R's tax proration discussion continued

Hello Diane

Thanks for the info.  I looked at the sales contract from this past summer...here's what I found about prorated taxes:

"PRORATIONS: Taxes for the current year, maintenance fees, assessments, dues and rents will be prorated through the closing date (Jun 26, 2012).  The tax proration may be calculated taking into consideration any change in exemptions that will effect the current year's taxes.  If taxes for the current year vary from the amount prorated at closing, the parties shall adjust the prorations when tax statements for the current year are available (in this case they were available Oct 1).  If taxes are not paid at or prior to closing, Buyer will be obligated to pay taxes for the current year."

So in this case, taxes were not paid at or prior to closing.  But I didn't take ownership of the property until Jun 26, yet I could still be liable for taxes owed during a period when I didn't even own the property?  My other frustration is that this stipulation in the contract is buried in the fine print...and if I don't happen to find this phrase on closing day, I'm stuck with all taxes?  I'm no expert on closing contracts.  If I was, why would I pay the closing agent to do anything?  I guess my other question...who should have made me aware of this?  My realtor/agent, the title company representative, or the building/owner?

And knowing this verbiage from the contract now, how would you proceed?

Thanks

R

Hi, R:  This is not unusual.  We all as consumers sometimes ignore the boilerplate in contracts but that doesn't mean that those words have no meaning.  As a buyer you are on your own unless you hire an attorney specifically representing you or you have a true buyer's agent.  The title agent, even if they are an attorney, is not acting the capacity of buyer counsel.  In fact, typically the sales contract is already negotiated before the title agent enters the transaction.  Buyers need to read their sales contracts and if they aren't sure, they need to hire an attorney to advise them.

You might still at least contact the title agent by email or phone to ask them how or why they calculated the prorations.  See if their explanation makes sense now that you have read that portion of the sales contract. If they clearly demonstrate that they were following the instructions contained in the contract, you have your answer. 

You might also want to talk with your real estate agent to see how they interpret this language in the sales contract.  Perhaps the agent can shed light on local custom or may even agree with you that there was an error.

I hope this information is helpful and I thank you for sharing your experience as I am posting it on the blog because I think it will help other home purchasers.

D

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