April 26, 2021
by Cody W. Lyons
As the recovery from the Great Recession began, and with the introduction of many television programs depicting “house-flippers” earning huge profits on distressed homes purchased at foreclosure auctions, many new investors have entered the market of acquiring assets through judicial and non-judicial foreclosure sales. These foreclosure sales are often conducted by lenders on the courthouse steps after a borrower has defaulted on one or more of its obligations to a lender. A relatively newer and lesser-known type of asset acquisition opportunity is government-imposed tax sales.
The most common type of tax sale occurs when property owners become delinquent by not paying their property taxes, and a county or municipality issues what is called a Writ of Fieri Facias, commonly known as a “Fi Fa.” If enough money is owed, or enough time passes, the local government will then publish for sale, and auction off the tax interest in the property in order to satisfy the outstanding taxes owed; the winning bidder will then be issued a tax deed. Tax deeds are often acquired for a tiny fraction of what a property is worth, causing a growing interest from real estate investors of all varieties. Unfortunately, there are significant risks and miles of red tape involved that many investors are not aware of until after they have already sunk a large amount of time, effort, and money into their investment.
While the return on a tax deed investment has the potential to be significant, there are many pitfalls that exist along the way that may not be obvious to an investor who is not experienced in tax sales. After bidding successfully at a tax sale, a purchaser has no right to use or occupy the property for at least 12 months. During this time, the delinquent taxpayers may still be living on the property and/or any homes or buildings located on the property might be destroyed or fall into disrepair. After the 12-month period has expired, the tax deed holder will then need to foreclose on the tax deed by publication and service of a notice of a right to redeem to all parties with an interest in the property, including lien holders, mortgagees, and joint tenants. Any party with an interest in the property may redeem the tax interest by paying back the delinquent taxes plus a premium. Locating and serving all interested parties creates potential hurdles of its own. For example, if an interested party has recently died, there will need to be investigation as to the status of the estate, if there was a will, who the decedent’s heirs are, etc., and all appropriate parties will need to be served with this notice.
Once the foreclosure process is complete, title to the property still contains a theoretical “cloud,” requiring further action to obtain insurable title. The next step is to file a petition to quiet title to the property, also known as a quiet title action. At this point, tax deed holders are required to serve all interested parties a second time and prove to the court that they have strictly complied with all procedures and establish that they are entitled to clear title to the property. In the event that the court grants the petition in favor of the tax deed holder, most would assume that they may finally be able to sell the property and get a return on their investment. However, another trap that many investors have been surprised with is that a successful quiet title action is not always the end of the journey. Even after following all of the requirements and winning a quiet title action, a title underwriter may refuse to issue a policy if they determine that the tax sale was not conducted properly, or if all interested parties were not correctly served with notice. A title underwriter may require the entire process to be completed again, or they may refuse to issue a policy altogether if the tax sale was conducted improperly and determine the tax deed to be invalid.
Obviously, investing in tax deeds carries significant risk, which in some cases can lead to the entire loss of an investment. However, after conducting significant due diligence before purchasing a tax deed and following all steps required by Georgia law, there is a potential to receive an exceptional return on the original investment. If you are thinking of bidding or investing in a tax deed, it is advisable to investigate and speak with an attorney that is experienced with this process who can guide you through this tricky and ever-changing field of law.
Cody W. Lyons is an attorney at Flint, Connolly & Walker, LLP and currently represents individuals and businesses in numerous corporate and real estate matters. Cody routinely advises investors, sellers, and lenders on negotiating and structuring real estate and corporate transactions. Cody is also a business owner and real estate investor and has knowledge and experience with various asset acquisition and exit strategies, including note purchases and assignments, stock purchases and sales, tax sales, estate acquisitions, and foreclosure sales.