Risks to Investing in Tax Liens

V. Risks to Investing in Tax Liens

1. Areas of Concern when purchasing tax certificates
   • Purchasing tax certificates on properties where there are numerousother outstanding tax certificates that have not been satisfied
   • The risk involved when considering certificate purchases for properties with previous outstanding certificates is that, whenever the property goes to tax auction, all of the certificate holders that held more recent certificates to your purchase of tax certificate will need to be satisfied before your certificate is satisfied.
   • Even if you are the only certificate holder or the first priority position, if no investors bid at the tax auction, you will become the deeded owner In exchange for your investment as the tax certificate holder.
   • However, this is not always a good thing, many of these properties may have been sitting without anyone managing the property
   • Your risks is that the property condition has deteriorated during the redemption period and you now a property that needs significant repairs or improvements, along with being responsible for the upcoming tax responsibilities

Tips

1. Only purchase certificates on properties with a minimal amount of outstanding tax certificates
2. Always compare the amount of outstanding tax liability against the base value of the property
3. Only purchase certificates for properties that you would be willing and able to manage, improve and/or develop in order to secure the return of your investment.
4. While all states have different rules and procedures for tax lien certificates and tax deed purchases, with enough research and due diligence an investor can find numerous opportunities for significant interest returns on daily secure investments.

1. Risk of Investing in Tax Deeds
   • When a property is foreclosed due to delinquent taxes – it creates a significant blemish on the property’s title – one that most title insurance companies will never insure over. As a result, it can be extremely difficult to sell a property that you purchased out of tax foreclosure because if your buyer can’t get title insurance, they can’t get a mortgage, which means they can’t buy your property!
   • No home inspection. Usually potential buyers will not be able to inspect a home prior to the public auction. The home could have a number of deficiencies that could be expensive or not practical to remedy
   • No marketable title. Generally, properties sold for nonpayment of taxes may not come with marketable title. To obtain one, you may need to file a quiet title suit in order to clear the title.
   • Redemption. The property owner has up until the time a successful bidder makes payment and a tax deed is issued to redeem the property by paying all back taxes.
   • Tax Lien & Tax Deed Investing on Property With Existing Liens
     • What if the property you are bidding on has a mortgage or other existing lien? In tax foreclosures, whether in lien states or deed states, tax liens are considered senior liens. In effect, mortgages and other liens will be wiped out upon sale and investors will acquire title free and clear of encumbrances.
     • The rationale behind this is that the law expects lenders or other lien holders to step in and pay the delinquent property tax bill if they wish to protect their interest in the property. If they fail to do that, then the law presumes they are waiving their claim.
     • However, local government and nuisance liens will not be wiped out upon the sale of a tax deed. While you as the new purchaser will have priority over any outstanding mortgages and most liens, any government or nuisance liens will not go away and you will be responsible for paying them. This is a major risk and why it is so vital that you search not only the recorded liens in the public record but also government and nuisance liens to ensure that you are doing a proper valuation prior to making any bids to purchase. This adjustment should be included in your overall property valuation analysis.
     • A tax deed sale extinguishes most liens. For the most part, only liens of record that run with the land, or those held by a municipality or county survive a tax deed sale. A recurrent issue has been whether a tax deed sale extinguishes homeowners or condominium associations’ liens or claims. The prevailing view is that it does and that these claims do not survive a tax deed sale. Most case law currently holds that any liens for past assessments do not survive and that the associations cannot hold purchasers at tax deed sales responsible to any outstanding dues or assessments. See A to Z Props. v. Fairway Palms II Condo. Assoc., 137 So. 3d 453, (Fla. 4th DCA 2014) (An owner of property acquired by tax deed is not liable to an association for unpaid assessments that accrued prior to the issuance of the tax deed.)
2. Property taxes are not the first position to all liens. They are subordinate to Internal Revenue Service liens, delinquent child support liens and certain other civil liens such as mechanics or court judgments. Although these are not your debts, they remain with the property and you inherit them. The lien holder’s hope is that the property sells and the proceeds pay the otherwise uncollectible debt. The problem is the proceeds of this sale go to the property tax collector, leaving nothing to be split among other stakeholders. According to the title, you become the responsible party by assuming the tax deed purchase.
3. Remedies
   • File a quiet title lawsuit if you are unable to clear the title with the outstanding liens. Quiet title exists to create a free and clear title on the property. You need to prepare the court documents and present the case that you are not responsible for these debts. While you can win, the problem is that tax deed sales are buyer-beware auctions. It is your responsibility to investigate the title and know what you might be liable for before you buy the property. If there was a clerical error that led to misinformation, the judge might rule in your favor and clear the title or have you and the lien holder negotiate a settlement. In the end, you might not clear the title until the lien is paid for.
   • It is possible to solve this problem in a couple of different ways: a. You can pursue a quiet title action, which is a 3 – 9 month legal lawsuit which can clear this title issue through the courts. Typically the cost will be about $2,500+ (all in). b. You can use a tax deed title clearing service. Assuming the county followed the correct procedures (and the vast majority of them do), this option typically takes less than two months to complete and will cost somewhere in the range of $1,950 – $2,150.
   • Keep in mind that with either of these solutions, you won’t be able to administrate the “fix” until AFTER you’ve purchased the property (which requires a leap of faith), and you’ll still have to deal with any government liens on your own – grass mowing fees, demolition judgments or EPA environmental liens (just to name a few). Regardless of which option you pursue, it’s a good idea to get a title report on your property to see the full picture of what’s going on.
4. Warning
   • If you are subordinate to another claim, you may be forced to surrender the home, but the party that receives the title is required to reimburse you for your purchase of the tax deed.