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Essential Information About Tax Sales.

JohnMenszer2-Exposure-1000931Lately, I am getting a lot of calls about tax sales. It is no coincidence that CivicSource recently conducted a property tax auction in Orleans Parish. Tax sales involve a lot of moving parts and unfortunately they don’t all work together. Let’s look further into this.

After the tax sale while you are waiting for the three year redemption period to run you are going to have to protect your investment by paying each subsequent year’s taxes.

However, if the property has housing violations you as the tax sale purchaser may receive notices from New Orleans Code Enforcement about a hearing.  If you do not remediate these issues the property may be burdened with fines and penalties.  Even worse, the City will not accept your payment of subsequent year’s taxes without payment of the Code Enforcement lien. This is horribly unfair – to expect a non-owner to fix up a property – but it is how the City operates.

There are two roads to reward with a tax sale.  If the owners redeem the property within the three year redemption period you make a nice return.  Your investment back, plus 5% penalty and 1% per month interest.  Twelve (12%) interest is not bad in this economy.

If they do not redeem, what next? The law provides that you can quiet the title to your tax sale purchase. This is the lure for many people – to get property inexpensively. But there are problems here too. The due process clauses in our Federal and State Constitutions work against the tax sale purchaser. As currently interpreted by our courts due process requires that reasonable attempts be made to notify every stake holder in the property prior to the tax sale.  Often, this doesn’t happen.  Most title companies just assume that tax titles are flawed and will not write title insurance on it.

I find that the people who invest in multiple tax sale certificates do best at these auctions. They win on some and lose on others. The purchasers of sole tax sale certificates sometimes lose their entire investments.

How Good is Your Tax Sale Title?

When it comes to Tax Sales the investor should be guided by the ancient motto “Caveat Emptor,” which in Latin translates to “Buyer Beware.”

There are two main reasons for this:

JohnMenszer2-Crop_-80661) When a property goes to tax sale no one has checked for prior clouds on the title; and 2) The tax sales are often conducted in such a manner that legal notice is not received by the former owners.

When I take a tax sale case the first thing I recommend is a title search. This should reveal the title issues that could be problems later. Next, I make a governmental request for documents that show the steps taken to notify the former owners of the sale. These notices state that the owners are about to lose their property if they do not pay the taxes before the auction. On lucky occasions the record shows that the owners actually got notice, but often it cannot confirm that the notices reached them.

Now a word about titles. The gold standard is a “merchantable title,” which means, not a perfect title, but a title unlikely to lead to litigation. A merchantable title is readily transferrable and a reputable insurance company will write a policy of title insurance on it. The latter is important because most mortgage companies require that a title insurance policy be issued to safeguard their loans. They will not make a loan without the title insurance. It has been the case in South Louisiana that reputable title insurance companies will not issue policies on tax sale properties.

I look at a the purchase of a tax sale as an investment. The tax sale purchaser will have to determine if the risks justify the rewards. Whether, the defects in the title, if any, and the lapses in the notice process, if any, justify the financial risk.

Tax Sales – How do they work?

JohnMenszer-1060877In New Orleans Tax Sales are conducted by online auctions. The price is set at the amount of taxes owed, plus costs. The bidder who offers the least percentage of ownership wins. The city issues the winning bidder a tax sale certificate who becomes the tax sale purchaser and holds a tax sale title.

Tip: Never bid less than 100% ownership, just to get the property. I know you want the winning bid. However, if you decide to quiet the title later, owning less than 100% can be a nightmare. It won’t be worth it. Don’t do it.

Keep in mind that what you bid is just your initial investment. You will have to pay subsequent years property taxes to maintain your interest in the property. And you may have additional costs to keep the grass cut and avoid environmental liens.

The owners have up to three years from the day the tax sale is filed in the public records to redeem the property. In order to redeem the owners must pay tax sale purchaser the amount of taxes paid, plus a 5% penalty and 1% interest per month (12% per year).

After the redemption period is over (if the owners have not redeemed) the tax sale purchaser becomes the owner and can file suit to quiet the title. The goal of a suit to quiet title is to have the courts recognize the rights of the tax sale purchaser.