As we discussed last week, tax sales are a major problem for lenders and borrowers alike. Tax sales occur when a borrower has become delinquent on their property taxes, but it’s a bit more complicated than that. For starters, the tax sale process differs from state to state. In some states, a property can be sold in a tax sale if the homeowner is delinquent on their taxes for as little as six months. In other states, a residential tax sale may not occur for a year and a half.
In order to ensure you are providing the highest level of customer service to your borrowers—and protecting your institution—it is imperative you understand the various rules in states you operate pertaining to residential tax sales.
Risk Management of Tax Sales
Given the fact that the tax sales process differs so dramatically between states (check out our ebook, The Impact of Tax Sales on Financial Institutions, for specific examples), there is a huge potential for risk to financial institutions. Unfortunately, homeowners don’t always understand how the tax sale process works, which can cause serious problems if they go delinquent on their property taxes. With this in mind, it is imperative for lenders to ensure they understand the tax sales process in their specific state and take the proper steps to educate their borrowers.
A tax sale is a forced sale of property, typically residential, that is set in motion by government regulations. When a borrower does not pay their taxes for a period of time (as specified by their state), the property can be sold for the amount of unpaid taxes. This means that, for example, if John Doe owes $2500 in delinquent taxes, his $400,000 home can be sold for that amount in a tax sale auction. This presents a major risk for both borrower and financial institution, as the institution is set to lose the entire amount of the loan if the borrower does not make good on his delinquent taxes.
This once again brings us back to the importance of outsourcing real estate tax monitoring to a reliable vendor. By working with a vendor who will notify you within 30 to 60 days if a borrower is delinquent, you will have enough time to work with them to get them caught up on their taxes, preventing the property being sold in a tax sale.
For more information on how the tax sales process differs from state to state (including specific examples!) download our ebook, The Impact of Tax Sales on Financial Institutions.