Your buyer has paid you every month for two years. Then you look up the parcel and see the county says taxes have not been paid since they bought it. The note looks fine. It is not fine.
Of the four problems in this series, this is the one that can cost you the land while the payments are still coming in.
Why do unpaid property taxes matter to the note holder?
Property tax liens come ahead of your mortgage or deed of trust in almost every state, even though you recorded first.
Normally the first lien recorded gets paid first. Property taxes are the big exception. If taxes go unpaid long enough, the county can sell the land or a lien on it, and depending on the state, that sale can end your lien. Your buyer could keep paying you monthly right up until a tax deed buyer owns the land free of your note.
Takeaway: a performing note with delinquent taxes is not a performing note.
How does a tax sale work?
Counties sell either a tax lien certificate or the land itself through a tax deed, and the rules and timelines vary by state.
| Tax lien sale | Tax deed sale | |
|---|---|---|
| What is sold | A certificate for the unpaid taxes | The land itself |
| What the buyer earns | Interest or a penalty when the taxes are paid | The land |
| Redemption | The owner, and often lienholders, can pay off the certificate for a set period | Some states give a period to buy the land back, some do not |
| Risk to your lien | If no one redeems, the certificate holder can apply for a deed | Your lien can be wiped out at or after the sale |
Many states require notice to recorded lienholders before a tax deed issues, but not all, and notices go to the address in the county records. If you moved or sold your business, you may never see it. Do not count on the notice.
How do I find out my buyer's taxes are unpaid?
Check the county tax website at least once a year, after the due date, using the parcel number.
It takes a few minutes. Search the parcel, look at the current and prior years, and save a screenshot. If you use a servicer, ask whether they track taxes. Some do, many do not unless there is an escrow. We check the county tax record on the land behind the notes we hold, because it is the cheapest insurance there is.
Holding a land note with a problem?
We buy performing and non performing land notes. Send the note and payment history for a bid.
Get a Free QuoteSell Your NoteWhat can I do if my buyer's taxes are delinquent?
Ask the buyer to pay by a deadline, add escrow, or pay the taxes yourself and add them to the balance. Never let a redemption period run out.
- Contact the buyer in writing. Most mortgages and deeds of trust make unpaid taxes a default. Give a short, firm deadline and ask for proof of payment.
- Add escrow. If your documents allow it, tell the servicer to add a monthly tax escrow. The payment goes up by the tax amount plus the servicer's escrow fee, and the servicer pays the county from then on.
- Pay it yourself and add it to the debt. Most security instruments let the lender pay taxes to protect the property and add that amount to what the borrower owes. Keep the receipt.
- Treat it as a default if the buyer will not cure. Send the required notice, then follow the normal path in what happens when a land buyer stops paying.
- Watch the calendar. If a tax sale is scheduled, or a redemption period is running, pay before the deadline. Whatever it costs, it is less than losing the land.
Can I add the taxes I pay to the loan balance?
Usually yes, if your mortgage or deed of trust lets you pay taxes to protect the property and add the cost to the debt.
Most standard forms have this clause, and many let the advance earn interest at the note rate. Read yours before you pay, and tell the buyer and the servicer in writing what was paid and that it was added. If your documents are silent, talk to an attorney before you count on getting it back from the buyer.
Should I require a tax escrow from day one?
It is a judgment call. At a minimum, write the right to add escrow into your documents.
An escrow from day one means you never chase taxes, but the buyer pays an escrow fee every month and the payment is higher, which can make the land harder to sell on terms. Many sellers skip escrow at closing but keep the right to add it the first time a tax bill goes unpaid. Either way, that right has to be in the documents before closing. Our seller financed land deal terms page covers the clauses to include.
Do unpaid taxes change what my note is worth?
Yes. A note buyer checks the taxes before buying, and delinquent taxes either get paid before closing or come off the price.
Unpaid taxes also tell a buyer something about the borrower. If taxes are behind but payments are current, fix the taxes first, then sell. See what is my land note worth.
This post is general information, not legal or tax advice. State law controls, and your own note and mortgage or deed of trust control. Talk to an attorney in the property's state before you act.
Frequently Asked Questions
Do unpaid property taxes come ahead of my mortgage or deed of trust?
In almost every state, yes. Property tax liens generally have priority over a mortgage or deed of trust, even one recorded first.
Can a tax sale wipe out my land note's lien?
It can. Depending on the state, a tax deed or a tax lien that is not redeemed can end your lien on the land, even if the buyer is still paying you.
Can I pay my buyer's property taxes and add them to the loan?
Usually, if your mortgage or deed of trust lets you pay taxes to protect the property and add the cost to the debt. Most standard forms do. Check yours.
How often should I check the taxes on land I seller financed?
At least once a year, after the tax due date. It takes a few minutes on the county tax website with the parcel number.