Every year when the taxes come out we see a lot of confusion between buyers and sellers about how those taxes affect their transaction. Since one of our taxing authorities is already available (Williamson County) and the others will be soon we wanted to send out some details on how taxes affect a real estate transaction.
The first thing to note is that once the tax bills are out those taxes are considered to be “due and payable” to the county tax collector. This means we should be collecting and paying them from closing.
One challenge that we run into are those files where clients have an escrow account and they want to use the funds in escrow to pay those taxes.
Why is this an issue? First, the lenders send all of their funds for properties in a specific county at one time. They do not pay per tax account. Second, most lenders wait until the last possible time to send in their tax funds for the tens of thousands of customer accounts they hold. Even more confusing, some lenders use a 3rd party service to pay taxes. Under this third item, your client may see that the taxes have been removed from their escrow account because the funds have been sent to the third party servicer. The issue then becomes that the servicer has not yet sent the funds to the county so the county cannot confirm payment! For closings from now up until Mid-November any ONE of these issues can mean that the chances that your owner’s lender has actually paid your specific client’s taxes are very low.
QUESTION: Do we have to pay the taxes?
The short answer is “yes, in most cases.” The reason that we have to answer this way depends largely on the buyer’s lender. Lenders require a title policy that they get for the loan they give the buyer. In this title policy, they require two special endorsements to the policy that pertain to taxes. First, they require insurance that all taxes be paid current. Second, they require insurance to state that there are no taxes (other than those we are collecting at closing) that are “due and payable.” Effectively, if taxes are out we are required to pay them so that the lender’s policy can be issued in the way that they require to approve the loan.
In the event you have a cash transaction the parties could negotiate between themselves to not pay the taxes and wait for the seller’s lender to pay the taxes from the escrow account. Obviously there is some risk involved in not paying those taxes at closing though and that should be considered before proceeding with closing this way.
QUESTION: When do taxes become a lien if unpaid?
If the taxes remain unpaid as of January 1st of the following year they become a lien on the property. This happens as an operation of law and remains true even though the county does not file an official lien notice. While they county cannot begin foreclosure proceedings or the assessments of penalties and interest until February 1st, they are a lien starting January 1st if they are unpaid.
Our closing teams at Texas National Title are experts when it comes to handling taxes each year as they start to come out. Please contact your escrow team for further assistance.