Advancing Property Taxes for NPNs

[Andy Mirza]

What are investors attitudes and processes when deciding on advancing property taxes?

Big banks advance property taxes on every asset (unless it falls through the cracks for some reason). Much simpler that way since they eliminate the risk of tax sale or penalties and late fees.

As a smaller investor that can pay more attention to individual assets, I consider more aspects than just the risk of the tax sale. Most tax sale situations require delinquent taxes for 2-5 years before someone can foreclose. 

Since most of our NPNs liquidate in less time than that, I've let taxes go delinquent knowing that I'd foreclose sooner than a tax sale would occur.

The main advantage is that it's essentially a loan I don't have to obtain that frees up my capital. This is especially true when the property sells at foreclosure sale. The delinquent taxes become the winning 3rd party bidder's problem.

If it becomes REO, I consider the penalties the interest I would have paid if I got a loan to pay the taxes. Sometimes this can be significant and it makes more sense to advance than to pay 20% plus in penalties.

The main risk of not advancing property taxes on a NPN is forgetting to redeem or pay taxes that become too delinquent and having the property go to tax sale.

The best way to mitigate this risk is to schedule a task to look up the tax status once a year on each NPN.

[Andy Mirza]

@Tim S. I'm dealing with this issue as we speak. Unfortunately, our previous attorney didn't have any good advice and we were stuck in the position of advancing property taxes and paying for FPI. We then filed a PPFN for whatever we advanced. We would get paid back eventually but there was no pressure on the debtor since this amount is just added to whatever the trustee paid us for arrears.

Not only did we have to come up with capital to pay the advances, we had a less valuable loan because note buyers would ding us for this.

We switched attorneys. The new one suggested that we issue a Notice of Default to the Debtor. (Completely different than the NOD when you start a foreclosure.) In most BK 13 plans, the debtor agrees to pay for insurance and property taxes. If they do not do so, they're in default on their plan. We issued the NOD in October, 2020.

The "BK" NOD gives the debtor notice directly of the default and what he or she needs to do to cure the default. In our case, we indicated that the debtor owed us several thousand dollars for the back taxes and FPI. They weren't responsive after 14 days, so we filed a MFR.

The MFR was a tool to get the debtor to do something about geting caught up. Before the hearing the debtor's counsel finally contacted us about an Adequate Protection Order. For our part, we required that the debtor get her own insurance, establish an escrow account with our servicer and gave her 12 months to pay the advances. Debtor's counsel agreed so we pushed back the MFR to this month to let the debtor work on this.

The debtor provided proof of insurance so we got that knocked out. (The proof was from August, 2020; thanks for promptly letting us know!)

We know the debtor has contacted our servicer but she has not set an escrow account up yet. 

I expect that debtor's counsel will ask for an extension. We'll say no and go in front of the judge. I'm hoping that the judge will sympathize with us since we've been proactive in solving the problem and the debtor is dragging her feet. Who knows what the judge will rule but this is much more progress than we've had than the previous 2 years.