Real Estate Taxes At The Foreclosure Sale – And How It Affects Bidding
If this sounds like detail for your attorney to worry about at the foreclosure sale, it is, but it profoundly affects the upset price so is therefore a vital every day issue for mortgage servicers. As is typical in these alerts, a case decision illuminates the discussion.
Until the late 1990s, property at a foreclosure sale in New York could be sold “subject to” real estate taxes (except New York City). This meant that whatever the outstanding taxes may have been – and these can be substantial in New York State – the foreclosing party didn’t have to worry about them. It was the bidder’s concern. But the statute [RPAPL §1354(2)] was changed requiring the referee (who conducts the sale) to pay out of foreclosure sale proceeds all real estate taxes which are a lien on the date of the sale.
If the lender or servicer is the successful bidder (and for a sum not in excess of the full amount due on the mortgage) then there is a credit bid. The mortgage holder never actually writes a check. Consequently, there are no proceeds and so the referee has no money with which to pay real estate taxes. Who pays taxes then becomes a non-issue, except that the lender or servicer will eventually be obliged to pay the taxes or lose the title it purchased.
But, when a third party is the bidder, all this becomes quite meaningful. To better understand this as a practical matter, examine the numbers. To make the example with a very low residential case amount, suppose the sum due on the mortgage is $300,000 and outstanding real estate taxes are $30,000. If the servicer has not determined the amount of those taxes, or having learned what they are does not take them into account, when someone bids $300,000 (presumably to make the foreclosing party whole), the referee will nevertheless be bound to pay $30,000 in taxes. That leaves a net for the lender or servicer of $270,000 – obviously a loss. Therefore, the lender or servicer must always consider outstanding real estate taxes in relation to the upset price. Then, if the bidder will go to the aggregate of the sum due on the mortgage plus taxes, the lender or servicer can be made whole.
Mindful that this can become somewhat thorny, on some occasions terms of sale will be prepared endeavoring to shift the burden of paying these real estate taxes to the bidder – certainly a good idea in theory. Case law [Bank of New York v. Love, 3 A.D.3d 303, 772 N.Y.S.2d 645 (1st Dept. 2004)] however, confirms that this cannot be done unilaterally. Unless the judgment of foreclosure and sale itself provides to the contrary of the statute and requires the bidder to pay the taxes, the terms of sale alone cannot vary what the judgment says. In short, neither the lender nor its counsel can unilaterally change the effect of the statute or the judgment to create a provision it finds comfortable.
So in the end, real estate taxes are a factor to be addressed and considered in the upset price for every foreclosure sale in New York State.
Mr. Bergman, author of the four-volume treatise, Bergman on New York Mortgage Foreclosures, LexisNexis Matthew Bender (rev. 2024), is a partner with Berkman, Henoch, Peterson & Peddy, P.C. in Garden City, New York. He is also a member of the The American College of Real Estate Lawyers, a fellow of The American College of Mortgage Attorneys, an adviser to the New York Times on foreclosure issues and writes a regular servicing column for the New York Law Journal. He is AV rated by Martindale-Hubbell, his biography appears in Who’s Who In American Law and he has been for years listed in Best Lawyers In America and New York Super Lawyers.