As a Note investor, why should I care about Property Taxes? Did you know that unpaid property taxes can result in tax liens on the property and even forfeiture of the underlying property and Note? What can you do to protect your Note and investment?
Introduction
Local communities use property taxes from real estate as a source of income. These taxes are required to be paid annually by the owner of the property. These property taxes are important for owner of seller financed Notes to monitor. If the taxes are not paid, late penalties are incurred. And if the property taxes are not paid for a longer period, the property can be sold at auction, and the borrower will lose the property entirely!
Property Taxes
Property tax is an ad valorem (based on value) tax levied by local governments on real estate (land and buildings) and sometimes personal property (vehicles). It is the primary source of funding for local public services like schools, police, fire departments, and roads. Tax amounts are determined by multiplying the assessed market value of the property by the local tax rate, or “millage rate”.
Statements and Payments
All property taxes are paid annually or semi-annually with set due dates. Taxing authorities usually accept various forms of payment that include credit cards, electronic bank transfers, checks and in person cash payments (some forms of payment may have fees). Normally, taxing authorities will send a proposed tax statement to the owner prior 3 to 6 months before the due date. This early statement gives the owner an opportunity to review and correct any incorrect items on the proposed bill and file an appeal if needed. Certain locations will have caps on annual increases as a way to help protect the owners from getting extreme increases.
The final bill is normally sent 30 or more days before the due date. Some locations will offer a discount if paid earlier. For example, all Florida property taxes are due on March 31st. However, the bills are sent out in early November. The earlier you pay the property tax bill, the greater discount you will receive.
Discounts and Exemptions
Each taxing authority will have different opportunities to reduce the overall property tax bill. The most popular is the homestead exemption which will reduce the properties assessed value while the owner is living in the home. Other popular exemptions are for senior citizens, disabled veterans, and widowers. Always check with the local taxing authorities for other discounts and exemptions.
Checking Payments made
For the owner of seller financed Notes, a key annual checklist item is to ensure property taxes are paid. Since you are not the owner of the property, you will not be receiving a bill or delinquency statement. To check payment status, you will need to access the county property tax site. Most times a simple goggle search like “county state property tax” will provide you links to the county sites where you can check payment status. Once on the site, you will need to search for the property using owner name, address or parcel number. After finding the property, there should be an overall statement of the account. Make sure that the current and previous years have been paid.
As the Note holder, you do have a few options to get the unpaid tax cleared. The first is to work with the borrower. Often time, the borrower is not aware that taxes are due, or the bill has gone to another address. If the borrower does not pay, you can pay the tax bill and add back to the mortgage. Every jurisdiction is different so check with local professional before completing. An option to prevent future tax delinquency is to setup and require escrow to be paid monthly. This escrow amount will normally be 1/12th of the annual bill paid and will be paid with the normal monthly payment. For many borrowers, this is a much better option than paying the full tax bill.
Tax Certificates
So, what happens when property taxes are not paid? The first step is that the unpaid property tax is sold to an outside investor through an auction. Investors will bid down from around 18% to the interest rate they will accept. This interest is accrued monthly, and the certificate is normally valid for 5 to 7 years depending on the state. In this way, the county will get their payment while the outstanding debt is now owned by an outside investor. To redeem the certificates, the owner will need to pay the original amount and the accrued interest. This redemption can normally be done directly with the county, either online or in person.
Tax Sale
So, what happens if the certificates are not redeemed? Counties will normally set a deadline for redemption (5 to 7 years). Once this period is exhausted, the owner of the certificate has the right to apply for a tax deed to initiate the sale of the property. Yes, the certificate owner can take control of the property, and you will lose your investment! Property taxes are considered a superior lien to a mortgage so a tax sale will always trump your seller financed note.
Summary
Property taxes are an integral part of real estate and monitoring them is a key item for all Note investors. Understanding how property tax is determined and billed are essential items for you to manage your investment. Checking annual payment status can ensure that your investment is not at risk. Remember, property taxes are a superior lien to your seller finance Note and if taxes are not paid, you can lose your entire investment!
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