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Is a new homeowner responsible for previous utility bills?

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The finer details of closing on a home can get lost in all the paperwork a new owner has to look through and sign. One aspect of homeownership that gets lost in that shuffle is utility accounts.

Specifically, who is responsible for what utility charges and how can a home buyer avoid getting stuck with bills from a previous account.

After all, if you are buying during the dead of winter or the height of summer heat, your move into your dream house can quickly become a nightmare without water, heating, or air conditioning.

For the average real estate transaction, checking for any utility liens or unpaid bills on a property is simple. The title company performs a title search to show any liens filed against a property in the public record. If they find any, the seller will have to satisfy them before the closing. They will also request a final meter reading prior to closing to see if there are any outstanding balances that have not yet become liens. At closing, the seller gives the closer their new address to send the final water bill. Once they receive the final bill, they usually pay. On the rare occasion that the seller doesn’t pay the small amount left, it’s added to the new owner’s bill.

Download our Fact Sheet on Common Misconceptions about Municipal Lien Searches

Buyer Beware: A missed utility reading can cost $1,000s

If you are intending to buy a foreclosure, however, things can get complicated and expensive. You can bet that if someone defaulted on their home loan, there are also other debts associated with the property, including things like unpaid property taxes, utility bills, and maybe even a code violation or two.

A woman in Fairport, N.Y. was hit with a $4,000 utility bill after she closed on a bank owned property.There was a meter reading just before the house was foreclosed on, but the bank refused to allow the Monroe County Water Authority to enter the property for additional readings for nearly a year. Finally, the municipality turned off the water, but within that time nearly 1.3 million gallons of water had been used! The loan company and contractor have no idea where all that water went. There were no signs of water damage to the home. Unfortunately, there was no final reading done before the closing, and the new owner is stuck with the bill.

Often times, bank owned properties will not have the water and electricity on. This makes it nearly impossible to do a proper home inspection, which is highly recommended for all buyers to conduct. If a seller is resistant to turning on the utilities so you can perform an inspection, it’s a red flag that there may be some major hidden issues. Many banks will perform an inspection upon acquiring the property, so they may share this document with you. However, it may not be up-to-date and reflect current unpaid balances as was the case for the woman in Fairport.

The only way to make sure you aren’t forced to pay a previous owner’s utility bills is to always get a final reading before closing on all utility accounts.

Who is responsible for unpaid utilities found after closing?
The buyer or the seller?

Who is repsonsible for unpaid utilities at closing - Seller or Buyer (1)

Most utility accounts and other special assessments for hookups and improvements stay with the property:

 

Electricity & Trash

Typically, these accounts stay with the individual. If the company is a subsidiary of the local government, it may be able to lien on the property. It depends on local and state laws.

 

Water & Sewer

Most water and sewer providers are public entities that do lien on a property for unpaid bills. If the utility company that provides water and sewer are a private entity, the unpaid bills may go to collections in the name of the previous owner and not the property.

 

Gas

A lot of people, even real estate professionals, often advise that the gas bills stay with the individual account holder just like electricity, but there are some strange caveats to that in certain areas. For instance, the City of Clearwater in Florida provides gas services to residents not only within their jurisdictions but also in other municipalities. Some of these cities serviced by the City of Clearwater extend far out of its governing county into neighboring Pasco County. The city has the option to lien on any of these properties if gas bills aren’t paid.

 

Other Special Assessments

Other aspects to consider before home ownership are special assessments levied by public entities. The property may currently be on well and septic, but if the city has assessed it for water and sewer hookups, the new owner will have to pay for the remaining amount left for the extension of services. Other municipal services homeowners are often assessed for include road paving, street lights, and storm water. Sometimes this information will be itemized on your property tax bill, but some counties and municipalities may hold the records of outstanding assessment amounts on a property with another department. Buyers need to make sure all proper requests for documents are sent to the correct municipal departments.

It’s important to talk to an experienced real estate professional in your area so you understand the details that will affect YOUR closing. When you work with an agent or attorney, they will be sure that all the necessary documents and reports are obtained. Retaining an attorney is a good idea as they are able to give legal counsel that a real estate or title agent can't, even though they do provide valuable guidance.

Unpaid utilities can become liens against the property!

A utility company can place a lien on the home with outstanding bills and potentially foreclose on the home to recoup the balance in the same way a bank may foreclose on a home when the owner doesn’t pay their mortgage. Other times, the municipality may sell the debt to an individual investor in a tax lien sale or private company that will tack on high interest and fees, which makes it impossible for most homeowners to pay, and they end up losing their house.

A woman in Baltimore lost her home to an investor after failing to pay a $362.28 water bill. City records show that one in five of these liens on properties is for unpaid taxes or other municipal bills amounting to $1,000 or less!

In some states, these municipal utility liens can be granted “superpriority” status. This means that they have a higher priority to take legal action and get reimbursed before any other lien, including the lien of the first mortgage holder.

How does a buyer make sure there are no hidden utility bills before closing?

When you get a full municipal lien search on your property, details like the current water and sewer and any associated special assessments by the governing jurisdiction will be revealed to you before closing. Be sure to ask your title agent, real estate agent, or real estate attorney about these hidden municipal issues during the inspection period or, better yet, before you make an offer. The report should reflect recent information on the property, so be sure that there was a meter reading for that month done and the current charges are reflected.

The underwriter for your owner’s title insurance policy will make sure that one of their agents orders a lien search of municipal records to show that all water, sewer, gas and other municipal utility bills are paid as well as to determine if there are any outstanding special assessments in order to remove requirements/exceptions from the title commitment. The municipal lien search is one of the items in the closing costs. Take a look at your contract to make sure it is listed and to see if the you, the buyer, or the seller will be responsible for the cost.

This is one of many the reasons why getting an owner’s title insurance policy is good for your investment! There will be additional real estate due diligence done on your behalf by knowledgeable professionals. If any issues arise after the closing like a utility lien from the municipality, your title insurance policy will help resolve these issues. Otherwise, without the utility and title search, you will be forced to foot the bill.

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About Author

Amanda Farrell
Amanda Farrell

Amanda Farrell is a digital media strategist at PropLogix. She enjoys being a part of a team that gives peace of mind for consumers while making one of the biggest purchases of their lives. She lives in Sarasota with her bunny, Buster, and enjoys painting, playing guitar and mandolin, and yoga.

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