going to do any of the work aside from the contribution of money.  Equity might make sense as a way to reward you for efforts, such as home design or renovation, that increase the value of the home.  You probably don't want to be in a position where you are together improving the property and your payback only comes when she sells for more money.  What if you have different ideas of how to do it?  She has to live there and may want improvements for her needs rather than for buyers.  What if she asks you to pay for a portion of the improvement costs or resents you not offering?  What if she doesn't want to sell for some reason, so your money is locked up with her family choices?  Renovations can often be stressful, so these decisions may be made at difficult times. Either a gift or a low-interest family loan may be simpler for your needs.  You can just set the loan terms you want, say payoff over 10 years or a deferred payment schedule.  If she gets in trouble, you could perhaps delay or forgive payments.  I don't know the UK tax consequences of a loan of this nature, if any. As a general proposition, it's best to set clear and simple expectations at the beginning, and avoid agreements that require multiple decisions to be made consensually in the future, possibly during a time of stress. "From April 2017 the plan is that there is now also going to be a ""Lifetime ISA"" (in addition to the Help to Buy ISA). Assuming those plans do not change, they government will give 25% after each year until you are 50, and the maximum you can put in per year will be £4000. Catches:  You can only take the money out for certain ""life events"", currently: Buying a house below £450000 anywhere in the country (not just London).  Passing 60 years of age. If you take it out before or for another reason, you lose the government bonus plus 5%, ie. it currently looks like you will be left with 95% of the total of the money you paid in. You cannot use the bonus payments from this one together with bonus payments from a Help to Buy ISA to buy a home. However you can transfer an existing Help to Buy ISA into this one come 2017. While you are not asking about pensions, it is worth mentioning for other readers that while 25% interest per year sounds great, if you use it for pension purposes, consider that this is after tax, so if you pay mostly 20% tax on your income the difference is not that big (and if your employer matches your contributions up to a point, then it may not be worth it). If you pay a significant amount of tax at 40% or higher, then it may not make sense for pension purposes. Tax bands and the ""rates"" on this ISA may change, of course. On the other hand, if you intend to use the money for a house/flat purchase in 2 or more years' time, then it would seem like a good option. For you specifically: This ""only"" covers £4000 per year, ie. not the full amount you talked about, but it is likely a good idea for you to spread things out anyway. That way, if one thing turns out to be not as good as other alternatives it has less impact - it is less likely that all your schemes will turn out to be bad luck. Within the M25 the £450000 limit may restrict you to a small house or flat in 5-10 years time. Again, prices may stall as they seem barely sustainable now. But it is hard to predict (measures like this may help push them upwards :) ).  On the plus side, you could then still use the money for pension although I have a hard time seeing governments not adjusting this sort of account between now and your 60th birthday. Like pension funds, there is an element of luck/gambling involved and I think a good strategy is to spread things if you can." I could be wrong, but I doubt you're going to be able to roll the current mortgage into a new one. The problem is that the bank is going to require that the new loan is fully collateralized by the new house.  So the only way that you can ensure that is if you can construct the house cheaply enough that the difference between the construction cost and the end market value is enough to cover the current loan AND keep the loan-to-value (LTV) low enough that the bank is secured. So say you currently owe $40k on your mortgage, and you want to build a house that will be worth $200k. In order to avoid PMI, you're going to have to have an LTV of 80% or less, which means that you can spend no more than $160k to build the house.  If you want to roll the existing loan in, now you have to build for less than $120k, and there's no way that you can build a $200k house for $120k unless you live in an area with very high land value and hire the builders directly (and even then it may not be possible). Otherwise you're going to have to make up the difference in cash. When you tear down a house, you are essentially throwing away the value of the house - when you have a mortgage on the house, you throw away that value plus you still owe the money, which is a difficult hole to climb out of. A better solution might be to try and sell the house as-is, perhaps to someone else who can tear down the house and rebuild with cash. If that is not a viable option (or you don't want to move) then you might consider a home equity loan to renovate parts of the house, provided that they increase the market value enough to justify the cost (e.g. modernize the kitchen, add on a room, remodel bathrooms, etc. So it all depends on what the house is worth today as-is, how much it will cost you to rebuild, and what the value of the new house will be. "If your parents are not on the deed then I am not sure how it could be their house. It seems like the sale was done unofficially. If your parents or aunt pass away this could be a real mess. Make this official ASAP. It might be possible for your aunt to gift you the house. This may have tax implication but the article below suggests that it may not be an issue. http://www.bankrate.com/finance/real-estate/aunt-be-taxed-for-bargain-price-on-house.aspx As you're probably aware, owning a house is expensive. Make sure you can afford taxes, bills, and maintenance. Things add up fast.  I should have address the ""rent to own"" plan. If you plan on transferring the house from your aunt to you by renting with $0 monthly payment and then claiming it is all paid off, then I think this would be considered a gifting of the house from your aunt to you. It sounds like fraud to claim you paid something that you didn't. In the end, it is either a gift from your parents or from your aunt. The sooner you get the house in your name the better" See, that Rent Seekervis another ridiculous loaded term.  The government gives us roads, electricity, water, etc. all at reasonable prices, with a reasonable expectation of consistency.  That isn’t “rent seeking”.  In fact, this comparison is so outrageous that it fails to take into account ABSOLUTELY EVERYTHING the government does for the governed, and reduces it to a false label of “rent seeking@. Something like this sort of thing happened to me but with Chase bank.  The county made a mistake on our taxes and forgot to give us the right deductions and we got a whopping high property tax bill. Since we did have an escrow account the bank just paid the taxes and raised our mortgage by a nearly unaffordable 60% or so even though we called the bank and told them not to pay the tax bill as it was being disputed. By the time we got the tax issues sorted out Chase refused to adjust the mortgage. The only way we were able to get out of it was to refinance with another bank and opt out of the escrow account and handle taxes on our own,  which fixed the whole problem. It seemed an awful lot like an attempt to force us into a foreclosure. If we didn't have the money to refinance we would have barely been able to afford the mortgage payment.  Why they would want to do that I have no idea. It really sucked though. An example, where I live. When you buy a house, the seller wants 'black' money. This is because that way the seller pays less taxes. However, it's not smart for the buyer to pay in black, as the tax reductions are lower. Eventually, when the buyer tries to sell the house, he has to declare the difference, so a higher buy price should not have affected... apart from the notary minutes.