Escrow Accounts for Owner-Financed Properties: Who Holds the Insurance and Taxes?

August 27, 2026 · Creative real estate finance, explained with real deals

Generated (Gemini), via Wikimedia Commons

In most owner-financed deals, nobody escrows taxes and insurance the way a bank would. The buyer pays both directly, and the seller protects their position by requiring proof of payment and getting named on the insurance policy. Only about 10 to 20 percent of owner-financed deals actually use a third-party servicer to collect, hold, and pay out escrow funds like a conventional lender does.

That's a rough range, not a hard statistic. Nobody tracks this nationally. But it matches what servicing companies and note investors describe: escrow accounts are the exception in creative finance, not the rule.

The Exception Most People Miss: The Seller's Own Mortgage

If the seller sold outright and truly owns the property free and clear, a missed tax payment or a lapsed insurance policy is bad, but it's a slow-moving problem. The county sends notices before a tax lien turns into a sale. Insurance can be reinstated or force-placed.

The real risk shows up in wraparound deals, where the seller still owes a mortgage on the property and is financing the buyer on top of it. Now there are two policies and two tax obligations layered on one property, and the seller's underlying lender has its own escrow requirements. If the buyer stops paying property taxes, the county doesn't care who has what agreement with whom. If insurance lapses, the seller's own mortgage is at risk, not just the buyer's equity. A seller carrying a wrap who assumes the buyer is handling taxes and insurance, without checking, can end up blindsided by a call from their own bank's escrow department.

This is also where due-on-sale risk gets tangled up with escrow. Some sellers try to keep the underlying loan's escrow account active and roll the buyer's payment through it, which can work, but it means the buyer's payment history becomes visible to the original lender. Others let the buyer set up a new policy naming the seller as additional insured or loss payee, and keep the underlying mortgage's escrow untouched. Both approaches exist. Neither is automatically wrong, but they lead to different failure points if the buyer stops paying.

What To Actually Do

Whether or not you use a formal escrow account, a few things protect both sides:

• Require the buyer to name the seller as additional insured, or better, as mortgagee/loss payee on the homeowner's policy. This means the insurer notifies the seller directly if the policy lapses, instead of the seller finding out after a fire or a storm.
• Ask for proof of tax payment once a year, right after the county due date. A copy of the receipt or a screenshot from the county treasurer's site takes the buyer two minutes.
• Put a default clause in the note that treats a lapsed insurance policy or unpaid property taxes the same as a missed payment. Without this, the seller has no fast contractual remedy if the buyer lets coverage lapse but keeps making monthly payments.
• If the buyer has thin credit or this is their first time owning a home, consider paying a licensed loan servicing company to collect, hold, and disburse the tax and insurance portion. This typically costs somewhere in the range of $15 to $40 a month, depending on the servicer and loan size, and it removes the guesswork for everyone.
• If there's an underlying mortgage involved, get clear on whether that lender's escrow account stays active and how the buyer's payment flows through it. This is not a detail to leave loose.

None of this requires a full-blown escrow account to be safe. It requires a paper trail and a consequence if the trail goes cold. We've written about this pattern before at Paper & Property: creative deals fail less often from bad intentions and more often from nobody checking the boring stuff for two years straight.

Related: If you're carrying a wraparound mortgage, read up on due-on-sale clauses and how they interact with insurance and tax payments before you close.