The key to selling your tax deed property successfully starts with getting title insurance on the property.

Unfortunately for tax sale investors–getting title insurance for these properties can be a challenge. 

Since title insurance is extremely unique and equally important, understanding how it pertains to US tax deed sales can be confusing. Especially if you are a first time investor. 

The Importance of Title Insurance

In the US, title insurance is an indemnity insurance that insures the history of the property, nothing in the future. 

The chain of title is the legal recorded history of the property and that is what is being insured. Nothing can change in the history of the chain of title, new items can be added but nothing can be removed or altered after it is recorded. 

When someone purchases title insurance, the policy is valid the day it is issued and ensures that nothing in the recorded history of the property can challenge your ownership interest in the property. If someone were to file a lien the following day, that would not be covered by the title policy. If someone were to try to enforce a lien that was extinguished by the tax sale, title insurance would protect from that since it was in the history of the property.

During a standard real estate transaction, liens and encumbrances in title are satisfied when a release is recorded in the chain of title. The release is a document prepared by the lienholder that shows that the obligation has been satisfied and is no longer enforceable.

During a normal purchase transaction, it is the title companies’ responsibility to order payoffs and releases. The title company pays off the lien holder at closing and records the releases with the buyers new deed. During a US tax deed sale, most liens and encumbrances (except municipal liens)* are extinguished by virtue of the tax deed sale.

Lien Holders and Quiet Title Actions

When a lien holder loses interest because it is extinguished by the tax deed sale, the lien stays in the chain of title but is no longer enforceable. Unlike a normal transaction, a release generated by the lien holder is not recorded. This creates a “cloud” on title. Historically this “cloud” is satisfied by a recorded quiet title judgment.

During a quiet title, all parties who lost interest due to the tax sale are served again and if no one responds, a judgment in favor of the investor/client is recorded in the chain of title. Although the QTA makes it easy for everybody to look at the chain of title to verify the validity of the tax sale, there is not a law requiring it. 

Less Costly Alternative to Quiet Title: Tax Title Services

Since a quiet title is expensive, timely and not required by state law to insure title to a US tax deed; there is an alternative solution to quiet title suits where a verification review is completed to assess the validity of the tax sale by certifying that all lien holders and parties of interest were served in compliance with state statutory requirements.

The US tax deed conveyed by the county to the investor kind of acts as the release to those liens, but someone has to verify the county conducted the tax sale correctly because it is not the county’s responsibility to make an  investor completely whole if something was wrong with the tax sale. There is a reason US tax deeds are sold as-is and buyer-beware. 

Can you imagine if you purchased a vacant lot for $5k at a tax sale, built a $500K home on that lot and the county mailed the notice of the tax sale to an old or wrong address? Remember, it is the prior owners responsibility to update their best address to be reached with the county.

That person could potentially overturn the tax sale and technically the county would only have to pay back the $5k. You would be out of pocket the $500k home since it is attached to the property. That is why Tax Title Services and title insurance is important. 

How Tax Title Services Works

After Tax Title verifies the validity of the US tax deed sale, the client can purchase an owners title policy, which would be issued in the name of the current vested owner (whoever is on the tax deed). Title insurance is not transferable and only covers either the tax assessed value or the amount the property was purchased for at the tax sale.

If you make improvements to the property, the solution to maintain your protection is to request an increased amount to be insured. Since title insurance is non-transferable, if the client decides to sell the property the buyer would need to be issued a new title policy that protects their interest at closing.

That policy would be based on the contract price of the transaction. If the buyer has a lender, the lender will more than likely require a lenders title policy to ensure the lender receives a senior lien position. Some lenders will also require the buyer to have an owners title policy. Through closing, the buyer will be vested the property via warranty deed.