Transcript:
Welcome to the Tax Sale Podcast, where tax sale investing is made easy. My name is Casey Denman, I’m a tax sale veteran, the leading tax sale expert, author of The Tax Sale Playbook, founder of The Tax Sale Academy and I’m your host right here on The Tax Sale Podcast.
Thank you so much for joining me on today’s podcast episode. This is a completely free podcast and is brought to you through and because of The Tax Sale Academy. If you’re looking to learn more about investing in tax defaulted real estate, just head to TaxSaleAcademy.com. Again that’s TaxSaleAcademy.com.
On today’s episode I wanted to discuss the different selling styles for tax deed properties. Selling properties that have gone through tax foreclosure is much different than your typical real estate transaction. And this is something that really, really, shocks a lot of new investors AFTER they purchase a tax sale property. Myself included.
Imagine your frustration when you’re marketing your property hard, spending quite a bit of time and effort trying to get it sold. Then you finally line up a buyer, negotiate a deal and sign a contract. You’re excited about getting it closed, send it to your title company and wait. Then a week later, they tell you that the title can’t be insured. Which means you can’t close on the property. Usually when they hear this, your buyer will back out and you’ll have wasted quite a bit of time and money. That was the very first tax sale deal I ever did and it fairly common based on the number of messages and comments I get to that extend.
So before we discuss the two different selling styles, we MUST address the primary issue of title insurance. So every property has a chain of title – this simply means a chain of sorts from one owner to the next. Owner A sells to Owner B, who sells to Owner C and so forth. That’s a very simple chain of title. When a seller sells a property, the buyer of that property wants to know that the seller actually does own the property. Anyone can create a fraudulent deed selling a property that they don’t own, collect money and disappear. It’s illegal in every sense of the word, but it’s possible. When we factor in mortgages and liens, if they aren’t paid at closing, the buyer would inherit these. So, in that regard if a buyer buys a property that the seller promises has no liens, only to later find out they owe $100,000 to a mortgage company then that’s obviously a big issue. So to solve this, we have title insurance. This is where a title company researches all of this information. If it satisfies their requirements, they’ll then guarantee this to the buyer. This is done so through title insurance – if there’s an issue, the insurance kicks in and pays for it. Issues after the fact are pretty rare, but could happen.
Alright, when a property goes through tax foreclosure the chain of title is broken. Instead of going from owner a to b to c, the title goes from owner a to owner C. Owner A never actually sells the property – they lose it to tax foreclosure. This foreclosure requires pretty specific criteria be met and because of all of this, title insurance companies typically won’t insure it. So you purchased a property where you can’t get title insurance. Alright, there are three ways to cure it – something called a suit to quiet title, a tax foreclosure certification or in certain scenarios a deed from the former owner. We are not going to go into details on the curing methods today as I have plenty of other trainings on those. So, you either cure the title or you don’t. When you cure it you have what’s known as clear title, you provide a deed with warranty and you can get title insurance. When you don’t cure it, you have a clouded title and you can’t get title insurance which diminishes the value of the property. That’s what we need to know for this podcast.
Alright, we discussed that because it greatly impacts how you’ll sell your property.
The first way to sell your property is through what I refer to as a conventional transaction. When you buy real estate, you’ve likely purchase it through conventional methods. When you look at Realtor listings online or on Zillow, it’s a conventional transaction. What this means is that the property has a clear title. A buyer makes an offer and negotiates a contract for the property, and as part of that negotiation and the contract they sign, the seller will guarantee that the title to the property is clear.
Most contract includes the stipulation that title insurance is also issued at closing. As a seller, if you truly believe that your property is free and clear from all liens, then this insurance protects you in the event the buyer, at some point in the future finds and issue with the title. Remember, you’re guaranteeing clear title on the contract and through the deed you sign – if there is an issue and the buyer sues, then they’ll sue you. But if you have insurance, the insurance will cover it. As a buyer, this title insurance protect you because you have an insurance company to guarantee clear title instead of just some random seller to sue that might not have any assets or could be dead by the time you find the issues.
Usually, if there is an issue getting this title insurance prior to closing, it usually requires the seller make diligent effort to solve the title issues or the buyer has the option to cancel the contract. Now, title issues on conventional transactions can happen – these are usually pretty easily solved issues. It could be that the last deed was missing a signature or had a typo in the legal description for example. An attorney is hired, corrects the issues and then title insurance can be utilized.
Now, even though you purchased your property at a tax sale and it was tax foreclosed, once you have cleared the title through the methods we discussed and get title insurance, then the property’s value returns to full market value. This conventional selling process is the only way for you to get full market value. A buyer should and is going to expect a clean title with title insurance and will pay market value because of this.
The marketing process itself is wide and varied. But once you have a clear title, this is where you’ll list your property with a Realtor and let them handle the work. You could list your property on Zillow, the newspaper or wherever else you want. Most consumers, when they see a property being advertised expect clear title – so feel free to market it however you want. Once you find a buyer, you’ll negotiate, sign a very conventional contract, then a title company or real estate attorney will prepare everything and issue title insurance, for a fee of course and then you’ll sign, get your cash and move on. Very simple process.
The second way to sell your property is through a nonconventional method. Clearing a title takes time, money and effort. Obviously that time money and effort translates into full market value for your property. But what if you don’t want to invest the time, money or effort into clearing the title? Well, that’s when you can sell the property WITHOUT title insurance. Essentially, you’re selling the property using a Quit Claim Deed, without any guarantees when it comes to the title. The next question in your mind should be, why would a buyer want to do this?
It all comes down to price. When you sell a property that has a clouded title it’s going to be sold much cheaper than a property with a clear title. We can almost compare it to selling a well kept perfect condition car, to a car that has been in an accident. There are issues with the property since the title can’t be cleared. Because of this, the buyer is taking a bit of a risk that THEY can clear the title and because of that risk they aren’t going to pay nearly as much for the property. And in fact, MANY buyers will not even buy the property in the first place. So you have a smaller buyer pool willing to pay less money for the property.
On that same note, this strategy likely won’t work for too many properties over the $10,000 mark. If someone is investing much more into a property, they likely won’t want to buy without title insurance, so keep that in mind.
Now, all of this probably sounds like a loss for the investor. But if you strategize correctly, it doesn’t have to be. Most the properties that I sell under $10,000 are sold without title insurance. And the reason is . . . again, price. When I’m planning to use this nonconventional strategy, I’ll buy properties that are cheap and well below market value. Then I’ll work to sell them as quickly as I can with a sufficient margin to me. Even though I’ll make money, the price at which I sell them at will also allow my buyer to clear the title and make money themselves if they decide to sell it or have equity if they decide to keep it. This provides incentive to my buyers. Yes, they’re taking on risk, but that comes with a discount of 30-50% sometimes so it’s a risk they’re willing to take on.
The marketing side is different from the conventional selling methods. It SHOULD be marketed differently so that you potential buyers have the right expectations. Marketing the standard way will result in buyer who expect the transaction to be closed with title insurance. So instead, when you market your property you’ll likely advertise it in places that are a little out of the normal. Craigslist for example, with a clear and concise sentence that the property is being sold without title insurance and a request for the buyer to perform their own diligence. You can also sell the property through an auction setting like eBay or Bid4Assets with the same disclaimer. It’s important that the property is bought at the right price, so subsequently you can sell it at the right price that allows you to garner interest of those buyers will to exchange the lack of title insurance for the equity that comes with the property.
Once you find a potential buyer, you’ll have them sign a contract that reiterates the fact that there is not guarantees on the title. From here you can utilize an attorney – who will handle the escrow and prepare then record your Quit Claim Deed. They’ll obviously charge for this service, but it’s most similar to a typical real estate closing – they take care of the details and you sign the documents. The documents will likely also include yet another disclaimer that the attorney is not guaranteeing any title, did not research the title and the buyer is accepting it as-is. So don’t think you’re going to sneak anything by the buyer.
Outside of using an attorney, if the buyer is comfortable with you handling the funds, you could handle the process yourself. This is where you’d collect the funds, prepare the Quit Claim Deed, record the deed at the county recorder’s office and then get the deed sent to the buyer and you’re all set.
So, there are the two different selling styles for tax deed properties. Each one of them has a place and time to use them. But hopefully knowing that these two different options exist for selling your tax deed properties will allow you to think creatively,, strategize properly and in the end, make more money in this business.
Thanks so much for listening today. If this episode or any of our other episodes have helped, please do us a huge favor and leave some positive feedback on whatever podcasting platform you’re listening to us on today. It really makes a huge difference to us.
If we can be of any additional help, there are a bunch of links in today’s show notes including one to our primary site at TaxSaleAcademy.com.
Take care and make it a successful day. See ya!