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Transcript:
Welcome to the Tax Sale Podcast, where tax sale investing is made easy.
I’m Casey Denman, a tax sale veteran, expert, and trainer, author of the tax sale playbook, founder of the tax sale academy and your host here on the tax sale podcast.
Thanks for joining me on today’s podcast, and as always, at the conclusion of this podcast, if you’re looking to learn more about investing in tax defaulted real estate head to taxsaleacademy.com. That’s taxsaleacademy.com.
On today’s episode we’ll be discussing something that is not discussed enough and is often overlooked by new investors. We’re talking about title clouds for tax sale properties. We’ll get into it more shortly, but the deal is that title clouds are one of the drawbacks to tax sale investing. It’s easy to overcome, but can be considered a minor hurdle. All the gurus out there don’t typically even mention this type of stuff. But it does exist, which is why we’re discussing it!
To start with, let me educate you on the subject. And this will all tie in at the end.
In a conventional transaction, when you buy or sell a property, title insurance it typically issued. What happens is that the issuing company researches the chain of title, this is called a title search. This means that they look at everything that is involved in the chain of title – we’re talking about every single deed, every lien, every encumbrance, perhaps any death certificates of former owners, maybe divorce decrees, that kind of stuff. They are looking for anything that would appear stop them from issuing what is known as “clear title.” They want to know that a property has passed from one party to the next and that any encumbrances have been removed.
Let me provide an example of an issue: Let’s say two people owned a property and they sell it. But one of the sellers forgets to sign the deed. Well, that would be an issue. Or how about a mortgage is recorded in 1995, then the property is sold to someone in 2005 and that mortgage is never satisfied or paid off, then that would obviously be an issue.
The title insurance company can be an attorney or closing company, and what they’re looking for is a clean chain of title. They want everything that surrounds that property to be clean and to appear in public records just like it should. If there was a mortgage, it needs to be marked as satisfied. All liens need to be paid. All docs need to have the proper signatures and other information.
If, and only if, their title search shows up clean and meets their standards, they’ll provide what is known as title insurance. This insurance is an insurance policy that protects both the seller and the buyer. If something later pops up that was not found during the title search that impacts the chain of title and causes issues, the buyer can go after the title insurance policy and make a claim. The seller is protected, since there is an insurance policy between themselves and the buyer if there is a lawsuit.
As you can probably tell, the risk is researched prior to the issuance of a title insurance policy. The title company performs their title search and IF it meets their expectations, then the insurance policy is issued. This differs from most other types of insurances of course.
With that said, when title insurance is issued, it’s issued for the purchase price of the property and it insures to the buyer that they are covered if there are any issues with that chain of title in the future. In short, it’s the safest way possible for a buyer to buy a parcel of real estate.
But do you remember when we said they check for a variety of stuff?
Well, one of those things that is a red flag are tax foreclosures. When a property goes through tax foreclosure there are a number of extremely specific steps that must be taken. Historically, these steps are either not taken correctly or are not taken to the title company’s approval. Ultimately, this results in the title not being clear enough for the title company to deem it insurable. This is known as a clouded title.
As we discussed, nearly all conventional arms length real estate transactions will come with a clear title accompanied by title insurance. It’s the only way to market the property as completely clear and to most importantly, receive the full market value for the property.
So, we obviously have an issue right? I just said that in order to receive the full market value for the property, it must come with title insurance. But, I also told you that properties that have gone through tax foreclosure are not insurable. So, what do we do?
Well, there are a few different ways to solve this problem. In order to get title insurance you’ll need to do what’s called “clearing the title.”
Now, there are a few different ways to deal with these title issues. I wanted to go over each of the different processes with you briefly in today’s podcast to give you a general overview. Just understand that I’ll be putting future episodes together where we’ll go into deep detail on each one of these methods.
The first way to deal with a clouded title is probably the most popular. It a judicial process known as “Suit to Quiet Title.” A Suit to Quiet Title is a lawsuit brought by the tax deed holder to establish and confirm their ownership interest in that property against anyone and everyone. The end result is it “quiets” everyone else’s claim to that property. As with every lawsuit it is a judicial action brought against all former owners and claimants in that property to establish that they legally lost ownership of the property through tax foreclosure, and, if successful, will be signed off on by a judge effectively clearing that title. This obviously takes time and is an additional investment. At the point where the judge signs that final judgment of quieting title, the title is then sufficient enough for the title company to issue insurance against it.
Another way to deal with a clouded title is through a specific action. A suit to quiet title is a number of different actions to clear the title, there are a lot of steps to it. What we’re talking about with this method is one or two very minor specific actions. What will happen from time to time is an attorney will perform a title search. In this search they’ll discover that perhaps a specific document or two weren’t filed or completed correctly. Instead of opening up a comprehensive action for a lawsuit to quiet title, there is a chance you can just solve one specific problem and cure that title. This might be refiling a document or reopening the file to solve something. A common solution is having the former owner sign a deed granting any of their remaining interest in the property to you. Of course, some people want to know why the former owner would do this. Perhaps there are excess proceeds they can claim with the tax deed owner’s assistance or maybe they’d rather sign that deed then be named in a quiet title lawsuit in public records. Whatever the case, handling the issue directly with one specific action can be a very quick method to clear the title in some areas.
Another option that doesn’t involve a Lawsuit to Quiet Title is called a tax foreclosure certification. Essentially this is a process where a third party, a certification company, opens up the tax foreclosure file and digs deep into it. They verify that every single step was performed as it should have been and that everything is accurate. If there are any issues, they’ll work to resolve them or will direct you on what is required. In some situations, these issues can’t be resolved without a quiet title suit, but in most situations, which is said to be around 95% of all files, the tax foreclosure is certified as completed accurately and thoroughly. From there, you’ll be able to get title insurance through one of their partner title insurance firms. There is still a considerable expense to this process, but it is usually much faster than a quiet title lawsuit and will provide you with the same result which is the title insurance you’re seeking.
The last thing you can do with those title clouds is absolutely nothing at all. Simply put, you just don’t worry or even think twice about them and you sell the property as-is, where-is. The difficulty with this is of course, the title to that property is not guaranteed and you’ll not only receive fewer potential buyers, but they’ll also be buyers who will want to pay substantially less because of the condition of the title. Obviously, this can only work for the cheap properties. A house worth $1m, must have a clear title to get that $1m, right? But in some cases, clearing the title is not going to work. I mean, you don’t want to spend $1000 or $2000 to clear the title to a lot in the middle of the desert that’s worth $500. The numbers just don’t make sense. So, you’d properly disclose all of the pertinent information regarding the clouds on the title and then you’d sell it as is.
So, one hidden issue for tax sale properties will always be the clouds on the title. But fortunately, they’re incredibly easy to deal with if you understand how the solutions operate and if you strategize correctly well ahead of time.
And we’ve got lots of information on this inside the tax sale academy, and of course on our YouTube channel. And like I mentioned at the beginning of this episode, we’ll have separate, more detailed, episodes on each of this methods.
Guys, that’s it for today’s podcast. If you’d like more information on investing in tax defaulted real estate, including trainings on to solve all title issues, be sure to visit us at TaxSaleAcademy.com. That’s TaxSaleAcademy.com, and don’t forget to get your FREE copy of my newest book, Tax Sale Playbook. Just cover shipping and we’ll get it in the mail to you.
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Take care guys and make it a successful day.
See ya!