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Florida Tax Liens versus Florida Tax Deeds
Tax Certificates are like bonds for unpaid taxes. To ensure proper local revenues, the Florida legislature has authorized counties to offer the public a chance to pay other people’s tax liability in exchange for a fixed rate of return until the property owner or an interested lienholder satisfies the outstanding tax liability. To sell tax certificates, the Tax Collector’s office holds a public auction. Investors bid on an acceptable interest rate of return (starting at 18%) and the investor willing to take the lowest rate of return wins the Tax Certificate.
Once a tax certificate holder has held said certificate for at least two years since the property taxes became delinquent, they can file an application for a tax deed with the tax collector’s office. Then, to proceed with the tax deed sale, the tax certificate holder will have to redeem all other outstanding tax certificates, interest, omitted taxes, plus interest, any delinquent taxes, plus interest, and current taxes, if due, covering the delinquent property.
The Clerk is tasked with holding the sale and as such they have to determine the minimum starting bids for the property in case of the delinquent taxes not being redeemed (paid off) by the property owner or their lienholders. That minimum bid differs depending on whether the property is homestead or non-homestead property. You can think of tax certificates as seedlings for future tax deeds.
In contrast, a Tax Deed is a type of title you receive from the Clerk of Court of the county in which you placed your winning bid, whose basis is the non-payment of property taxes by the prior property owner. A Tax Deed is not a Warranty Deed. A Tax Deed is not a Quit Claim Deed. Quit Claim Deeds are bare bones transfers in which the seller promises to give the buyer whatever interest he/she may have, if any, in the property described therein. There are no guarantees and no promises to defend title issues in the chain.
A Tax Deed is a completely different animal. Tax Deeds are brand spanking new title issued directly from the state to the winning bidder. There are no guarantees. However, this doesn’t mean that investors are now stuck with the equivalent of a Quit Claim Deed.
Investing in real estate is all about due diligence. Due diligence in the context of Tax Deeds means that you are taking reasonable steps to determine the physical condition, location, access to, and occupancy of the property in calculating your bid price at auction. Due diligence also means that in calculating that bid price, you take the time to review the chain of title to the property, review the Clerk’s Tax Deed pre-auction file, assess the potential cost of surviving liens, and plan for the cost of hiring an attorney to quiet the title to the property if you are not holding it for at least the next four years.
A proper title search and analysis will cost you a couple hundred dollars and can save you hundreds of thousands of dollars. It also can help you identify profit potential blind-spots. At a minimum, title due diligence should involve do the following:
· Pull the property tax history
· Pull the property appraiser history, reviewing the legal description therein, assessing whether the property is or is not receiving a homestead exemption, comparing the legal description on the Clerk’s notice of sale to the appraiser’s legal description and the last deed of record’s legal description, and comparing the name and address of the assessed owners to the last deed of record
· Order a lien search. For about $90 you can see if there are utilities owed, county/city liens, permit history, and tax history
· Do a title search. This involves reviewing the chain of title to the most recent marketable title, and then searching under the names of the property owners for county and city liens, mortgages, judgments, child support arrearages, IRS claims, probate orders, department of justice judgments, certified copies of credit card or other judgment holders, SBA loans, county mortgages, state of Florida mortgages, association liens, filings of Lis Pendens*, subsequent deeds, trust agreements, death certificates, powers of attorney, affidavits, and testaments. Then search under the legal description for wild deeds, wild mortgages, and other wild claims and for inconsistencies in the legal description across time. Look for sinkhole reports, notices of commencement, mechanics liens, and other charging liens.
· Look through the Tax Deed file at the Clerk’s office, compare the liens found with the parties that were sent notice of the upcoming auction.
If you do a title search yourself remember to set aside 3-5 hours per property. Depending on the prior owner’s name (very common versus very rare), the search may take more or less time, but the estimated time above is a good average. If you do not have time to do the research yourself, then strongly consider hiring a title search professional such as an attorney or title company to produce a title abstract or O&E Report (owners and encumbrances report). The turnaround time for a reliable and in-depth search is between 24 and 48 business hours.
Items of Record that can Cloud your Title
When you purchase a Tax Deed and there is a Bank of America, Wells Fargo, or other private mortgage previously secured by the property, the state is somewhat guaranteeing that the private lender cannot attempt to collect that mortgage from or foreclose on the Tax Deed purchaser, and his/her successors in title. Similarly, if there are any homeowners’ association, or condominium association liens on the property, the associations cannot collect past due sums that accrued prior to the date of the issuance of the Tax Deed. Credit card certified judgments, private litigation certified judgments, and other private claims of record which purport to secure collection of debt through the property are also inferior to Tax Deeds, and therefore uncollectable against the Tax Deed purchaser, and his/her successors in title.
Title Search v. Municipal Lien Search
A title search will examine the chain of title for potential clouds to title if a Tax Deed is issued. A Municipal lien search will look to utilities, ordinance violations, permitting, and other factors that may not be recorded but that may still create a lien that would survive a Tax Deed Sale. It is worth paying the few hundred dollars to get verification of municipal liens because these liens SURVIVE a tax deed and cannot be quieted out.
A homestead tax lien is a lien against property for the erroneous or fraudulent assessment of a property as a homestead when it was not in fact a homestead. There are specific statutory penalties and a fixed annual interest rate on the taxes that should have been paid had the property been assessed as a non-homestead. Investors should consider this lien a super priority lien, equivalent to a lien for non-payment of property taxes. While these liens are ideally included in the minimum bid amounts, they are quite often not included in calculations and MUST be paid off by the Tax Deed purchaser.
Municipal liens for overgrowth, demolition, trash, health violations, and other hazards...
These liens are not normally super-priority liens. Instead, the priority they are given is based on when the lien was recorded in the official records of the county where a property is located. The per diem fines on these liens can feel like an egregious punch in the stomach for investors, ranging from a few thousand dollars to daylight robbery. These liens specifically survive Tax Deeds under Florida law.
Child support liens: In the United States, both at the Federal and state level, there is a deep commitment to the public policy that children must be prioritized, cared for, and protected. As a result, child support delinquencies are given special status and priority, even in bankruptcy. In Florida, child support liens are effective for 20 years from the date of the original filing of the warrant or other document required by law to establish the lien.
For a child support obligation to become a perfected lien against real property, it must satisfy the conditions of Florida Statute 55.10.
A child support lien is not, on its face, a lien “held by a municipal or county governmental unit, special district, or community development district,” so why should an investor care about these liens?
If the lien is held between private parties, even if perfected, it is not superior to a Tax Deed and will be extinguished so long as the Clerk sent certified notice to the lienholders of the sale.
If the lien is held by the Florida Department of Revenue, and the Clerk sent certified notice to the lienholders of the sale, the Department can argue that it is a super priority tax lien, co-equal in dignity to the property tax lien and therefore not extinguished under Florida Statute 197.552 because of the priority of status created under Florida Statute 197.122.
The moral of the story is, if you see a child support lien, look at whether the State of Florida is involved in the collection.
Criminal fines and penalties: Fines and penalties assessed against state criminal defendants for defense fees, specific criminal fines, and restitution are collected through the Clerk of Court of the county in which the crime was prosecuted. The lien specifically survives Tax Deeds under Florida Statute 197.552 as a lien held by the county because the debt is collected through the county Clerk, a county agent.
Quieting Title v. Cheap "Title Certificates"
Because Tax Deeds are creatures of a state’s administrative foreclosure (another way of saying an involuntary sale), like judicial foreclosures, they can be challenged and undone in the courts.
Whether your investment strategy involves acquiring property to flip or acquiring property for rental purposes, every Tax Deed acquisition had better involve quieting the title. In the case of flips, the reason is obvious, your end buyer will want to use a title company to close and receive a Warranty Deed. Flips take 3-6 months on average, and so investors are almost certain to hold on to the Tax Deed for less than four years. Any respectable title insurance underwriter will require, as a title clearing condition, that the Tax Deed owner file suit to quiet the title against those prior interest holders in the chain who should have been noticed of the Tax Deed sale as well as those prior owners who appear in quit claim deed chains and were not bona-fide purchasers for value.
In the case of rentals, even if the investment goal is to hold the property for at least four years, the option of refinancing the property to improve it decreases substantially because your lender will not be able to get title insurance on their loan without a quiet title. Additionally, no investor wants to get served with a lawsuit to undo the Tax Deed four years in, and have to account for every penny coming in and every penny being expensed on their rental property to a complete stranger. I have yet to meet an investor who keeps intact receipts and accountings for this long.
By filing an action to quiet the title, investors shorten that statute of limitations period by forcing the prior interest holders to speak up or forever hold their peace once they are served with the investor’s lawsuit.
An action to quiet title can also encourage the IRS to disclaim an interest in the property before the 120 day period passes. The United States has granted permission to be the defendant in this kind of lawsuit under 28 U.S.C. § 2410. The goal in filing an action to quiet title is that after formally serving the IRS with the lawsuit, they will file a disclaimer of interest to the property. I have found that within 30 days of formal service, the IRS files a disclaimer in response. To clear the lien from the title, a certified copy of the disclaimer may be recorded in the official records of the county where the property is located. The investor can then proceed with undertaking the physical improvements and upgrades in their plan to flip the property, so long as there are no other Federal liens.
There is no shortage of investors who have told me “well so and so title company will close without doing a quiet title and issue title insurance subject to a quiet title” or “well so and so title company will close with a Tax Deed search certificate.” Wonderful, you’ve identified companies that you should never work with or refer to.
Title insurance premiums are promulgated by the State of Florida at a fixed rate that is directly related to the purchase price of the contract. Therefore, you are paying the same fixed sum for your buyer’s title insurance policy whether they receive clear title or not. Imagine paying the same rate for a hazard insurance policy that doesn’t cover sinkholes, hurricane damage, or flood damage as another policy that covered all three of those items. Would you feel cheated if you got the policy that did not cover sinkholes, hurricane damage, or flood damage? Would you refer the insurance agent that sold you the bare bones policy to other people? What kind of reputation is your business going to have in the homebuyer community?
If the end-buyer community perceives you as cutting corners on the quality of title you are conveying, you can be certain that they will perceive you as cutting corners on the quality of craftmanship of your flips. Additionally, by not tolling the statute of limitations against any of the prior interest holders of record, you can guarantee having to defend title litigation and paying tens of thousands more in attorneys’ fees and costs than in a quiet title suit. Is that a risk you want to take with your profit margins?
Investors often ask why actions to quiet title take “so long.” While it is true that properly done actions to quiet title take an average of six to twelve months, in the scale of litigation these are fairly quick proceedings. To put matters into perspective, mortgage foreclosures can take two to five years. Complex personal injury litigation can take five to ten years. Contested divorces can take one to three years. The time frame is also impacted by the judge assigned to your case, which is completely out of your or your attorney’s control. Circuit judges manage 5,000 to 10,000 cases any given year in the most populous counties, so you can imagine that getting a hearing date before your assigned judge may take months.
A Note about IRS Liens:
Since Federal law says a Tax Lien is a lien “upon all property and rights to property, whether real or personal,” and because Federal law is supreme and preempts state law, then it’s decided! The Tax Deed cannot wipe out the IRS lien! Right? Well, as lawyers will tend to tell you, it depends.
The Federal government understands the importance of revenue raising for the states and has created relief from preemption for the states so long as the right hoops have been jumped through. When you are preparing yourself to bid at a Tax Deed auction, and your title report indicates there is an IRS lien attaching to the property you must confirm that the Clerk of Court sent notice to the IRS of the impending tax foreclosure sale.
The Clerk of Court needs to have sent notice of the Tax Deed sale in writing, by registered or certified mail or by personal service, not less than 25 days prior to such sale, to the Secretary of the Treasury. If notice has been sent as directed by Federal law, then the IRS has 120 days from the date of the sale to redeem the property.
What if the IRS Redeems? The IRS has to pay you back your purchase price, plus 6% annual interest, plus necessary expenses paid to maintain the property less income + a reasonable rental value. That’s right, you do not have to be renting it out, the IRS can impute rental income.
Federal law does not require the IRS to reimburse you for all the upgrades, flooring, and improvements you made to the property. Thus, if you take no steps to have the IRS discharge their lien or disclaim their interest to the property you should wait at least 120 days before you begin work on the property, or risk losing a painful amount of cash.
Why Title Insurance is Essential to Profit
There will always be challenges. The three most common challenges to a Tax Deed are 1) that the prior owner paid the taxes before the Tax Deed was issued, 2) that the prior owner or interest holder did not receive notice of the Tax Deed sale, and 3) Sovereign Citizen challenges.
Prior owners of record or prior lienholders of record who did not receive notice of the Tax Deed sale can challenge the validity of your Tax Deed based on Constitutional due process challenges. On its face, it may appear that the Clerk sent certified notice to all of the interested parties in the chain of title, but parties have still successfully challenged notice based on where the notices were sent, the type of follow up the Clerk engaged in when mail was returned unclaimed or undeliverable, the information prior owners gave the Tax Collector when their addresses changed, the prior owners having other properties in the same county, and even whether notice was posted at the property. This is why it is so important to retain an experienced real estate attorney soon after you receive your Tax Deed.
Sovereign Citizen Challenges
Mention the phrase ‘sovereign citizen’ to an attorney and you will hear groans, laughter, rage, and frustration within seconds. Sovereign citizens are individuals who believe through fantasy, delusion, or cult-like control, that they are not subject to the laws of the State of Florida or the United States of America, and that instead they and the property you’ve purchased are their own sovereign state.
They are notoriously litigious individuals who will file bulky nonsense pleadings in their names and those of their alter ego often referring to non-existing tribes, religious sects, inapplicable federal laws and Uniform Commercial Code regulations. Their goal is to consume your attorney's time in responses, motions to strike, and hearings in the goal to stay in the properties or keep their ‘tenants’ in the properties as long as humanly possible.
These individuals, and their alter egos, will file sham pleadings in the quiet title case, in federal court, and in bankruptcy court, as well as attempt to involve other federal agencies by making non-sense allegations against your company, your attorney, and the judge.
Rarely ever are they successful in challenging your Tax Deed. Nevertheless, they can be very successful in creating expensive litigation for you and ignoring their filings is at your peril. Since you have no way of knowing if the prior owner, unauthorized occupant, former tenant, fake title holder of record, etc are sovereign citizens, its essential to retain an experienced real estate attorney soon after you receive your Tax Deed to quiet the title and silence their "claims" through a judgment, and no Tax Deed Certificate service can do that.
Parties that can challenge your Tax Deed, make claims of superior rights or right to notice, or that have a lien on your title are marked as clouds on title. These clouds have to be removed or cured prior to a title company issuing title insurance on a refinance or purchase transaction. Without recorded releases of lien, or quit claim deeds from prior title holders in favor of the Tax Deed purchaser, these interested parties remain clouds on title unless removed via a judgment quieting title. Its worth the investment (of generally $6k or less) in time and money quieting the title, than paying 50k or more in attorneys fees defending title challenges. I represented a Tax Deed client a few years ago in a Tax Deed challenge suit; the former owner's attorney fees were well over $100,000 for about eight months of litigation. Attorneys fees for actions to quiet title will always be far less than attorneys fees defending an action to undo a tax deed or defend the title after you sell the property. We offer flat graduated fees for quieting titles. In contrast, defense litigation incurs an hourly rate. Quieting title may take 6-12 months, but that too is far less time than the years it may take to resolve title defense litigation. Considering the risk, cost, and time, it is a no brainer to quiet the title.
Once the title is quieted by receiving a final judgment removing all clouds that are inferior to the tax deed, and you've paid the surviving liens, you can get title insurance coverage on your Tax Deed property. This allows you to sell the property via Warranty Deed, expanding your potential buyer base exponentially. (All traditional mortgage lenders and most private lenders require their borrowers to have warranty deeds). If you do not have a quiet title, you've just limited your potential buyer pool to investors, who will absolutely not give you the best price offer for the property. Additionally, you just limited the available lender pool to refinance the property, delaying further acquisitions by years!
If you're ready to maximize the value of your Tax Deed, contact Natalia@lcolawfl.com to get your Tax Deed title quieted FAST. Cases are filed as quickly as 48 business hours after receipt of payment.
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