Escrow issues for sellers can arise when closing near property tax due date
Whenever a real estate settlement is close to a property tax due date, the potential for a post closing property tax issue increases. Simply, it is a matter of bad timing. Here are a couple escrow issues that can cause problems for home sellers who are planning to close near a property tax due date.
Taxes are double-paid
Let’s take Montgomery County, Maryland for example. Real estate property taxes are due by September 30 and December 31 (assuming a principal residence).
Now let’s say that you have scheduled a closing for the sale of your home on September 20. Your current lender is escrowing for property taxes, which means that they are planning to pay your property tax bill by September 30. So what could go wrong?
As of September 20, your payoff lender has not sent in the property taxes so the title company, collects the property tax bill from you at closing and pays it, since the deed cannot be recorded unless the taxes are paid.
The title company sends out your payoff, but it doesn’t get credited until September 21, and in the meantime the payoff lender has sent in your taxes to the county.
As of September 20, the county tax office has not credited your taxes as having been paid. So the title company collects and pays the taxes with the deed. When you receive your escrow refund from the payoff lender, it is less than you expected.
When you call the payoff lender, you find out that they paid the taxes as well, but the check was sent to the county a few days before the closing, so they were not credited until after September 20.
In both situations, the taxes have been double paid, and, because of bad timing, nobody is really at fault. Now you are stuck having to try and obtain a refund from the county for having overpaid the property tax bill. That will likely take some time and, depending on the size of the tax bill, could mean you are chasing thousands of dollars.
Taxes are delinquent
You were pro-active and called the payoff lender and found out that they sent a check to the county, but the county cannot yet confirm that the taxes were paid.
The title company, since it has to provide title insurance and one of the conditions to close is to make sure the taxes were paid, has agreed to escrow from you the taxes until they are credited by the county, but that means they are holding onto $3,000 to $5,000 of your funds in escrow.
Not much you can do here. You are at the mercy of the county tax office and how quickly they process your check and report the taxes as paid.
So, what can be done?
Probably the best solution is to contact your payoff lender and inform the bank that you are selling your home, give them the settlement date, and inform the bank that you do not want them to pay your property tax bill.
Most lenders will freeze or put a hold on your escrow account if you tell them to do so and they know that you are selling the property. The title company can then collect the taxes at closing and the payoff lender will not have paid the bill, and will therefore refund it to you as part of the escrow refund (which should arrive within 30 days of payoff).
Of course, there are risks with this solution as well, chiefly that if the settlement is delayed, you might be delinquent on your taxes.
Using the above example, let’s say that you called your payoff lender and informed the bank that you will be closing on September 20 and that they should freeze your escrow account. As long as settlement takes place on September 20, there will not be a problem, but what if the settlement is delayed?
If the settlement is pushed back after September 30, the taxes will be paid late, and a late fee will apply. Also, if the settlement falls through at the last minute – say for example there is a walk-through dispute that kills the deal – then the payoff lender will have frozen the account and your taxes will not be paid.
So if you do call the payoff lender and ask for the account to be frozen or put on hold, make sure that you also inform the payoff lender if there are any settlement delays. It would be unfortunate (and ironic) that being pro-active about the taxes might cause penalties, interest or, potentially, a tax lien.
agents, bethesda, Buying 'n' Selling, chevy chase, closing costs, Escrow, maryland, Montgomery County, post closing, Potomac, property tax, property taxes, real estate, Rockville, sellers, settlement, Silver Spring
If I wish to not escrow taxes in MD, would that cause my rate to go up? A lender is telling me that my rate would go up .25 if I wish not to escrow.
Yes, it is customary that a lender will charge a higher interest rate for the privilege of paying your own taxes. Remember, a lender has a vested interest in making sure real estate taxes are paid since real estate taxes are a priority lien over the lender’s mortgage lien. Because a lender is most likely going to sell the loan on the secondary market, a loan with escrow reserves is going to be more marketable than one without escrow reserves.
Is it highly unusual for a title company to contact you months after closing stating you owe them money because the property taxes turned out to be higher than originally thought. Or, they had to pay unpaid taxes they weren’t aware of?
I am the seller and closed on the 14th January 2016 and was told they would overnight funds. I received an empty FedEx envelope on the Saturday the 16th when I say empty there was nothing in it. I called and left messages so did the realtor, I did receive an email apology but they explained it was a “clerical error”. With the banks closed on the 18th I am still waiting for my money who can I file an official complaint with? Thanks
Hi Stephen, While this wasn’t a transaction we were involved with, we’re glad to suggest a place you might start. The Consumer Financial Protection Bureau wants to hear about the experiences of homebuyers. You can share your thoughts here: http://www.consumerfinance.gov/complaint/
I closed in Sept 2015 and as previously stated and had to double pay, since the check my mortgage sent did not clear the county office when it was time to settle. Prior to settlement I told the title company that the payment was sent and was told they were aware, but since it hadnt posted that they had to collect at closing and would issue me a refund. I have yet to hear back after emailing them to verify when my refund would be sent to me. What should I do next?
Hi MB, it’s tough for us to offer specific advice for many reasons. This was not a case we were involved with, and we don’t know the all the details. You may want to pick up the phone and call your title company to see if they can help resolve the issue. If you feel you’ve exhausted all your options, you can consider filing a complaint with the CFPB or the Better Business Bureau. Thanks for your question!
How can I get proof from the lender that they paid my property taxes for me?
Hi Katie, thanks for your question. You can call your lending bank’s customer service number and ask for the date of the most recent tax bill paid or go online and login to your account with the bank and review the most recent escrow disbursements.
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