Lending, Foreclosure: Unpaid Taxes

Question 

We have a question about unpaid ad valorem taxes on foreclosed property. We foreclosed and ended up buying the property at the foreclosure, but the borrower did not pay the ad valorem taxes and we did not include that in our bid.  Can we add the unpaid ad valorem taxes to the note - or in this case the deficiency?

Answer 

The bank is lucky that Texas is a non-judicial foreclosure state, where the note and deed of trust survive the foreclosure. In a judicial foreclosure state, the note and mortgage would be merged in the foreclosure order by the court, and if the final order did not include payment of the ad valorem taxes, then the bank would have to deal with that issue when it tried to sell the property and would end up paying the taxes and would not have any recourse against the borrower.

Most deeds of trust have a covenant in them that if the borrower does not pay ad valorem taxes, the lender has the right to do so and add it to the note.  Since the property has already been foreclosed upon and the bank has bought the property, the bank is not going to get clear title in order to sell the property unless the ad valorem taxes are paid. So the bank must pay the taxes, but then they can add that on to the deficiency.

Note: Take this as an opportunity to review your foreclosure sale bidding strategy.  The amount of taxes and repairs are not necessarily added on to the amount of the bid at foreclosure, but rather the taxes and repairs become part of the debt, which is necessary in formulating a foreclosure bidding strategy. Also, the bank needs to do a title run before the foreclosure!