When buying tax deeds in the State of Florida–research is the key to everything.

I’m not just talking about knowing when the sale is, and what properties are available.

You need to have a deep knowledge on all of the encumbrances (liens) on the property, what each mean and how it affects you if you end up as the winning bidder.

First off, let’s dive in to a bit of an overview on tax deed and tax lien investing in Florida

 

Florida tax lien and tax deed investing basics

First off, you should know that tax liens and tax deeds are both sold in the State of Florida. The tax lien is sold to an investor prior to a tax deed being sold. When bidding on a tax deed you are actually bidding on the amount of the initial tax lien plus the interest that was accrued while the lienholder held the tax lien.

In addition to the tax lien amount and the interest accrued, the county also will apply any hard costs incurred to the base bid of the tax deed. These costs typically include admin fees, servicing fees and marketing fees pertaining to the tax deed sale.

This often confuses first time investors because there is a huge difference in buying a lien versus buying a deed. We will discuss that in a different post–for now our concern is what to be aware of while buying the tax deed. 

 

The Biggest Thing Tax Deed Investors Overlook

Most first time investors are primarily concerned with the physical condition of the tax deed property. Whether it’s improved and has a structure on it or if it is vacant land, the physical condition of the tax deed property and what repairs will be needed is what most investors look at.

These items affect your bottom line when investing, but what most investors don’t realize is the condition of the chain of title can affect the bottom line equally as much if not more!

When I say the “condition of the chain of title” I am talking about what liens and encumbrances appear in the chain of title. Your chain of title is the history of the property. This is where you will find most liens and encumbrances that are of record and that affect your property. 

What makes investing in tax deeds in Florida attractive is the fact that many of the liens and encumbrances found in the chain of title are extinguished from the tax deed sale.

The items are extinguished because the tax lien has priority over the other liens and encumbrances per Florida Tax Sale Statutes.

This is assuming that all parties were served correct notice of the tax deed sale. The tax deed sale also has to be carried out in accordance with state statues. A lien or encumbrance on title that is extinguished as a result of the tax deed sale does not mean that the item is removed from the chain of title–it just means that the affected party has lost their interest in the property because the tax lien has priority.

This is what you will hear title agencies and underwriters call a “Cloud” in the chain of title. The “Cloud” is because the parties lost their interest without any type of release being recorded which technically means the lien has not been satisfied. 

Let’s talk about the different types of liens and encumbrances that “Cloud” title.

 

Liens that can cloud your title

The primary items you will see that cloud titles (and potentially kill your profits) are: 

  • Mortgages 
  • Personal Loans / Credit Card Liens
  • Deed of Trust 
  • HOA liens 
  • IRS liens
  • Medicaid Liens
  • Child Support
  • Municipal Liens
  • Code Enforcement Liens
  • Mechanics Liens

 

Most of these liens, encumbrances, and recorded items will show up with a title search or Owners & Encumbrance Report (O&E for short). This is the starting point for most title agencies when clearing a “Cloud” on title.

All of the liens listed above with the exception Municipal Liens and Code Enforcement Liens are extinguished as a result of the tax deed sale.

Again, these are all extinguished because the tax lien has priority over them. Yes, you read correctly…the county tax lien has priority over a 1st Mortgage!! 

Where investors encounter problems is that in the State of Florida, municipal liens do not always show up in an O&E report or title search. You will need to order a municipal lien search and / or call all of the different municipal entities within the city.  

These include (but are not limited to): code enforcement department, water & sewer department, department of special assessments, and the building permit department.

This will outline what municipal liens are against the property. Municipal liens cover a variety of items including trash, water, sewer and abatement liens that also include code enforcement violations.

These could be building codes and/or weed liens. These liens are all issued at a municipal or city level and do survive a tax sale.

They are not extinguished and, in most cases, will need to be satisfied or paid before you will be able to sell or take a loan against the property. Municipal liens do not sound like much but if the city has been paying someone to maintain your property at a cost of $250 a day for three years…..well, you can do the math. 

Remember, order your O&E report and take it a step further by calling the city to verify any potential outstanding municipal liens.

Keep in mind, every city is different.

In addition to municipal liens against your tax deed you also need to be cautious of cross-attaching liens. Cross-attaching liens are municipal liens against another parcel that the prior owner had prior to the tax sale.

If you connect the dots on the words “cross-attaching lien” it means the liens against that other parcel are also levied against the parcel you acquired. This makes it important for you to also search the prior owners name within the same county to avoid this potential issue. 

Where first time tax Deed investors in Florida get crushed

 

In our 20yrs of experience in FL we’ve witnessed more first time investors lose their shirt because they failed to identify any direct or cross-attaching municipal liens.

That first property you purchased for $5k has $18K in delinquent municipal liens. Good luck selling that for a profit!

Two other liens from the list above that have a lot of misinformation circulating about them are HOA and IRS liens.

HOA liens are extinguished by the tax deed sale provided they were served statutory tax sale notice (same as all other parties of record).  A payoff letter from the HOA is called an Estoppel or Demand. An accurate Estoppel should only include fees from the date you purchased the property via tax deed sale forward.

Often times the HOA will be unaware of the tax deed sale and will still attempt to collect the past due fees.

In most cases, you can simply show them the tax deed and they should adjust the Estoppel to reflect the correct amount owed.

There was a time a few years back in the aftermath of the financial crisis where HOA’s would try to claim a “Super Priority Lien” status and collect past due fees from before the tax sale.

That has been overturned by the courts numerous times, including a Florida Supreme Court Ruling, and is not something you should be concerned with.

Again, as the tax deed investor you are responsible for the HOA dues from the date you purchase the tax deed forward. All fees prior to that date are extinguished.

IRS liens are also extinguished through the tax deed sale provided they were served with the same statutory tax sale notice, however, the IRS is provided with a 120-day right to redeem.

In our 20 years of investing and clearing title we have never seen the IRS redeem a tax sale property. They want the money owed to them by the prior owner. The IRS understands the importance of getting the property back on the tax roll of the county. 

What to do once you’re the winning bidder

After doing your your due diligence,  ordering an O&E report,  contacted the city and made sure there were no liens and encumbrances against the property, you drove by the tax deed property to make sure that it was in the condition that you are okay with, and you were the winning auction bidder….CONGRATULATIONS on your tax deed purchase! 

Now, what are you going to do with your tax deed property?

Something most investors do not realize is that just because you did your due diligence correctly it does not mean that you will be able to get title insurance!

The problem is that in the eyes of title insurance underwriters there is still a “Cloud” on title.

Even though many of the liens and encumbrances are “extinguished”–there is still a Cloud on the title in the eyes of the insurers.

Historically, the only way this has been remedied was through a quiet title action (legal action filed in Court).

A quiet title action in Florida is a lawsuit brought to the court to establish or secure your right as the undisputed owner of the property.

Since no releases were recorded, the liens and encumbrances are technically still open even though the tax deed sale has priority over those liens and therefore, extinguishes them.

By going through a quiet title action all of these affected parties who lost their interest as a result of the tax deed sale will be named in the quiet title action.

The problem with the quiet title action are the enormous lawyer fees that will accrue as you go through the process.  

epending on the number of parties affected by the tax deed sale, a quiet title action could take months and in some cases years.

As an investor the thought of that makes me cringe! Fortunately, an action to quiet title is not the only way to cure the cloud on title. 

Tax Title Services offers an alternative to a quiet title action.

In many ways, our process is more effective and thorough than a quiet title action because we take a deeper dive into the tax deed foreclosure and can easily identify title risk to the tax deed investor and insuring title agent.

The biggest difference between a Tax Title Services Certification and Quiet Title Judgment is that a quiet title is a judicial process and Tax Title is not…which saves huge time and money.  

Once Tax Title issues its certification, title agencies are comfortable enough to insure over the items extinguished by the tax deed sale. To the tax deed investor, the most important impact of a TTS certification is that there is one set price and will only take 30 days in Florida.

If you are an investor looking to control the variables of your tax deed investment Tax Title Services is a great tool for you!

Why you need to get title insurance on your tax deed property

Having title insurance will allow you to convey the property to a potential buyer via Warranty Deed–which is the only way someone can buy a property with a mortgage.  It’s also the only way most of the retail real estate buying public would buy a property.

Not getting the property cleared for title insurance limits your buyer pool to just investors–which cuts out most of the market.

The first time you take a property purchased through a tax deed sale to a realtor the realtor is going to tell you they cannot do anything with it. “Go get a quiet title action” or “Wait four years until the tax deed is seasoned”.

Having title insurance will not only protect you and your potential buyers, but it will also help you to maximize what you can sell your tax deed for (market value).

If you cannot convey your tax deed with a Warranty Deed to your buyer, you are opening yourself up to being haggled on price. Your potential buyer and realtor will see the property as damaged goods and will factor in that they are now assuming a title problem.

Additionally, not having title insurance means having no ability to obtain a loan for either a resale or refinance. Your Lenders will require a title policy to secure their position as a first lien position. And perhaps most importantly, what if one of those foreclosed parties (owner, lender, judgment/lienholder, etc.) decide to challenge either the tax deed sale or ownership to your investment? 

With title insurance you have 100% protection, without it you will have to battle and defend on your own. 

Whether you use Tax Title Services or get a Quiet title action in Florida, you’re going to want to get title insurance if you care about maximizing profits.