Deal with it early. Unpaid property taxes generally become a lien on the property that ranks ahead of yours, and if they stay unpaid the taxing authority can eventually sell that lien or the property itself. Confirm what is owed, put the borrower on written notice, and be ready to pay the taxes yourself to protect your position.
Why this is your problem too
A lien is a recorded claim against a property. Liens are normally paid in the order they were recorded, so if yours went on record when you sold the property and nothing sits ahead of it, you are first. Property tax liens are the exception: in general they move to the front and are paid before any mortgage, deed of trust or land contract, however old.
So every unpaid tax bill, with its interest and penalties, sits in front of your note and eats into the value protecting you. If the county goes on to sell the property for taxes, your lien can be at risk. The rules and the timing differ a great deal from state to state, and a local attorney can tell you how it works where the property is.
Step one: confirm the facts
A rumor, or a late notice forwarded by a neighbor, is not enough to act on. Property tax records are public, so go to the county tax collector’s website or call the office and find out:
- which years are unpaid, and the total with interest and penalties
- whether the debt has been sold to an investor as a tax lien or certificate
- whether a tax sale has been scheduled, and for when
Step two: read your own documents
A mortgage, deed of trust or land contract normally requires the borrower to pay the property taxes. Find that clause in yours and note how it is worded. Look next for your right to step in, since loan documents commonly let the holder pay unpaid taxes and add the amount to what the borrower owes, sometimes with interest. Then read the default clause, because what counts as default on a note is set by the document, and unpaid taxes are commonly on the list even when the monthly payment arrives on time.
Step three: put the borrower on notice
Send a letter, on paper. State the amount the county shows as unpaid, quote the section of the document that requires payment, and give a date by which you expect proof that it has been paid. Keep a copy and proof of delivery. If your documents set out a formal notice procedure, follow it exactly, and have an attorney check the letter if a tax sale date is close.
Step four: decide whether to pay the taxes yourself
If the borrower does not act and a sale is approaching, paying the taxes may be the only way to protect your lien. Before you do:
- confirm your documents allow you to add the amount to the debt
- pay the county directly and keep the receipt
- tell the borrower in writing what you paid and that it is now owed to you
Then stop it happening again. Ask the borrower to agree to an escrow, where they pay one twelfth of the yearly taxes with each monthly payment and the bill is paid from that account. A loan servicer, a company that collects and tracks payments for a fee, can run the escrow for you. Taxes and insurance are the two bills an escrow covers, and a borrower behind on one may be behind on the other, so run through the checks for a lapsed insurance policy while you are at it.
What unpaid taxes do to a sale
You can still sell the note, and unpaid taxes sit alongside the other reasons holders decide to in when selling a note makes sense. A buyer’s title search will find the tax debt, because lien position, meaning what ranks ahead of the note, is among the first things a buyer prices. Disclose it yourself and include the county’s figures. One way a buyer handles it is to have the taxes paid from your proceeds at closing. The other is to lower the price by the amount owed plus something for the trouble. If the monthly payments are late as well, the note is priced as a troubled one, with a wider gap between the balance and the price.
If a tax sale date has already been set, the attorney comes before any buyer. Otherwise, once you have the county’s total and your letter has gone out, send us the note details with the tax figures to see what the note is worth as it stands.
Related questions
How do I find out whether the property taxes are paid?
Property tax records are public. Search the county tax collector's or treasurer's website by address or parcel number, or call the office. Check once a year, shortly after the due date, even when all seems well.
Will I be told before the property goes to a tax sale?
Counties generally send notices to parties with a recorded interest, but practice varies and notices go to the address on record. Do not depend on it. Keep your address current with the county recorder and check the tax record yourself.
Can I require an escrow for taxes after the note is signed?
Only if your documents already allow it or the borrower agrees. A borrower who wants a default cleared has a reason to accept one. Put the change in writing and have an attorney review it.