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Spotting Bargains in Tax Foreclosures Help Investor Clients Take Advantage of Discount Properties by Advising Them on Issues That Can Complicate the Process

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Spotting Bargains in Tax Foreclosures Help Investor Clients Take Advantage of Discount Properties by Advising Them on Issues That Can Complicate the Process By David H. Martyn Vice president and associate senior underwriter Stewart Title Guaranty Co. Spotting Bargains in Tax Foreclosures Help investor clients take advantage of discount properties by advising them on issues that can complicate the process avvy investors are always on the protect their interests. lookout for bargains, and tax-lien The statutory process Sproperties that have been foreclosed for the foreclosure of tax for nonpayment of delinquent property liens varies greatly from taxes offer serious discounts. The unique one state to another. issues related to the title of these fore - Tax-lien regulations in closed properties, however, mean that due some states are so in- diligence, planning and good communica- adequate that the title tion with the title insurer and lender are of becomes unmarketable the utmost importance. for years. For example, it Depending on the state in which the is a fairly common pro- property is located, tax-foreclosed prop- cess in some states for erties can provide real opportunities or the municipal treasurer turn into lengthy, complicated deals. Com- to hold an auction of mercial mortgage brokers who are knowl- delinquent tax liens to edgeable about these properties’ issues third-party tax-lien buy- can offer significant value to their investor ers. The tax-lien buyer clients. Before working with investors on then has the right to try these properties, brokers should become to collect the tax from familiar with the unique tax-lien challenges the delinquent property that come with the territory. owner. After a certain Like a mortgage foreclosure, a tax-lien fore- amount of time — usu- closure is basically a repossession of the ally years — the tax-lien property for nonpayment of a debt. The simi- buyer can attempt to larities between the two end there, however. foreclose the tax lien Because the tax debt is owed to the gov- privately and evict the ernment, the foreclosure of the statutory property owner. lien created by the failure to pay the tax is In cases of abuse, a governmental act of taking property. As a the property title can result, the government is required to follow become difficult to in- Wunsch Dennis Illustration: the due process requirements set forth in sure. Furthermore, in the U.S. Constitution, which center on pro- many cases, the private tax-lien purchaser viding proper notice to the property owner has no intention of ever foreclosing on the David H. Martyn is a vice president and associ- that the property is being taken for nonpay- property. Rather, they simply hope they can ate senior underwriter of Stewart Title Guaranty ment of taxes. If the government fails to fol- make money from the taxpayer under the Co., and is manager of Stewart’s National Title low this procedure, the foreclosure of the tax threat of foreclosure. Services office in Detroit. He is a member of lien can be set aside. Any subsequent sale the state bars of Michigan and Georgia, and is on the Michigan Land Title Association board after a failed tax foreclosure is subject to the Quiet title of directors. Martyn received his bachelor’s original taxpayer’s ownership interest, which In many jurisdictions, the delinquent degree from Cleveland State University and means that purchasers of a tax-lien fore- taxpayer has the ability to redeem the his juris doctor degree from Emory University. closed property must take proper steps to continued >> Reach him at [email protected]. Reprinted from Scotsman Guide Commercial Edition and scotsmanguide.com, January 2012 All rights reserved. Third-party reproduction for redistribution is prohibited without contractual consent from Scotsman Guide Media. << continued foreclosed taxes for a period of time. By The property usually can be acquired at a identified, involve your title-insurance com- simply paying the delinquent tax amount deep discount off the market price. If the pany immediately. The insurer likely must (plus any applicable interest, fines and ad- notice requirements are met, and docu- acquire a copy of the treasurer’s file to con- ministrative fees), the title to the property mentation to that effect is provided, title is firm that the treasurer has met the notice is once again vested in the taxpayer. This generally insurable and lenders often will requirements under state law and the U.S. further adds to the question of the status provide financing. Constitution. This will take time and may re- of ownership because, while the property Under this progressive and more rigor- quire a Freedom of Information Act request has been foreclosed, the title to the prop- ous process, more is required of the trea- for a copy of the file. That file cannot be re- erty is in limbo — and uninsurable until the surer in process and documentation. The viewed until produced by the treasurer, so delinquent taxpayer’s redemption rights result is usually a marketable title to prop- prepare for a longer lead time. have expired. erty, however. When it is made available Another avenue to pursue is acquiring The only way to insure property under to developers and investors, it can be re- tax-foreclosed property from a govern- tax-lien foreclosure processes, as de - turned to productive use and adds value to mental “land bank.” Available in a growing scribed above, is to file a lawsuit to “quiet” the community. number of states, land banks are designed title. This process can take years to settle to acquire vacant, abandoned, blighted or the question of ownership, and therefore Pursuing an opportunity tax-foreclosed property; repair title defects quiet any challenges or claims to the title. It is worth considering tax-foreclosed prop- and other issues; and return the property to Even after a successful quiet-title suit, fi- erty when working with investors or devel- the stream of commerce. In addition, land- nancing this type of property is extremely opers. The first step is to meet with a title bank properties are eligible for brownfield difficult because of the reluctance on the insurance underwriter to discuss whether designation (abandoned or unused indus- part of the insurance industry to cover a it is possible to acquire a title-insurance trial or commercial properties) and associ- title with so many competing interests. policy in the state where the tax-foreclosed ated federal grants and funding. Additional The advantage to the municipal treasurer property is located and, if so, what the title information on land banks is available from in this tax-lien auction procedure is that the company’s requirements are. the Center for Community Progress website treasurer collects some of the delinquent If an underwriter is unable or unwilling at communityprogress.net. tax money right away through the sale of to insure tax-foreclosed property, shop • • • the tax lien. This benefit is illusory at best around. There are several title-insurance because it renders the title to the property companies, and they likely have different In 2009, Wayne County, Mich., held an auc- unmarketable for years to come, and un- underwriting requirements when it comes tion of 9,000 tax-foreclosed properties in marketable property rarely adds value to to tax-foreclosed properties. At this point, Detroit. Less than one-fifth were sold. The the tax rolls. you are not asking for a commitment to in- titles of the remaining 7,200 properties sure. Rather, you are asking whether a title- — both commercial and residential — re- Government control insurance policy for this type of property is mained with the government. They were You can compare that system to one in even available. not producing tax revenues, jobs nor add- which the municipal treasurer actually fore- Depending on the state, you may find ing value to the community. Those 7,200 closes on the property and takes title to that no underwriter is willing to insure title properties represent opportunities to in- the property itself, rather than auctioning to the property. If this is the case, then it is vestors, developers and businesses. the lien. In states that operate under these obviously not a viable opportunity to pur- Tax-foreclosed properties like those in statutes, the treasurer follows a more rig- sue. In addition, it is unlikely a prospective Wayne County are an increasing burden orous tax-foreclosure process, wherein the property owner can secure financing from a on communities across the nation in the treasurer provides — or attempts to pro- lender under these circumstances. current economic downturn. In states with vide — notice to the property owner. If an underwriter confirms that insurance progressive statutory processes of foreclos- After complying with notice require - may be available, the next step is to meet ing tax-delinquent properties, or those that ments, the treasurer forecloses through a with a representative from the municipal- have land banks, transactions involving judicial hearing and the government takes ity’s treasury office to become familiar with these properties can usually be insured and title to the property. At that point, the tax- the timeline and process for purchasing tax- therefore can provide security for mortgage payer’s interest in the property is extin- foreclosed property. Generally, there will be financing. With proper risk management guished, including any redemption rights. an auction date for the property that has through title insurance and due diligence, Any subsequent auction is not for the tax been acquired. these properties can offer great value and lien, but for the title to the property itself. When a specific property has been opportunity for investor clients. • Reprinted from Scotsman Guide Commercial Edition and scotsmanguide.com, January 2012 All rights reserved. Third-party reproduction for redistribution is prohibited without contractual consent from Scotsman Guide Media..
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