Volatility in the Real Estate Market in Georgia over the last several years has led many of our Real Estate Investor clients to invest in Tax Liens. There are many potential benefits to this type of investment, but many savvy Investors get into the game without fully understanding how they’re going to cash back out.
Basically, if property taxes are not paid on a piece of property, then the County may seize the property and sell it. The idea is similar to that of a foreclosing bank, but the practice is much different. So, an investor goes to the Courthouse steps and bids in an auction to buy the property (or at least the Tax Deed for the property). What happens next?
The investor waits. He has not bought the property. He has bought the property subject to the right of redemption. If, at any point during the 12 months after the investor bought the tax deed, the original property owner or any lienholders on the property come to the investor and pay him the amount of his winning bid plus 20%, then the investor is obligated to accept that payment, and the property is no longer his. (There are additional provisions for another 10% in the second year, but we’re not trying to get too detailed here).
Okay, no one has redeemed the property for 12 months, so the investor owns the property now, right? No. Now he has to foreclose on the right to redeem, again, much like a foreclosing bank. He has to directly notify anyone with a legal or equitable interest in the property, and also publish a notice in the paper giving notice of the foreclosure. Once that process is done, surely he owns the property, right? Well, sort of. He can build on it, use it, etc…, but when he eventually wants to sell the property, he has to be able to convey marketable title. The definition of marketable is a little bit squishy, but for practical purposes it means title that you can get title insurance for. In Georgia, a tax deed and foreclosed right to redeem simply isn’t enough.
In order to get marketable title, you now have to move forward with a quiet title action. This is technically a lawsuit, filed in Superior Court, where a judge issues a decree vesting good marketable title in the new owner. The process of a quit title action can be cumbersome. It involves title searches, notices being sent to banks, lienholders, and potentially all adjoining property owners. All parties involved in the case can file answers or challenges to the title, and the Court may appoint attorneys known as special masters to review the title and make a report regarding the status of title to the property. Also, the investor will need to make a risk determination as to whether he wishes to file his quiet title action, and establish title good against all the world (which includes any boundary-line issues with adjoining parcels, etc…), or whether he simply wishes to eliminate any interests in his specific property, while leaving any potential disputes with neighbors hanging out there.
Additional risks involve the tax-debtor filing bankruptcy, or if the tax-debtor has passed away, various claims that may be filed by his heirs or beneficiaries.
The point is this: Tax liens can be great investments. You may make 20% on your money in less than a year (which is fantastic), or you may get a piece of property for a very low price (which is also great). However, investors need to calculate the time and cost of these various steps in obtaining marketable title when making a decision on how much to bid at an auction.
If you have questions about tax-lien investing, or any other Real Estate questions, please contact our office and let us know.