Real Estate: June 2006 Archives

One topic I haven't covered yet here is homesteading. This has nothing to do with the Homestead Act of 1862 that encouraged settling the western United States.



A declaration of Homestead basically protects your equity. In many cases, you may not even have to file a declaration to receive the benefits, but whether this is so is complex. If you file, you remove the ambiguity.



A homestead declaration may only be filed upon a primary residence, and only if you own it. Rental property, second homes, and property held for business purposes is not eligible. Law between the states varies, as does the exemption amount



How it works is pretty consistent. First off, it protects no equity arising from dates prior to declaration. If you are in one of those situations where you have to explicitly declare homestead instead of it happening de facto, you have to actually declare it before the incident happens. You get in a traffic accident that's your fault, and go out and declare homestead the next day, it won't help you protect your equity against that particular lawsuit.



Note that it protects your equity, not your asset value. If the home is worth $500,000 (as is often the case in San Diego) but you owe $400,000, you have $100,000 of equity. How much it protects is dependent upon your state law and exact situation. Default protection in California is $50,000, but it can be up to $150,000 if you or your spouse are 55 or older, disabled, or have income less than $15,000 per year.



It can also prevent sale of the property in some, although not all situations. In California, the judgment creditor usually has to get a court order, after they have won the judgment, in order to sell the property. I'm not a lawyer, so I'm not going to presume to advise anyone on what those circumstances are.



Now, there is some question in some minds as to whether a homestead declaration inhibits enforcements of Deed of Trust, so many lenders will require an abandonment of homestead prior to funding their loan. You can always re-declare as soon as the loan funds, anyway. I know that some folks have fought this issue in court, costing the lenders money to pay their lawyers, so it's hard to blame the lenders for requiring it. You can refuse to do this, but they can also refuse to give you the loan. It's their money, and they are the arbiters of how they lend it out.



Caveat Emptor.

UPDATED here

my prorated property taxes came were paid at closing but now I'm getting a delinquent tax bill

You mean they were supposed to be paid at closing.

There are two major possibilities:

1) They were not, in fact, paid

2) They were paid, but were miscredited, or they were properly credited, but your county goofed anyway.

Look at your HUD 1 form. Lines 106 and 107 are for buyers reimbursing sellers for taxes. Lines 210 and 211 are for tax liabilities incurred but not yet paid. Line 1004 is taxes and assessment reserves, and I've also seen extra lines in section 900 used. If it is listed as paid, contact your escrow company to determine if it was paid in truth. Sometimes the escrow company messes up. If the escrow company tells you that taxes were paid, double check with the county. Sometimes the payment was misapplied to the wrong parcel, sometimes it was correctly credited, but due to the fact that government bureaucrats get paid the same whether the job is correctly done or not, they just aren't up to date. Sometimes time will repair the problem, but it's not something to count on. Get a statement from the escrow officer that it was paid, receipt number this or in conjunction with escrow number so and so, thus and such date, in the amount of $X. In some cases, you may have to get a copy of the canceled check to prove that it was paid to the county's satisfaction.

Do not allow this problem to sit. It will only get worse, and you could find yourself facing tax liens, tax foreclosure, or a situation where the lender then pays the taxes to protect their interest, and follows up by presenting a bill to you. They'll charge you interest for any amount they pay in defense of your interests and theirs, plus a fee for the trouble they were put to. I've never had it happen to me or a client, so I don't know how high the interest is, but it's not cheap.

Property tax liens take first priority over basically everything. It takes a while - potentially years in California - before they can condemn the property for unpaid property taxes, but once they do start the process, all of the protections you have against lender foreclosure are much weaker against property tax foreclosures. Lenders are therefore understandably nervous about delinquent property taxes, and they typically want to take action pretty quickly. Don't let it get to that stage. If you have to, you're better off paying them a second time and applying for a refund than letting it get to the point where the lender feels obliged to step in to protect their interests.

Caveat Emptor

UPDATED here