Tracking Your Rentals – The Importance of Monitoring Your Escrow Accounts

Unless you own all of your rental properties free and clear, chances are that you have some escrow accounts with your lenders. These escrow accounts are fed every month from your mortgage payments and this money is supposed to be used by the bank to pay your annual property taxes and insurance premiums. While it is tempting to let this system run on autopilot, you really shouldn’t rely on your bank to get this right. Banks do make mistakes, some more frequently than others. While I personally may just have bad luck, I have had more than my fair share of challenges with different banks messing up my insurance payments over the years.

Of all the bizarre things that I have seen happen to my escrow accounts over the years, recently one of my lenders paid someone else’s premium from my escrow account. Needless to say, after receiving telephone confirmation that this issue has been resolved, I am monitoring my escrow account very closely to make sure that the premium is returned to my account.

Most of the time though, when your bank messes up, it is just an annoyance that requires some extra time on the phone.

Here are some of the things that can go wrong when your bank doesn’t pay your insurance premiums:

Your bank issues a lender-placed policy because they get a cancellation letter from your insurance company.

I know, this makes no sense since they were the ones who were supposed to pay it to begin with… but when this happens, it is especially important that you not only get your bank to pay the correct premium to your insurance company (if you haven’t already paid it yourself for fear of losing your policy), but that you also get them to cancel the lender placed policy AND refund the premium amount to your escrow account.

You may not get a good answer, but trying to figure out the source of the snafu to prevent its future occurrence can be useful too.

Your policy lapses and the insurer will not offer to renew.

Most of the time, your insurance company will reinstate your policy once they receive payment. There is, I believe, a short grace period. However, if the insurer is not writing any new policies for rentals, they may not renew your policy.

If you have a newer house, this probably isn’t so big of a deal. However, if your house is older, your new insurance company may require inspections of the plumbing and electrical systems, etc. before they write a policy on your property. This, is obviously very undesirable because it takes your time and money unnecessarily.

Furthermore, whatever errors go on inside your bank that cause them to accidentally not pay a policy or mistakenly place a lender policy when you already have insurance (this too has happened to me), they are not always that great at fixing the damage. Be prepared to follow-up to make sure that everything has been corrected: your policies paid and your escrow account credited properly. Unfortunately, you may have to call back more times then you’d like to resolve some issues. That’s why it’s best to avoid this problem to begin with.

My advice after years of hassles: be diligent about checking up with your bank to make sure that they’ve paid the premiums due on any bills you receive… even though the bills say they’ve been billed to the mortgagee and you have a healthy escrow account parked with your lender. Specifically, I recommend:

• Whenever you receive correspondence from your bank or insurer, open it immediately… time is frequently of the essence in these situations.
• Utilize your bank’s online features to monitor escrow activity and to see if the premium has been paid.
• If you don’t have online access, call in and listen to their automated reports of your escrow activity.
• If your premium is due in less than a week, and the bank has not paid the premium, CALL them and request that it be done. Then follow up.
• When you go online, or listen on the phone, make sure that the policy number the bank has matches the one on your premium bill and policy.
• Don’t file away any premium notices until you can write on them that they were paid out of escrow on this date and for how much.
• Regularly check your escrow balance for any unscheduled activity… banks do make errors!
• Lastly, if you are good at managing and budgeting money throughout the year, ask your bank if you can close your escrow account and pay your own bills (and then you, not the bank can earn interest on this money). However, many banks require that these bills be paid out of escrow.

So, while it is tempting to let this system run on autopilot, trust me when I say that it’s much easier catching a potential problem before it becomes a major hassle. Follow up on your bank and make sure that your bills are getting paid.

Until my next post,

James

P.S. Download the Secret Property Management Tips and Tricks real estate course while it is still free.

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