Tax Foreclosure

Mon, 12/14/2020 - 1:22pm

If you have clients that buy properties at a tax foreclosure there can be some hidden issues that they need to be aware of for their purchase.  

Tax Foreclosure: A Timeline
Taxes become “due and payable” as soon as the bills are issued by the county.  If they remain unpaid as of January 1st of the following year they become a lien on the property as a matter of law.  This tax lien has a super priority and takes priority over all other liens on the property.  The county does not have to file anything special.  The lien comes into effect merely from being unpaid.

How Does The County Foreclose a Tax Lien? 
In order to foreclose, the taxing authority must file a lawsuit against the owner of the property.  How the owners are served with notice of the foreclosure lawsuit, affects a title company’s ability to insure the property in a subsequent transaction.

How Does Tax Foreclosure Affect Resale of the Property? 
This is where your foreclosure buyer can run into issues.  There are two concerns when reselling property that was purchased at a tax foreclosure sale.  
ISSUE ONE: Right of Redemption
When a property is foreclosed on from a tax sale, the owner of the property (we’ll call them the “ debtor”) has a right of redemption in the property.  This means the debtor has a time period in which they can come back and purchase the property back (i.e. “redeem) from the foreclosure purchaser.  The time frame in which the owner has to redeem the property depends on the classification of the property at the time of the foreclosure.  If the property was residential homestead, the owner has 2 years to redeem the property.  If the property was not residential, the owner has 6 months to redeem.  

Of course that debtor has to (1) repay the taxes that were owed and (2) pay a premium to the new owner, but if they do those things they are able to take back the property from the purchaser.  To redeem, the debtor must pay the purchaser the amount that they paid for the property, the amount of recording fees, and all taxes, penalties and interest.  The owner must also pay an additional 25% of the total if the property is redeemed in the first year and 50% of the total if the property is redeemed in the second year.

This means is that if your client tries to sell the property before the redemption period is over there are exceptions that must be added to the Owner’s Title Policy and the Lender’s Title policy.  A sample exception may read as follows: 

Any rights of redemption in connection with the tax foreclosure and sale reflected by Sheriff’s/Constable’s Deed filed [date of filing], and recorded in/under [recording data],  __________ Records of  __________ County, Texas.

Obviously there are few buyers or lenders that will proceed with closing with an exception like this in their policy.  

ISSUE TWO: Invalidity of the Tax Sale
The way in which the debtor was notified of the foreclosure could provide them with a mechanism by which they can undo the actual tax sale.  Many debtors are notified by publication - meaning they are served by publication of a notice in a newspaper – which is not personal service.  Distinguish this type of service from the kind where the process server meets the debtor personally and hands them the papers.  With service by publication the debtor could possibly argue that the notice was not effective to let them know their interest in the property was subject to being lost.  

On a foreclosure where the notice was by publication, the following exception will appear in the title commitment.  Underwriters differ on how long after the sale this exception must remain on a commitment, but in most cases it can be two to four years after the tax sale:  

Any claim of invalidity of the foreclosure and tax sale pursuant to judgment entered in Cause No., District Court of __________ County, Texas, and as reflected by Sheriff’s/Constable’s Tax Deed filed [date of filing], and recorded in/under [recording data], __________ Records of __________ County, Texas.  

Much like the redemption exception, there are few buyers or lenders that would be willing to accept this exception in their title policy.  

While the above items can be challenges when dealing with a tax foreclosure property, they are not necessarily complete barriers to closing.  There are additional steps that can be taken to clear these up and your expert escrow teams at Texas National Title can guide you in what those steps are.  If you are representing a client looking at tax foreclosure properties it is a great idea to call your closer first so that these issues can be talked through.