Developer · Garland, TX · Member since 2008 · 8k+ posts · 4k+ votes
What are the caveats and how do you structure escrow accounts for property tax and insurance?
I'm selling a home that I own free and clear. I'm creating a new 30 year note, contract for deed. My buyer is finding their own property insurance, and my LLC will be named as additionally insured. I'll pay the tax annually. How should I set this up?
Most folks that seller finance transactions, do not escrow for taxes and insurance. As long as you are listed as loss payee and additional insured on the insurance and record your contract listing the new buyer as the owner with the county, both the insurance company and the county will keep you posted as to what is going on. Your note should also require that they show you proof that both taxes and insurance are paid as due. On top of the legal reasons mentioned above escrow accounts are also just extra work to maintain.
The one time I bought a seller financed house I paid the taxes and insurance myself. Most states have regulations on escrow accounts. They limit the low balance of the account. In CA, it was zero. Here in CO, its something like two months payment or some such. Interest may be regulated. You may have to provide an annual escrow analysis.
Most folks that seller finance transactions, do not escrow for taxes and insurance. As long as you are listed as loss payee and additional insured on the insurance and record your contract listing the new buyer as the owner with the county, both the insurance company and the county will keep you posted as to what is going on. Your note should also require that they show you proof that both taxes and insurance are paid as due. On top of the legal reasons mentioned above escrow accounts are also just extra work to maintain.
Only catch here is that mandating that the buyer provide proof that taxes and insurance are paid as due doesn't prevent them from not resulting in the tax still potentially becoming a lien against the property that would take priorty before you mortgage (that I assume you'll be filing for the note liening the note to the property). Your recourse for noncompliance to this stipulation would be pay and file suit or foreclose resulting in much more expense than what you could or would spend for either an escrow service or setting on up yourself to manage. You'll need to check with your specific state requirements regarding escrow accounts. With this being a private note, perhaps a traditional small business checking account would be possible also rather than a specific "escrow" account. Ultimately if you are providing the financing on a single asset and the agreement clearly states that you are accepting responsibility to pay the insurance and taxes with that amount spread through the monthly installments. This being private financing does make things a bit easier to work with, thus, a small business checking or something specific to manage these funds collected through monthly installments should suffice without outside intervention.
I use a note servicing company and I make it VERY EASY for my payors.
Their account is automatically deducted for the PITI + service fee on the 3rd of every month. So it's basically like having a mortgage company with an impound account.
I have done a few, and it's well worth it for buyer and seller. It usually doesn't cost more than 15 dollars a month and you should have the buyer pay for it.