16) Foreclosures

Let’s talk about foreclosure and the two primary methods you’ll encounter as a tax lien and real estate investor.

Foreclosure only becomes a possibility for tax lien investors after the redemption period has expired. Remember that the property owner is protected from foreclosure and, in many cases, even protected from any contact from a tax lien certificate holder during the redemption period. Redemption periods typically range in length between 6 months and 3 years.

There are two primary methods for executing a foreclosure through a tax lien certificate, and the method used is determined in the state statutes. The first is called a judicial foreclosure, and the second is called an administrative foreclosure.

The steps to complete a foreclosure, whether judicial or administrative, are the same – the primary difference is that a judicial foreclosure is done through the court system using an attorney’s help, and an administrative foreclosure is done through the county. There are advantages and disadvantages to each.

Judicial foreclosures typically cost more money and take much longer, but that isn’t always a bad thing. Judicial foreclosures often cost $2,500 – $3,500 and can take a year to complete in some cases. Administrative foreclosures typically cost $250 – $750 and, depending on the county, can take 6 – 12 months to complete.

Here are the typical steps to any foreclosure in simple terms:

1. Default by Property Owner
   1. This happens when the property owner fails to pay their property taxes during year 1.
2. Notice of Default
   1. The county will notify the property owner of the default, or delinquent property taxes, towards the beginning of year 2.
3. Roll Up All Liens
   1. In most cases, a tax lien certificate holder must become the only tax lien certificate holder by purchasing all other viable tax lien certificates. This is called rolling up, and is usually done in conjunction with step 4.
4. Filing of the Complaint
   1. Once the redemption period has passed, the tax lien certificate holder, will initiate the foreclosure by filing a complaint. This is done through an attorney or through the county government.
5. Notice of Complaint to Interested Parties
   1. Once the complaint has been filed, all financially interested parties must be notified of the foreclosure and pending sale of the property.
6. Responses and Remedies
   1. All parties have a time period within which they must reply with their defense or response. In most cases, the only viable response by financially interested parties is full payment of the tax lien certificate along with interest and penalties accrued to that point.
7. Sheriff’s Sale
   1. The Sheriff will attempt the sell the property at a public auction. The starting bid is usually the sum of all tax lien certificates, or the roll up, along with any fees, penalties, or additional interest earned from the time the complaint was filed, or when the roll up event occurred, and the time of the sale. The price is then bid up from there, with the surplus going to the previous property owner.

Let’s look at Florida’s state statutes as an example of an administrative foreclosure and discuss some positives and negatives:

A tax deed is applied for by a tax certificate holder at any time after 2 years have elapsed since April of the year of the issuance of the tax certificate… (Florida Statute 197.502)

The tax collector shall deliver to the clerk of the circuit court a statement that payment has been made for all outstanding certificates or, if the certificate is held by the county, that all appropriate fees have been deposited, and stating that the following persons are to be notified prior to the sale of the property:

• A legal titleholder of record.
• Any lienholder of record if an address appears on the recorded lien.
• Any mortgagee of record if an address appears on the recorded mortgage.
• Any lienholder who has applied to tax collector to receive notice.
• Any lienholder that has a lien against a mobile home.
• Any person to whom the property was assessed on the tax roll for the year in which the property was last assessed.

• The clerk of court shall notify, by certified mail with return receipt requested or by registered mail if the notice is to be sent outside the continental United States, the persons listed in the tax collector’s statement pursuant to Florida Statute 197.502(4).
• Notice must be mailed at least 20 days prior to the date of sale.

Here is an example provided by the county of what the notice might look like:

WARNING: There are unpaid taxes on property which you own or in which you have a legal interest.  The property will be sold at public auction on ___ date unless the back taxes are paid.  To make payment, or to receive further information, contact the clerk of court.

Back to the State Statute:

Upon the receipt of the application as provided by Florida Statute 197.502, and after the proper charges have been paid, the clerk shall publish a notice once each week for 4 consecutive weeks at intervals in a newspaper selected as provide in 197.402. 

Proof of the publication or posting of the notice provided for in this section shall be filed by the clerk of the circuit court in the clerk’s office on or before the date fixed for the making of the sale.

Real Property advertised for sale to highest bidder as a result of an application filed under 197.502 shall be sold at public auction by the clerk of the circuit. 

The starting bid is: The amount required to redeem the tax certificate, plus the amounts paid by the holder to the clerk in charges for costs of sale, redemption of other tax certificates on the same property, and all other costs to the to the applicant for tax deed, plus interest at the rate of 1.5 percent per month for the period of running from after the date of application for the deed through the month of sale and costs incurred for the service of notice.

There are obviously very specific steps that need to be followed in Florida, and there are similar rules in every other state as well. It’s crucial that each step is followed thoroughly and perfectly, otherwise interested financial parties can dispute the foreclosure and if they can prove that a step was incomplete or completed improperly, then they can retain their interest in the property and the foreclosure is nullified.

The good news is that you will not do the actual work described in the steps above or under the state statutes. In a Judicial Foreclosure state, the work will be handled by an attorney’s office; in an Administrative Foreclosure state, the work will be handled by the county.

But it is important to understand what steps need to be taken in order to make sure that they are taken by each office so that you’re protected.

On the surface an administrative foreclosure is preferred due to the cost and timeline, except that each one of those steps is completed by county workers not attorneys. Attorneys can be held liable for their mistakes and county workers cannot.

So while it is less expensive initially, it’s possible that you could end up paying in the long run.

One way to combat the terrible scenario above is by completing what’s called a Quiet Title, which is usually included and completed in the attorney’s fee of $2,500 – $3,500, but is not included in the county’s fees and processes. If foreclosing in a non-judicial, or administrative state, then you would hire an attorney to quiet the title once the foreclosure is complete, which usually costs $750 – $1,500.

Quieting title is essentially when an attorney compiles all the proof showing that the complaint filing, notices, and other steps were completed fully, presents that evidence before a judge, then the judge awards a Quiet Title. Once the title is quieted, previous parties with financial interest in the property are quieted and cannot challenge the foreclosure.

If purchasing a tax deed from the county, most of those steps were already completed before the investor purchases the tax deed, except for quieting the title. That’s an important thing to consider doing when purchasing a tax deed.