One of the most important financial decisions that we make in a lifetime is the purchase or refinance of a home or other real property. While most all of us understand the benefits of car, life or health Insurance, title insurance is something that is rarely given much thought prior to sitting down at the closing table with an escrow officer or attorney. A title insurance policy insures that there will not be any unpaid claims or interests tied to the newly purchased property. The American Land Title Association reports that more than 30 percent of all real estate transactions have a defect in title, and while there are many ways that the title to our property can be compromised, delinquent property taxes remain one of the most problematic and costly.
Imagine purchasing the home of your dreams, only to find out that the previous owner had failed to pay the taxes on that property for the last several years. Those taxes have inadvertently become your responsibility, as they are tied to the property. Your recourse as the new owner would be to contact the title company that issued the title policy and file a claim. In the vast majority of these cases, the insuring title company defers to the tax certificate which can provide full or partial indemnity in the case of unknown or unpaid property taxes, penalties and interest, or tax liens.
During the last 30 years, tax certificates have become an integral part of the escrow closing process as title companies have looked to third-party vendors that manage this potential liability. Through well-defined risk assessment, turning this task over to property tax experts makes all the sense in the world.
So, what is a tax certificate?
A tax certificate is a fully or partially indemnified document that reflects the current status of property taxes, penalties, interest, and any other affiliated costs due on a designated property legal description. It also provides up-to-date ownership and address information, assessed values, tax rates, exemption status, and, most importantly, any delinquencies. Additionally, a tax certificate identifies all collecting entities and their contact information allowing for quick and easy disbursement. A tax certificate does not constitute a report on the status of title, mineral interest’s taxes or leases, personal property taxes or other forms of non-ad valorem taxes.
Tax certificates provide another level of protection to the borrower, the title company/agent and ultimately the underwriter who is insuring the transaction. In the case of tax delinquencies or liens, a sound tax certificate provides a safety net for the buyer. Generally provided by companies that specialize in property tax research, the information is vetted by professionals who have a clear understanding of taxing authority requirements and property characteristics. Hidden delinquencies, rogue property splits, special districts and agricultural rollback liabilities all play a big part in the everyday world of tax service. For a title insurer with so much at stake, the smart and obvious play is to reduce liability by employing a tax service to assume the risk.
Gathering reliable information
What was originally a completely manual process has evolved greatly over the years. While there are still some aspects of tax research that require a hands-on approach, the vast majority of tax research is now automated. The most common method of data aggregation requires the periodic purchase of assessor/appraisal tax rolls. Depending on the tax service’s requirements and the designated tax cycle, these rolls might be purchased weekly, bi-weekly, monthly or quarterly. This method has shown to be for the most part, efficient and reliable. The most common complaint regarding the roll-purchasing method is that even when obtaining rolls on a weekly, basis there can be a time gap in the information which could result in delayed or inaccurate results.
Another method is “real-time” fulfillment. Through technological advancements, real-time research is emerging as the go-to solution in tax service fulfillment. This method provides up-to-date results with no time lag. The information is retrieved through automation at the time of order and reflects all current and delinquent taxes along with the most current appraisal account information. This provides the title company a true snapshot of the property status, effectively reducing the number of “updates” needed prior to closing by the escrow team. Real-time is especially effective during the current tax cycle, when tax bills are sent out by the assessor. It is during this frenetic time when tax payments are being received by the collector on an almost minute by minute basis. While a week old purchased roll cannot reflect the payment status, real time results can report this information up-to-the minute, once posted. The most common complaint regarding real-time fulfillment is the current limited availability in smaller, rural counties.
Tax certificates are in most cases ordered by the title company/agent at the beginning of the title examination process. Whether through escrow software automation or a stand-alone platform, the order is submitted directly to the contracted tax service. Depending upon the complexity of the research required on the subject property, the tax certificate can be returned within minutes or in some cases it could take several days to complete the examination. These cases are rare; tax certificate requests are almost always fulfilled prior to the completion of the title work.
In most states, tax certificates can be considered a pass-through cost on the closing disclosure. This passes on the fee to the seller if a purchase, and the borrower if refinance, and is inclusive in the total closing costs. Comparative to other closing preparatory items, a tax certificate is moderately priced considering the risk associated with property taxes
What happens if there’s an error on the tax certificate?
Chasing down property tax information can appear very simplistic, and in the vast majority of cases it is. However, it’s that other small percentage of orders that can morph into a serious issue before, during, or after the closing process. No matter how thorough or complete the research is errors still may occur. Depending upon the warranties represented in the agreement between the tax service and the title provider, the tax service can be liable for the missed taxes, penalties and interest, and any tax suit costs that may apply.
Title servicers understand these risks and rely on the tax service professionals to research, identify and report any threats to the transaction. Like many challenges that emerge during a title search, a property tax issue can effectively bring a transaction to its knees. Ultimately, the tax certificate provides a simple, common-sense solution for all parties involved in the transaction, and more importantly, peace of mind.