taxes are the topic this week

In one case, the seller told the buyer that the property had a homeowner exclusion which allowed for a discounted rate.  Turns out that wasn't true.  Homeowner exclusions are generally processed once a year by the tax assessor.  Miss the cycle and you pay more tax.  This buyer can apply for the exclusion but got stuck paying for the extra tax for at least this year.


In the other case, a buyer of a condo in a converted building just received a bill from the tax assessor for a catch up period back to the conversion.  This assessment change was pending at the time of the sale but it's not determined if anyone knew who could have informed the buyer.

In both cases, the buyers were careful when they closed.  It's hard to say if either case is worth pursuing the seller or filing a claim against title insurance.  It doesn't cost anything to try a claim, however, title insurance does not cover tax bills that are not yet due and payable. A case would have to be made that the title agents had evidence in hand before closing that these taxes were incorrect or incomplete information.

I wish these homeowners much luck and am posting their situations just to keep you all informed about things that can and do happen.

Be a savvy consumer. Pay attention at closing.

The company was given $3100 at our closing last June and neglected to pay the School Real Estate Taxes that said money was put in escrow to pay. When we received an invoice showing it was unpaid, the school district had added penalties and fees. We contacted Diane at The Closing Specialists and were told that it was our fault and that we had to pay the fees and penalties. Unacceptable. She then said she would remit the $3100 when she felt like it rather than when it was due. Bad business.

Hi, Sherry: As we discussed yesterday, the escrow agreement you and your husband signed at closing clearly stated in bold that you were responsible for getting a tax bill to our office. The statement we received yesterday was the first statement we received. The amount owing was higher than the escrow balance. The escrow agreement also said that you were responsible for any amounts owed beyond the amount held in escrow. Upon receipt of your statement while talking with you on the phone, you were clearly upset and told me you would not pay the difference. I said we might either send the full $3100 to the tax authority or might hold it and wait for you to send us the difference. 

After having a couple of minutes to think about the best solution to your problem, we cut a check in the amount of $3100 and mailed it to the tax authority. I then sent an email to the email address we had on record, I believe it was your husband's email and let him know we mailed the check and suggested that you send the remaining balance to the tax authority to avoid the filing of a lien against your property. 

All actions performed by The Closing Specialists in this regard are according to the terms of the escrow agreement. We understand after having received your email later in the day that you are in the title business operating as an abstractor. This puts you in an unusual position as a consumer. Unlike most consumers you are professionally familiar with the tax collection process in PA and also, as an abstractor trained to read documents carefully with close attention to detail. Every document related to a real estate closing is important. We do understand that there are many documents that will be signed at the time, however, that doesn't mean that the terms of the documents can be ignored. Thank you for taking the time to post this on Facebook. I'll include it in a discussion on our blog, Title Insurance Talk. It's always good to remind consumers to pay attention. Every party in a transaction has their part to play. 

Best wishes. Diane Cipa

A wants to know why she should have to pay a tax that the title company missed.

Diane,

Thank you for answering this email in advance.

I closed on my home 10-30-2013.  A clean Title was transferred.  I am now getting contacted by the title company stating I owe some property taxes.   The property taxes in question is from a sewer and recycling bill that was not paid in July (a bill I did not receive because I was living out of state) that automatically was applied to property taxes at the end of the year.  

Here is my issue; On the HUD-1 Settlement statement, #404 there is a credit for 2 months November and December (The bill comes out once a year in July).  The title company knew about the taxes owed, why did they not say anything about it at the time of closing?  Is it not the Title Company's responsibility to exercise Due Diligence?  It is not the title company's responsibility to investigate into the property and disclose what they find?  They found it, just didn't disclose it. I, the seller, should not be held liable for non-disclosure of information that was not discovered in the process of that investigation.  The  finding of the unpaid portion of the property taxes was not addressed at the time of  closing therefore would not be my responsibility.  Isn't that why we pay a title company and why we buy Title insurance?  Since the title was transferred free and clear at the time of closing The title company  is liable for anything that comes up Correct?   I, in no way, shape or form knew anything about this until January 4th 2014.  And the only reason I am being contacted is because the title company doesn't want to pay for their error.    If the research was done correctly this would have been noticed.  

A

Hi, A:  Thanks for letting me help you with this issue.  You are expressing the frustration that many consumers share when confronted with an error discovered after closing.

Let's start with the basic function of title insurance.  The insurance is for the benefit of the insured.  In the case of most purchase transactions the insured are the buyer - new owner - and their mortgage lender.  The insurance is not issued for the benefit of the seller.

Human error is one of the most common sources of title insurance claims.  Mistakes can happen at any stage of a transaction.  There may be mistakes at the courthouse, in the pre-closing examination, at closing or after closing.  The job of the title insurer once an error is discovered is to rectify it under the terms of the title insurance policy so that the "insured" parties are not injured.

The fact that the taxes were missed in the closing process does not negate the fact that you owe the tax.  It's a bit like a clerk giving you the wrong change.  You can't say gotcha and keep the extra any more than you would expect a clerk who shorted you to do the same back to you.  If the title insurer had made an error by charging you too much tax, you'd expect a refund, right?

So, here's how this is playing out.  The title insurer is making a demand to you to pay the taxes that you rightfully owe.  If you fail to pay the tax, they will pay it so that the insured are protected and then they will go after you in court.  In the end you will pay the tax.  Paying it now is the least expensive way to handle it. 

If you are in a bind and don't have the money, ask them if they will accept payments.  Some will, some won't.

I hope that answered the question.  Best wishes and I do understand your frustration.

Diane

Richard wants to know if the seller has to pay taxes that the title agent failed to collect.

Diane,

I would appreciate your thoughts on this situation:

Preliminary title report lists property taxes for the current year as due, supplemental taxes as payable.  But it doesn't show up in the HUD-1, so seller receives more than she would have if they were accurately reflected. Two months later, the title company tells the seller they have to reimburse the title company for the taxes they paid (the ones in the title report).  Would seem they made a mistake and while they may not be required to pay all the taxes, the seller shouldn't have to pay their fees, since as the title company's representative has indicated they "screwed the pooch".  

Your thoughts much appreciated.

 

Regards,
Richard

Hi, Richard.  One of the documents required for title insurance is an owner/seller affidavit used to bind the seller legally in the event of just such an error.  Title insurance covers human error.  Some errors happen in the closing process because people are human and often rushed at the end of the process.  There are checks and balances in the system to help find and eliminate these types of errors.

The seller has personal knowledge of the property and thus should have noticed that the taxes were not collected on the HUD-1.  The affidavit is supposed to jiggle their memory.  When the seller signed that affidavit, the seller affirmed that all taxes are paid or are being paid on the HUD-1.  The affidavit is made for the purpose of inducing the title insurer to insure.

The seller should pay the taxes.  If the seller does not, the title insurer may litigate to recover damages.

It's a bit like having a store clerk give you the wrong change or a bank accidentally depositing money into your account and discovering the error later.  It's not your money and you can't keep it.  In this case, the seller was unjustly enriched. ;)

Diane

R wants to know if a tax proration error is covered by title insurance

So I bought a house on Jun 26, that was the day we closed.  I just got the property tax bill from our county and it was rather high, and I don't remember any credits coming my way at closing from the Jan 1-Jun 25 timeframe.  I went back to look and still don't see anything.

My question for you -- since I didn't take ownership until Jun 26, I assume I'm not liable for property taxes from Jan 1-Jun 25, right?  Should those have been prorated and charged to the seller at closing?  Even if they were estimated at the time since final property tax bills aren't issued until Oct 1?

And if this was a human error of some sort, who's responsible for the screw up?  The title company?  And how would I go about getting reimbursed so I'm not stuck with the entire 2012 calendar year tax bill?  Can I invoke title insurance for human error?  I assume these are the types of things title insurance is used for?

Your thoughts?

Thanks

R

Hi, R:  The method of prorations for taxes and whether or not prorations take place is set out in the sales contract.  The title agent would look at the contract and set up prorations or not based on what buyer and seller agreed to.  In the absence of such instruction from a contract, a title agent would typically do whatever is the custom for that area.  The responsibility of the buyer and seller, then, is to review these figures and then by signing the settlement statement, acknowledge acceptance.

If the county tax bill is based on a calendar year, and the bill doesn't come out until October for this calendar year, then it would make sense that the seller would have given you a credit for January 1 thru June 26.  This credit would be on page one of the HUD-1 on the bottom half of the page.

If the county tax is based on a fiscal year, the dates may be different and it is possible that the October bill is for a fiscal year that started after June 26 but in that case you would have given the seller a credit for the county tax to adjust for what they had paid beyond closing to the end of the fiscal year.

Tax prorations are typically not covered by title insurance.  However, they may be covered by a Closing Services Letter if you are in an area where such letters cover consumers.  In PA the letters DO cover buyers.  The basis of a claim under the letter is that the title agent did not follow the written instructions.  In that case you would have to show that you gave written instructions for prorations and as I mentioned before, these are typically in the sales contract.

If there is no basis for a title insurance claim you could speak with an attorney and consider suing the title agent for negligence. Again, though, I think you'd have to show that they were given instructions and did not follow them.

Prorations of taxes are not mandatory as part of a real estate transaction.  They are negotiated by agreement between buyer and seller.

Hope this helps. ;)

Diane

tax amount calculated incorrectly on HUD-1

A tax amount was calculated incorrectly on my hud-1 statement in my favor.  The settlement lawyer called me and requested that I pay the money back; which I believe I should.  However, there is no correction being made on my statement.  My question is:  Shouldn’t I get a corrected Hud-1 statement to show my true settlement cost.  Also is this even legal without a correction?

I would really appreciate an answer as I researched this and can’t find anything that covers this situation, I am being harassed at my job and receiving phone calls on my cell asking for the money.

I not really sure what’s the right thing to do.

Thank you,

L

Hi, L.  If the taxes that were incorrect impact the prorations on HUD-1 keep an eye on the 1099 if one is being issued to the IRS.  You want to be certain correct figures are given to the IRS.  Otherwise, I think you should expect a letter from the attorney explaining what happened and evidence to support the tax figures.  You are honorably correct that you need to make right an error but I wouldn't give money unless I had documentation for my records.  You can use the letter and evidence in addition to your HUD-1 statement as a formal record for your tax preparer.  These things are often resolved without redoing the HUD-1 statement.

Thanks for reading and sharing.  Hope this helps.  ;)

Diane

PS  Hmmm..not to confuse - when I mentioned the IRS 1099 I was presuming you were the seller.  If you were the buyer and you had a mortgage lender, then your mortgage lender needs to be part of the decision whether or not to create a corrected HUD-1. If they don't care, get that in writing - email is fine.  ;)

query: Why do I have to pay real estate taxes at closing even if I do not escrow?

That's a great question.

Even though you are not escrowing your taxes with your mortgage lender, your lender requires that you verify payment of the real estate taxes.

Your mortgage lender also requires a loan policy of title insurance without exception for real estate taxes.  The title insurer will check to see if there are any real estate taxes currently due and payable.  Currently due and payable means that a bill has been issued by the tax office.  Even if the bill says you are in the discount period, the taxes are still currently due and payable so the title insurer must collect these taxes from you and remit them to the tax authority in order to issue a clear loan policy to your lender.

This is why you have to pay real estate taxes at closing even if you do not escrow.  It sets the slate clean and from that point on your responsibility is to pay your taxes as they come due and provide proof of payment to the lender annually.  If you fail to pay your taxes, most mortgage lenders will revoke the waiver of escrow, step in and pay the taxes to protect their security interest.  They will then setup an escrow account for you and if you fail to fund it, start foreclosure.

I've been in this business for a darn long time and it is my observation that most consumers get into trouble without an escrow account.  This is why responsible lenders view the waiver of escrow as a privilege and they only grant it to consumers who have demonstrated an ability to handle it or have a large equity position.

Since we are on the subject of waiver of escrow, I think it's important to note that a failure to escrow taxes by the predator mortgage lenders who engaged in the subprime market was a primary cause of the property value bubble.  They setup consumers who were irresponsible with money - needed subprime lending - and left them with paying taxes on their own.  Do you think they didn't know consumers who have a hard time controlling their finances wouldn't pay their taxes?  Of course, they knew.  Once the consumers got tax sale notices they needed to refinance again to save the house and all the lender had to do was up the value of the property to cover a new mortgage and then set them up yet again for another failure with another escrow waiver.  This was a churning scheme with each transaction pulling in thousands of dollars for the subprime lenders and ballooning values to cover the new fees and all based primarily on a system of NOT escrowing property taxes.  It was hideous but I am rambling and I think I have already answered your question so I'll stop here.  ;)

open your mail! ;)

This is a shot in the dark, however, any information would be helpful.  I have a fairly confusing situation.  I refinanced my home in 2007.   When we originally bought our home in 2000 it was listed as 2 parcels.  2 years later we went through the proper process of obtaining a building permit to put a manufactured home on the 'empty' parcel for my father-this was signed off through the county.  Little did we know that their had been a financial segregation (FS) put into place by previous owners, this was supposed to have been 'lifted' at the time of sale but was not, in addition the county should not have allowed a building to be placed on the FS parcel.  My original lender routinely paid the taxes for both parcels per my request  without any questions asked.  When I refinanced in 2007 I asked for the same convenience of having my taxes and insurance paid with my P&I payment.  It was recently brought to my attention that my new lender had not been paying on the taxes for the 'other' parcel.  It appears that there was a mix-up in the legal description; the lenders legal description does not encumber both parcels, however, the county legal description does encumber both parcels.  In order to avoid foreclosure on the property the lender paid the back taxes and gave me 1 year to pay them back, raising my mortgage payment another $1400.  This has proven to be a financial hardship.  In discussion with my mortgage company somebody had suggested that I file a claim with the title company.  I did contact the title company and they are saying that they have documentation by the lender requesting that the 'other' parcel be removed from the deed of trust.  I am confused as to who is responsible for this mess.  The lender, the title company or both?  I apologize for the lengthy question.  There are many factors that further complicate this situation such as the county not having lifted the original financial segregation and the fact that I chose not to open my tax statements assuming that they were getting paid along with my parcel/home taxes until it was too late.

Regards,

T.


Morning, T:

I'm not sure about the FS because we don't have that in PA, however, on the issue of the taxes and encumbering the second lot, I can comment.

Lenders do not pay taxes on land that they have not mortgaged and so the current lender cannot be faulted for not not paying them for you.

There may have been some reason why the lender did not want the second lot in their mortgage.  We don't know, but the real problem in all of this is just basic communication and taking the time to read documents you sign.

Presuming there were no written [pre-closing] disclosures that described the land or the tax figures, there were at least two documents presented at closing that, if read, would have alerted you.  The mortgage document contained a description of the land.  The initial escrow statement gave you tax figures.

In a refinance transaction, the title company is insuring the lender and they are taking their instructions from the lender.  There is a presumption that you and the lender are on the same page.  A good title agent will keep their eyes and ears open for possible misunderstandings and help the lender and consumer resolve potential errors, however, this is a courtesy and good service and not part of the insurance.  I don't see a title insurance claim here.

If you've not read the book or seen the movie, I recommend looking for The House of Sand and Fog.  It's about a title insurance claim and based on a true story in which the homeowner neglected to read her mail.

Humans can have misunderstandings and consumers have an obligation to read over documents or risk being legally bound in an unexpected circumstance. This seems to be a hard lesson learned.  I wish you well.

Diane

query: what does paid in arrears mean as related to property taxes

Paid in arrears means you are paying for a period of time that has already past. The subject as it relates to property taxes usually comes up when we explain tax prorations.

At closing, the settlement agent will calculate what taxes have been paid by the seller as of that date, then work out credits and/or debits between buyer and seller so that both have paid their fair share as of the date of closing.

Today is December 2nd. If I were prorating the school taxes on a parcel of ground in western PA, I would have the buyer reimburse the seller from today thru June 30, 2008. That is because the fiscal school tax year runs from July 1st thru June 30rd. The tax bills come out at the end of the summer and so often sellers and buyers think we should prorate as of the tax bill due date. We prorate on the fiscal year, whatever that is.

I like to use the analogy of the federal income tax. Though your payment to the IRS is due by April 15th of 2008, you are actually paying and reporting on taxes for the prior year.

I hope this answers your question. If not, please ask again but give me the context of the question.

query: title company settlement statement mistake error

Here's a good one. Who is responsible when there is an error on the HUD-1 Settlement Statement? There's no real rule here, but I'll give you my opinion. Whoever was responsible for paying the item in question in the first place should take care of it when the error is discovered.

I believe each party to the transaction bears responsibility for review and approval of the HUD-1 prior to closing. The title company or agent preparing the HUD-1 has less personal knowledge of the transaction than the seller, buyer, Realtor, or lender. The person preparing the HUD-1 is gathering instructions and data from numerous sources and using the best information available. They are typically receiving this data last minute and finishing the statement in a compressed timeframe, under a lot of pressure. They are likely to make an error or two - even the best make mistakes.

Once the HUD-1 is prepared it is the responsibility of the title company/agent to distribute the statement to ALL parties for review and approval. Each person should carefully review the final figures against their personal knowledge of the transaction.

If you find a mistake, you must bring it to the attention of the title company/agent.

If a mistake slips through and isn't discovered until after closing, the title company/agent will contact the parties and work out a plan for correction.

Here's an example. Last year a member of my staff prepared a HUD-1 with a seller assist of $3000. She was new to HUD prep. She gave the buyer the $3000 credit and failed to hit the button that deducted the $3000 from the seller. Her checks balanced because the computer software created a deposit of $3000 to offset the credit to the buyer. She did not notice the odd deposit on the report. The transaction closed and the seller walked out of closing with $3000 more than expected. She said nothing.

I discovered the error during our monthly escrow account reconciliation. I noticed the odd $3000 deposit in uncleared items. We contacted the seller and she refused to pay because she thought we should eat the mistake. It took three months and a court date with a magistrate before she finally listened to reason. She called her attorney to prepare for the magistrate and upon hearing the facts of the case, he told her the $3000 was her responsiblity and she should pay it immediately. She did.

Oh happy day.