Several times a week I get calls from people that have purchased or want to purchase at a Tax Deed Auction or a Foreclosure Auction. Often they ask which is better. The answer itself is not all that difficult, but the issues behind the answer are very complex. Agents and Brokers should understand these two property acquisition methods as well.
Which Is Right For You?
Tax Deed Sales -
The first thing to consider is how much money do you have to invest in the purchase. Tax Deed Sales typically sell for a fraction of the value of the property. However in Florida (about which this article is written - check with local counsel if you are in another state), if the property being sold is registered on the tax rolls as “homestead property” then the minimum bid is the higher of the unpaid taxes or the tax assessed value of the property. Compare this to non-homestead property which carries a minimum bid of the unpaid taxes regardless of the tax assessor’s value on the property.
Foreclosure Deed Sales -
Mortgage Foreclosure Sales carry no minimum bid, except you are bidding against the foreclosure judgment holder. The foreclosure judgment holder can bid up to the amount of the foreclosure judgment without actually having to pay that amount to the Clerk of Court if they win the bid by being the highest bidder. The result is that many foreclosure sales end up with the foreclosure judgment holder being the highest bidder. However, if the value of the property as perceived by the public bidder is higher than the foreclosure judgment amount, there is likely to be competitive bidding by the public above the judgment amount.
The Big Difference -
The biggest difference between a tax deed sale and the foreclosure sale has to do with due diligence by the buyer. I like to say that “a tax deed is first in priority except for God and code enforcement liens”. It is a generalized statement but pretty accurate none the less. If the property burns down or is hit with a natural disaster, you just cannot prepare for that. Further, code enforcement liens (in Florida) stay with the property and must be paid and the violations cured by the tax deed buyer. The buyer is also liable for homeowner or condominium association fees after the tax deed is issued by the Clerk of Court.
Foreclosure deeds however may be subject to senior (superior) mortgages. This is often seen when a homeowner or condominium association lien is foreclosed. The novice buyer in those circumstances is then stuck with paying off the mortgage to keep the property. However, a code enforcement lien in a foreclosure action can in many cases be eliminated at least up to the date of the issuance of the Certificate of Title by the Clerk of Court to the winning bidder.
Due Diligence!!!!!!!!!!!! -
In each case, whether Foreclosure Deed or Tax Deed, it is absolutely important for the potential buyer to gather real information about not only the property, but the court or administrative proceeding so that knowledge of other liens, mortgages, judgments, code violations, building permits and such local issues as a good real estate attorney may know of for that locale. If you are not experienced in doing these purchases, seek professional help from someone that has that knowledge.
A Horrible But Typical Story -
I received a call yesterday from someone that if they were my client before they bid at the foreclosure sale, would have invested under $1,000 with me and ended up saving over $100,000! They bought a property by getting the winning bid on an association lien foreclosure. Their bid was under $40,000. They did not know about the mold in the house ($50,000 to repair). Fair enough – due diligence probably would not have shown that as a problem. So in addition to the repairs, they put in another $30,000 in upgrades since the previous owner stripped out the house. Then a year later they found out that the house has been in foreclosure on the first mortgage for about 5 years and the foreclosure sale is going to occur in a few weeks. So they have to lose their investment and move. This was all preventable. The caller said that they had the wool pulled over their eyes and it was not right. In reality they had their eyes closed as all the information they really needed was obtainable by the public – if they bothered to look. Of course if they did not know how to look they could have hired a knowledgeable Realtor or attorney.
What Kind Of Title? - Marketable or Unmarketable Title – Who Cares?
The next difference is the type of title you get from the Clerk of Court in each sale. In a foreclosure sale the Clerk of Court issues a Certificate of Title based upon a Court issued Final Judgment. This is a judicial deed. In a tax deed sale the Clerk of Court issues a Tax Deed based on administrative procedures. Because this is not a judicially directed deed, the title to the property issued by way of a tax deed is not “marketable” and you cannot get title insurance issued without special exceptions. A tax deed title can be attacked by parties that may have been interested but were not noticed of the unpaid taxes or of the tax deed sale for up to 4 years. The good news is that while a tax deed purchaser has this unmarketable voidable title, they can still use or rent the property. The bad news is the property could be lost by an attack by someone challenging the sale up to 4 years out. Understand that if you cannot get marketable title, you cannot borrow against the property and you usually cannot sell the property to anyone except someone like in the example above.
The Tax Deed Quiet Title Lawsuit -
The solution to this unmarketable title can be just wait and hope for the 4 years that no person comes forward to redeem the property from the unpaid taxes based on non-notice, or file a lawsuit called a “tax deed quiet title action” that has the Court issue a final judgment saying all the things that should have been done administratively by the tax collector and Clerk of Court were indeed done correctly, and everyone that should have received notice did indeed receive notice of the unpaid taxes and tax deed sale date.
Although this may seem simple – it isn’t. The United States Supreme Court a few years ago determined that basic due diligence by the Clerk of Court to provide notice to the necessary parties to a foreclosure action is not enough under a broad range of circumstances. So in a tax deed quiet title action the attorney must examine how the Clerk provided notice to whom, what responses the Clerk of Court got and if the Clerk of Court reacted in accordance with the Supreme Court determination of what is real due diligence for a tax deed matter. Further the investigation and title search done by the Clerk of Court must be confirmed as accurate. Lastly the people determined by the Clerk of Court and then the quiet title attorney must all be served with a summons and quiet title complaint for the opportunity to respond and object to the judge quieting title in the name of the tax deed purchaser. If there are any persons with interests that should have gotten notice and they are dead, then their heirs may have to be found and a guardian ad litem or attorney ad litem must be appointed to look after their potential interests regarding the quiet title action.
Obtaining a tax deed quiet title judgment should be handled by a competent attorney. Legal fees will vary, but expect legal fees to vary from $1,500 to $3,000 or more, depending on the experience of the attorney as well as the complexity of the particular factual issues. And don’t forget court costs and expenses which can run from a few hundred to a few thousand dollars, depending on a myriad of rules, state court fee schedules and discovery issues. Find an attorney that does this work (many will do it statewide, so he or she does not have to be local to you) and they should be able to give you a some cost guidelines for your particular case.
Looks Easy – From A Distance! -
This is all much more complicated than most people would assume (usually I get a statement from a potential client – “all you need to do is file the suit and go and get the judge to say the tax deed is ok”). Once all the preparation work for filing the suit is done and then served upon all the defendants, if no one responds then it is indeed simple to get the judge to do just that. It looks simple from a distance but up close there are a lot of gears that have to be made to mesh just right.
So go and have fun – make money! But be prudent and most of all be smart and make informed decisions. Jumping in before finding out how deep the water is can be a very hurting experience!
See my other articles related to this topic at FORECLOSURE BUYERS GET INTO BIG TROUBLE!
© 2014 Richard P Zaretsky, Esq.
Be sure to contact your own attorney for your state laws, and always consult your own attorney on any legal decision you need to make. This article is for information purposes and is not specific advice to any one reader.
Richard Zaretsky, Esq., ZARETSKY LAW GROUP, 1615 FORUM PLACE, SUITE 3A, WEST PALM BEACH, FLORIDA 33401, PHONE 561 689 6660 RPZ99@Florida-Counsel.com - FLORIDA BAR BOARD CERTIFIED IN REAL ESTATE LAW - We assist Brokers, Owners and Sellers with Quiet Title Actions, Short Sales and Traditional Transactions Statewide! contact@Florida-Counsel.com Website www.Florida-Counsel.com.
See our easy to find articles at TABLE OF CONTENTS - SHORT SALE AND LOAN MODIFICATION ARTICLES
Comments(24)