If you are a buyer of REO property here in Sacramento, you should know about an interesting "quirk" in our utility and tax billings that could cost a buyer time, money and aggravation.

When homeowners are losing their property to foreclosure many of them stop paying their utility bills.  The water, sewer & garbage portion of these utilities are billed by the City or County of Sacramento and they have a unique process to insure payment for delinquencies.  This method has caused many REO buyers to deal with utility liens/billings after close of escrow.

Here is a summary version of the process.   If there are delinquent amounts on the property by mid summer the utility companies"roll" the delinquent amounts over to the property taxes.     The tax assessor will add this amount to the next years tax bill and it will appear on the annual property tax bill as a utility lien.   If the lien was for $600.00 then the tax bill is increased the same amount.  For example if the property tax bill would normally be $2000, it would now show as $2600.   

Back at the utility department, the account is now considered in current status as the collection of the delinquency has been assured.  If you call the utility departments - they will tell you it is paid current.   The Escrow industry in our area is very familiar with this issue and they will ask "have you rolled any amounts over to the taxes".    They also make a written inquiry.

The challenge for the REO buyer is understanding the time gap between Mid summer and when the property tax bill is actually issued (October).  Additional to be on the alert for escrows that are being processed out of our area.  Those title/escrow companies could not possibly be well versed enough in the "quirks" of every county in California.   This is the danger zone for REO utility liens.

Knowledgeable agents are very familiar with this and we make sure to doublecheck with the our local water/sewer/garbage bills for liens.  Particularly, when we know the lien will appear on the taxes we notify the escrow officer to verify a credit will appear from the REO lender to the buyer for that inflated amount.

The reason this is critical is the language commonly found in addendums used by REO sellers::

Examples:

... Buyer acknowledges that the preliminary title report may not contain every item affecting title... Seller shall have no obligation to cure or remove any item... which the buyer disapproves.

... all pro rations ...including utilities...as reflected on the settlement statement are final... no adjustments or payments will be made by the seller after closing.  Tax pro-rations shall be based on the last ascertainable actual tax bill.

... Assessments now a lien shall be paid current by the seller, any payments not yet due are to be assumed by Buyer. 

At the end of the day, it is all about the discovery.  A couple of phone calls will usually identify the issue.  Since utility bills average $70-$100 per month, this could represent a substantial amount if left to the tax bill.