Like a mortgage foreclosure, a tax-lien foreclosure is basically a reposses- sion of the property for nonpayment of a debt. The similarities between the two end there, however. Because the tax debt is owed to the government, the foreclosure of the statutory lien created by the failure to pay the tax is a governmental act of taking property. As a result, the government is required to follow the due process requirements set forth in the U.S. Constitution, which center on pro- viding proper notice to the property owner that the property is being taken for nonpayment of taxes. If the government fails to follow this procedure, the foreclosure of the tax lien can be set aside. Any subsequent sale after a failed tax foreclosure is subject to the original taxpayer’s ownership interest, which means that purchasers of a tax-lien foreclosed property must take proper steps to protect their interests. The statutory process for the foreclosure of tax liens varies greatly from one state to another. Tax-lien regulations in some states are so inadequate that the title be- comes unmarketable for years. For example, it is a fairly common process in some states for the municipal treasurer to hold an auction of de- linquent tax liens to third-party tax-lien buyers. The tax-lien buyer then has the right to try to col- lect the tax from the delinquent property owner. After a certain amount of time — usually years — the tax-lien buyer can attempt to foreclose the tax lien privately and evict the property owner. In cases of abuse, the property title can be- come difficult to insure. Furthermore, in many cases, the private tax-lien purchaser has no in- tention of ever foreclosing on the property. Rather, they simply hope they can make money from the taxpayer under the threat of foreclosure. « BARGAINS continued;from;page;21
met, and documentation to that effect is provided, title is generally insur-
able and lenders often will provide financing.
Under this progressive and more rigorous process, more is required
of the treasurer in process and documentation. The result is usually a
marketable title to property, however. When it is made available to de-
velopers and investors, it can be returned to productive use and adds
value to the community.
“Like a mortgage
foreclosure, a tax-lien
foreclosure is basically
a repossession of the
property for nonpayment
of a debt.”
In many jurisdictions, the delinquent taxpayer has the ability to redeem the
foreclosed taxes for a period of time. By simply paying the delinquent tax
amount (plus any applicable interest, fines and administrative fees), the title
to the property is once again vested in the taxpayer. This further adds to the
question of the status of ownership because, while the property has been
foreclosed, the title to the property is in limbo — and uninsurable until the
delinquent taxpayer’s redemption rights have expired.
The only way to insure property under tax-lien foreclosure processes, as
described above, is to file a lawsuit to “quiet” title. This process can take
years to settle the question of ownership, and therefore quiet any challenges
or claims to the title. Even after a successful quiet-title suit, financing this
type of property is extremely difficult because of the reluctance on the part
of the insurance industry to cover a title with so many competing interests.
The advantage to the municipal treasurer in this tax-lien auction procedure is that the treasurer collects some of the delinquent tax money right
away through the sale of the tax lien. This benefit is illusory at best because it renders the title to the property unmarketable for years to come,
and unmarketable property rarely adds value to the tax rolls.
You can compare that system to one in which the municipal treasurer actually forecloses on the property and takes title to the property
itself, rather than auctioning the lien. In states that operate under these statutes, the treasurer follows a
more rigorous tax-foreclosure process, wherein
the treasurer provides — or attempts to provide — notice to the property owner.
After complying with notice requirements, the treasurer forecloses
through a judicial hearing and the
government takes title to the
property. At that point, the taxpayer’s interest in the property
is extinguished, including any
redemption rights. Any subsequent auction is not for
the tax lien, but for the title
to the property itself. The
property usually can be acquired at a deep discount
off the market price. If the
notice requirements are
Pursuing an opportunity
It is worth considering tax-foreclosed property when working with investors or developers. The first step is to meet with a title insurance underwriter to discuss whether it is possible to acquire a title-insurance policy in
the state where the tax-foreclosed property is located and, if so, what the
title company’s requirements are.
If an underwriter is unable or unwilling to
insure tax-foreclosed property, shop around.
There are several title-insurance companies,
and they likely have different underwriting requirements when it comes to tax-foreclosed
properties. At this point, you are not asking for
a commitment to insure. Rather, you are asking
whether a title-insurance policy for this type of
property is even available.
Depending on the state, you may find that no
underwriter is willing to insure title to the property. If this is the case, then it is obviously not
a viable opportunity to pursue. In addition, it is
unlikely a prospective property owner can secure financing from a lender
under these circumstances.
If an underwriter confirms that insurance may be available, the next
step is to meet with a representative from the municipality’s treasury
office to become familiar with the timeline and process for purchasing
tax-foreclosed property. Generally, there will be an auction date for the
property that has been acquired.
When a specific property has been identified, involve your title-insurance
company immediately. The insurer likely must acquire a copy of the treasurer’s file to confirm that the treasurer has met the notice requirements under
state law and the U.S. Constitution. This will take time and may require a
Freedom of Information Act request for a copy of the file. That file cannot be
reviewed until produced by the treasurer, so prepare for a longer lead time.
Another avenue to pursue is acquiring tax-foreclosed property from
a governmental “land bank.” Available in a growing number of states,
land banks are designed to acquire vacant, abandoned, blighted or tax-foreclosed property; repair title defects and other issues; and return the
property to the stream of commerce. In addition, land-bank properties are
eligible for brownfield designation (abandoned or unused industrial or
commercial properties) and associated federal grants and funding. Additional information on land banks is available from the Center for Community Progress website at communityprogress.net.
• • •
In 2009, Wayne County, Mich., held an auction of 9,000 tax-foreclosed
properties in Detroit. Less than one-fifth were sold. The titles of the
remaining 7,200 properties — both commercial and residential — re-
mained with the government. They were not producing tax revenues,
jobs nor adding value to the community. Those 7,200 prop-
erties represent opportunities to investors, develop-
ers and businesses.
Tax-foreclosed properties like those in
Wayne County are an increasing burden
on communities across the nation in
the current economic downturn. In
states with progressive statutory
processes of foreclosing tax-delin-quent properties, or those that
have land banks, transactions
involving these properties can
usually be insured and therefore can provide security for
mortgage financing. With
proper risk management
through title insurance and
due diligence, these properties can offer great value
and opportunity for investor clients. •
David H. Martyn is a vice president and associate senior underwriter of Stewart Title Guaranty
Co., and is manager of Stewart’s National Title Services office in Detroit. He is a member of
the state bars of Michigan and Georgia, and is on the Michigan Land Title Association board
of directors. Martyn received his bachelor’s degree from Cleveland State University and
his juris doctor degree from Emory University. Reach him at firstname.lastname@example.org.