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.

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Comments (9)

  • RIck

    RIck

    08 August 2013 at 22:48 | #

    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.

    reply

    • webmaster

      webmaster

      13 August 2013 at 15:31 | #

      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.

      reply

  • Craig Hawins

    Craig Hawins

    14 May 2015 at 19:42 | #

    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?

    reply

  • Stephen

    Stephen

    19 January 2016 at 11:29 | #

    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 Sa