Have you ever wondered what happens to properties that don’t end up selling at county tax deed sales or if a party decides not to pay the final amount owed at a tax sale? Or what happens if a tax lien holder fails to foreclose the right of redemption? Obviously, the county needs to recoup the lost revenue from these properties, but how? Investors may be able to obtain these properties directly from a county, state or land bank; however, there are many pitfalls involved when investing in real estate this way. First let’s talk about how properties end up at a tax sale.

How Properties End up at a Tax Sale

Every year counties across the US have properties where the current owner failed to pay their property taxes. When this happens, the county reserves the right to recoup the funds/taxes owed to them by selling the debt. Counties in some states sell what is known as a tax lien certificate, which does not grant you ownership to the property while other states allow counties to sell you the property which is conveyed directly from the county to the highest bidder on the delinquent taxes secured by that property. The county will convey a deed to the investor and the type of recording instrument used in that conveyance can vary state by state. For the sake of this conversation, we will refer to any property sold for delinquent taxes as a tax deed.

But what happens if the property does not sell at the county tax sale. You’ve probably attended an auction, either online or live in-person, and noticed a property that looks great on paper but nobody clicks the bid button online or raises their number to make an offer on the property. Why is that? To start, the common misconception is that when a property is sold through a county tax sale, all liens and encumbrances are extinguished.

That is 100% not true, at all. Many liens and encumbrances, such as a first mortgage or mechanics liens, are extinguished by the tax sale however, oftentimes municipal liens, which are your trash, water, sewer, abatement, condemnation, open permits all survive tax sales. On the surface those encumbrances and liens sound very mundane to rookie investors. You ask yourself how much of an impact could that really make against your return on investment (ROI). If the municipality had to send somebody to cut the grass and keep the property secure for the entire delinquency period, let’s say 3yrs of delinquency, twice a month at a rate of $250.

That adds up to $18k in municipal liens. That is a lot of money, especially when dealing with lower value properties. What if contractors used the property to dump asbestos contaminated construction debris or if the property is landlocked with no easements granting access to the property? None of these liens or encumbrances are extinguished by a tax sale. These situations are just a snippet of some of the scenarios we have seen in our 20+yrs and 50k tax deeds reviewed and only a few of the many reasons why investors may not bid and the property ends up as an OTC or with a land bank.

How Properties End up at the Lank Bank

Now that you have hopefully been scared enough to tread cautiously we can dive into how a property finds its way to an OTC list or with a Land Bank. Purchasing property from either source can be a good way to obtain property for well below market value if you understand all the risks and have a strategy.

 

When a property at a tax deed sale fails to receive a minimum bid for the delinquent taxes, the property can go into the possession of the taxing authority (city, county, state).

These are considered your Over-The-Counter (OTC) properties. Every state manages this inventory of properties differently and they do not always end up with these entities. We are being very general with this conversation so to those reading and thinking that in FL when a property does not sell at a tax deed sale, it reverts to the tax lien holder who requested the tax deed sale, you are correct. Getting back on the OTC topic… The three main places where an investor can find these properties are with the city, county and/or state. Throughout most of the southeast (AR, MS, AL), the Commissioner of State Lands do a great job of managing the inventory. Jacksonville, FL typically has a hearty list of OTC properties.

Some of the lists held at the state level can contain tens of thousands of properties for investors looking for the diamond in the rough.  

Land Banks obtain properties in slightly different way but primarily from delinquent tax sales. Sometimes a land bank can buy the property before the bidding begins for the third-party investors and in other cases properties are sent to land banks if they do not sell at the tax sale. When a property goes into a land bank, the land bank typically wants a prospective investor/purchaser to have a plan and execute that plan. Since many land banks are quasi-governmental entities and work closely with local redevelopment authorities, the properties are typically sold to those who have the best plan and not always the best offer. If an investor does not execute on their plan to repair or redevelop the property they could risk fines or losing the property. Some of the land banks with larger inventory such as Shelby County TN or Wayne County MI do not have as strict of a criteria for buyers and investors as a smaller land bank managing only a few properties. 

Municipal liens on Land Bank Properties

We spoke about municipal liens being one of the driving forces as to why people will not bid on properties at a tax sale. When a property finds itself on an OTC list or into a Land Bank, it does not mean that those municipal liens are also struck off, extinguished or released. In many instances you would still have to pay those municipal liens, no matter what. Or they are baked into the asking price of the property.

Make sure you run a title search to investigate what liens or encumbrances are still attached to the property and also take a few minutes to ask the entity that holds the property or is responsible for managing it if they know of any issues. Oftentimes Land Banks are able to help negotiate some of these liens and some cities and counties are willing to work with you when negotiating down the amount owed if you have a plan to bring the property back into commerce and create a positive impact on the community.

Any property sold off an OTC list will probably have all liens and encumbrances still attached.

Avoiding a Quiet Title Action on Land Bank Properties with TTS

We have seen some investors score great deals with these properties and we’ve seen others get burned. Either way, if you buy a property from a land bank, a COSL or OTC list you’re still going to inherit some sort of title issue or “cloud”.

When you buy a property at a tax sale in most states, especially non-judicial foreclosure states, title companies require additional curative measures because the property was sold without a judicial foreclosure.

Very much like a tax sale quiet title action, a quiet title action on one of these properties is going to end up costing you a few thousand dollars and take about nine months to complete, if you are lucky.

You now must be asking yourself, is there a better way?

Short answer, ABSOLUTELY! Tax Title Services has been providing its certification that verifies all adversarial parties in a chain of title, who had their rights extinguished by virtue of the tax sale were served in accordance with the applicable state statutes.

This certification is accepted by title insurance agencies and underwriters nationwide in lieu of a quiet title action. Not only is this going to be a much faster path to insurable title, it will probably be the least expensive option available to you. Knowing that properties obtained through OTC lists and land banks are typically very low value we have specialized pricing for vacant land properties valued under $25k.