Real estate tax monitoring is an essential task for lenders to ensure that borrowers are paying their taxes on time.
Because portfolio monitoring requires substantial time and effort, lenders sometimes struggle to stay on top of it. This is either because they lack the necessary internal resources or have outsourced real estate tax services to a subpar lender.
Whatever the reason, when lenders fail to properly monitor their portfolios, they're taking big risks that could hurt their organization and their borrowers. Let's examine five potential problems that can occur when a financial institution's real estate tax services are not up to par.
Risk 1: Massive interest and fees
When real estate taxes are delinquent, the tax agency begins to charge late fees, interest and/or penalties. If a lender is unaware of delinquent taxes, the tax bill can skyrocket due to these additional fees.
The lender may be required to pay legal fees and other costs associated with resolving the delinquent taxes. These expenses can be passed on to the borrower, or the lender may absorb the costs, which can eat into their profits. It's in the lender's best interest to ensure that real estate taxes are paid on time to avoid these massive fees and expenses.
Risk 2: Foreclosure or tax sale
When a tax bill is delinquent for an extended time, the lender (and borrower) are at risk of losing the property in a foreclosure or tax sale. Tax sale procedures and timelines vary by state and county, but some tax offices begin the tax sale process in less than a year. When a property is up for a tax sale, the lender or borrower must pay the entire tax bill (which has likely multiplied) plus additional costs, in a short time frame to save the property. If they don't, the borrower and the financial institution may lose the property.
Risk 3: Taxes sold to tax buyer
Another scenario that can occur when real estate taxes are delinquent for too long is the taxes getting sold to a third-party tax buyer. In this situation, the tax buyer then holds the primary lien on the property. The lender or borrower must buy back the taxes (at whatever fee the third party sets) in order to save the property.
This scenario is particularly risky, because when a tax agency sells taxes to a third party, they then mark those taxes as “paid” with no designation if the taxes were purchased by someone else. If the lender (or their tax servicer) just sees “paid” on a tax agency's website, they may not even realize another party now holds the primary lien position.
Risk 4: Negative borrower experience
Naturally, all these negative scenarios lead to borrower dissatisfaction. Though the borrower is responsible for paying their taxes on time, many rely on their lending institution to alert them or pay taxes from their escrow account. If the borrower is more on the ball than the lender, the borrower may call panicking and wondering why they received a notice that their taxes weren't paid, leading to major annoyance at best.
When long-term delinquencies lead to massive fees and tax sales, borrowers will lose trust in their bank or credit union and take their business elsewhere—likely telling others about the service they received.
Risk 5: Commercial portfolio negligence
Some lenders don’t monitor their commercial portfolio as closely as their residential portfolio. This can result in the same types of losses mentioned above, but on a much greater level.
When commercial borrowers don’t pay their taxes, the stakes are higher: these properties cost more and the higher tax bills equate to larger fees. It's even more important that lenders prioritize monitoring their commercial portfolio to avoid significant losses.
Don't let a poor real estate tax monitoring process put your portfolio—and your borrowers—at risk. By working with a professional real estate tax service provider, lenders can ensure that taxes are paid on time and accurately, reducing the risk of these potential problems.
Want to learn more about the risks of poor tax monitoring and what sets Info-Pro apart in providing real estate tax services? Check out this ebook, Before Working with Info-Pro: Delinquencies and Lost Properties.
