Tax deed auctions provide an opportunity to buy tax-delinquent properties at a discount, wipe away existing liens and mortgages, and earn sizable profits in the process.
This week, I invited my friend Phil Kessler back to the podcast to teach us how this unique type of real estate investing works.
If you’ve ever wondered how tax deed auctions work, how to win them, and how to due diligence this type of real estate, then don’t miss this insight-packed episode.
What you’ll learn:
- How tax deed investing differs from tax lien investing
- How tax deed auctions work, how they differ from other foreclosure auctions
- The most important things to due diligence when it comes to tax deed properties, and how to due diligence them
- The most helpful online tools for property due diligence
- How to buy tax delinquent properties BEFORE they go to auction (and avoid competing against scores of other bidders)
- How redemption periods work, and which states have them
- How a quiet title lawsuit works, how much it costs, and what happens if a title dispute arises
- How tax deed auctions affect existing mortgages and liens, and how to verify the rules in your state
Have you ever bid in a real estate auction? What was your experience? What other questions do you have about tax deed investing that weren’t covered here? Let me know by leaving a comment.
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Links mentioned in this episode:
- Summary PDF of state-by-state rules, interest rates, and redemption periods for tax lien certificates and tax deeds
- The Deed Feed
- Velocity REOs
- Grant Street Group
- AAR Auction
- Natalia Ouellette (real estate, tax deed, and estate planning law)
- How tax lien investing works and how to buy tax lien certificates (HYW066)
- Real estate investing through house auctions and hard money lending with Ethan Gao (HYW032)
- Schedule a private 1:1 consultation with me
- HYW private Facebook community
Read this episode as a post:
Andrew Chen 01:22
My guest today is Phil Kessler.
Phil is a tax deed and tax lien investor who has extensively researched the tax foreclosure investing laws in states like FL, MD, AZ, NJ, CO, and TX.
He’s been investing in this asset class since 2013. He also creates educational content about tax deed and tax lien investing at propertyonion.com, a website that provides information about foreclosure and tax deed auctions. He’s known on the site as the “Tax Deed Professor” for his expertise on deed investing.
I previously had Phil on the podcast to talk about tax lien investing, and today I invited Phil back to share insights on tax deed investing. There are similarities, but there are also key differences.
Phil, thanks so much for joining us today to share key insights about tax deed investing!
Phil Kessler 02:07
Yeah. My pleasure, Andrew. Thanks for having me.
Andrew Chen 02:09
I’d love to start out just by learning a little bit about…how did you even get into tax deed investing?
Phil Kessler 02:16
Over the years, I was primarily, in fact, only a tax lien investor for seven or eight years. And I found myself in a bit of a predicament. And this is one of those good problems to have, I guess you could say.
But I invested on a weekly basis. This was just how I would save my money: by putting them into tax liens.
A good way to think of tax liens is they’re similar to a bond. You’re putting money in for a period of time. You’re earning an interest rate.
And what happens over time is that checks come back, so I had a set amount of money that I would invest every week. And when you get a few years into doing that, you have a fair amount of money coming back and you’re also investing more money.
So, every week, five or six years into this, the problem I was running into was finding enough tax liens to invest this sum of money, so it started taking up too much of my time.
I had never really looked at tax liens as a way of acquiring property, even though, to some people, that’s the primary reason they do it. I just wanted interest returns. So, over the last two years, I made a pivot into going after property.
And as simple as that is, it’s just that I wanted to go after the property to get more money invested at one time, your hold time is shorter, and you’re getting lump sum cash in the end. And if you do it the right way through a self-directed Roth or something like that, you can avoid capital gains.
Andrew Chen 03:59
Got it. Let’s have a background. High level, what exactly is tax deed investing, and what are the key differences compared to tax lien investing?
Phil Kessler 04:10
Think of it this way. The states are broken up into two different camps. You have tax lien states, and then you have tax deed states.
And it’s split right down the middle. I think there’s 26 tax lien states and 24 tax deed states.
Now, what a tax lien state does is they are going to sell the debt. A county has x amount budgeted for police roads, fire, etc. And when people don’t pay their taxes, they’re not able to meet their budget, so what they do is they sell the debt to investors like you or me at a guaranteed interest rate.
They sell that debt, and at the end of what they call the redemption period, a mandatory wait period, you can foreclose on that property, or at least initiate a foreclosure.
In a tax deed state, they still apply tax liens to the property, but they don’t sell them. The county holds those tax liens. And at the end of whatever their redemption period is, they simply auction off the property to investors, and then they have a lump sum cash coming in.
There is a downside, and I’m seeing a transition into lien investing in states. There are states that are moving from tax deeds to tax liens. In California, for example, you’ll see Orange County has filed for bankruptcy a couple of times over the past couple of decades.
The reason is that they will wait five years before foreclosing on a property. Someone can go five years without paying property taxes in California before the county seizes their property and sells it at auction. And what happens is it creates this big deficit.
When counties are running on a deficit for five years, it can really affect the economy. That’s why you have counties filing BK.
Andrew Chen 06:07
Got it. So it sounds like in deed investing, you’re getting the full property. In lien investing, you’re getting a note.
In the last couple of years that you’ve gotten into this, what states have you personally invested in tax deeds?
Phil Kessler 06:21
Honestly, just Florida. Florida is the only one I’ve bought deeds in. I’ve taken a swing and a miss in a couple of states.
But I think something that people should know about tax deed investing is that you’re not going to go into an auction and just win a property every time you participate. There are other people out there that are sometimes more aggressive than you. If you calculate the numbers beforehand and you set a budget, you need to stick to that budget.
And you’ll see people that get auction fever. I see it every auction where you’ll see there are two people fighting for a property where they’re almost paying market value. And then what’s the point at that point, right?
Andrew Chen 07:03
Yeah. Got it. On that note, when and where do tax deed auctions actually take place?
Are they different from foreclosure auctions where you didn’t pay your mortgage? Is it in person? Are they online?
Phil Kessler 07:20
It’s a mixed bag. It depends on the state, and in even some cases, just the county.
Let’s take Texas for example. Texas has a different system than what we’re talking about: a traditional tax deed where they just sell the property and then you take title on day one. Texas is a little bit different.
We’ll jump into that a little bit, but in Texas, there are eight or maybe nine counties right now that are online. Now, a year ago, there was zero online, so we’re seeing a transition.
But most of them take place on the county courthouse steps if they’re not online. But I think maybe 10 states right now are doing their deed auctions online.
Andrew Chen 08:00
And are these separate events compared to, say, mortgage foreclosure auctions?
Phil Kessler 08:05
State-specific. In Ohio, they just lump them together. In Ohio, they have their tax defaulted properties and their mortgage foreclosures in the same sale.
In Florida, they’re separate. Most states, they’re separate.
Andrew Chen 08:19
Got it. Can you talk a little bit about how the deed auction actually works in terms of the mechanics? In person, I guess the mental image that a lot of folks may have is somebody from the county is literally holding live auction, and people waving their placards or whatever.
Phil Kessler 08:40
Raising their paddle.
Andrew Chen 08:41
Yeah, exactly. Is that essentially what the mechanics are? It’s a very interactive dynamic?
And how does that differ online where you’re not seeing people?
Phil Kessler 08:52
That’s a good question. The auction will be set for a specific date.
Let’s say that you and I are going to start Andrew Phil LLC, and we want to participate in an auction that’s happening on May 4th. Right now, we would be doing our due diligence on that property. We’d be looking at information like title defects, things like that.
And as of today, we could right now set something called a proxy bid. On the 4th at 10:00 a.m., the auction is going to open up and our bid is going to be submitted.
Typically, the way it works is, let’s say there are two people that have set proxy bids prior to the auction. We decided we were going to bid $50,000. Now, we may be willing to go higher than that, but just as our opening bid, we’re going $50,000; the other person maybe bid $40,000.
When the auction opens up, basically, the starting bid is going to be $40,100, and we’re going to be winning that auction at that amount. Now, if nobody else bids, then we’ll win the property for $40,100.
But there is typically a ticking clock, less than two minutes in most cases, where it’s just ticking down and people will start bidding up. Now, if somebody bids within, say, the last 30 seconds of that auction, it will add another minute to the clock. So, it’s similar to the courthouse steps where you are just bidding until bidding stops.
Andrew Chen 10:27
Got it. Do you find that in-person or online auctions…which one is more or less competitive? Are they pretty much similar?
Phil Kessler 10:36
They’re similar to a degree. I’ve participated in some in-person auctions, and there’s a lot of them coming up in the next 45 days that I’m going to be taking a swing at.
I find that the live auctions are less competitive. And my thought behind it is that it’s not really a global market. It’s mostly local investors.
And the funniest thing is that when you go to these things, it is never who you expect to be bidding. You’ll always have someone in a suit and tie, and they’ll throw a couple of bids in, but it’s the farmer in the overalls that is really bidding hard and winning properties.
Those are the ones to watch out for that come out, and you wouldn’t expect them to win property but they’re taking all of it.
Andrew Chen 11:27
Got it. And it sounds like online, you’re certainly competing with more of a global pool of investors. Is that accurate?
Phil Kessler 11:35
Correct. I’m outside of Las Vegas and I’m bidding in Florida. And a lot of my students…I have one in the Dakotas who is bidding in Florida, and one in Wisconsin that’s bidding in Texas.
And they just won a property there. So, it’s a global market.
Andrew Chen 11:56
Got it. The websites where the online auctions take place, are they like county government websites, or are they some private company’s website that the county partners with? Literally, when you want to participate in the auction, what do you type in your web browser?
Phil Kessler 12:15
Most are done through third parties. The biggest one, and this is my favorite. There’s a company called Realauction.com.
Realauction does the tax lien and tax deed sales. Their big accounts are Florida. They just got Maryland.
They do the Texas deed auctions, Colorado, Arizona, New Jersey, which has 500 plus municipalities that have tax deed sales. They use Realauction. And there’s a handful of others, probably eight or nine sites, and then counties that will do them individually.
Andrew Chen 12:54
Got it. That makes sense. How would an investor locate the eight or nine sites?
Phil Kessler 13:09
For whatever reason, people keep a tight lid on this stuff. You can Google it all day, and it’s really difficult to find. I can tell you the big ones are Realauction.
And this is for your students and for people watching this. There’s one called Grant Street. They do five counties in California and then three counties in Florida.
CivicSource does Louisiana, Kansas, Tennessee. And I might be mixing some of those up with another website. Zeus Auction is another one that you’ll come across.
AAR Auctions does New York State. GovEase does Alabama, Mississippi. They do that whole southeast corridor.
Those are a handful of them. If you guys want to go and Google that or look those websites up, you could find them.
Andrew Chen 14:18
If they’re really hard to find, why don’t the website companies themselves…I assume they would want to market because they would like to have more bidders, right?
Phil Kessler 14:28
I don’t even know. That’s a great question. I think it’s one of those where there might be pressure from investors who spend a lot of money in those counties to not have that marketed.
The third parties are probably getting a percentage of the sale, so you would think they would be incentivized to market that information. But honestly, I don’t even have an answer for that one.
Andrew Chen 14:58
Got it. No worries. As an investor, where does one actually obtain the list of properties that are scheduled to be sold at a tax deed auction?
Do you get that from the county? Do you get that from private companies, etc.? Where do you go to get that list?
Phil Kessler 15:12
It’s funny. I’m in a hotel right now, and while we were driving here, I stopped in a county and I got their local newspaper. Their local newspaper has all of the properties that are going up for auction.
In most cases, you can go to the county clerk website or the county treasurer website. One of those two will have the list, in most cases.
Andrew Chen 15:35
Got it. As a tax deed investor, what is your step-by-step process for due diligencing a tax deed property? How do you get as much info as possible about it before the auction?
Phil Kessler 15:53
Something that’s important, and as a remote investor, probably the best piece advice that I can give is don’t trust Google imagery. You need to get eyes on that property.
One of the big differences between tax lien investing and tax deed investing: tax lien investing is pretty much a solo venture. You can do all your research online, you get a rough estimate of the property, and you’re hedging your bets. You’re maybe loaning 2% of the property value.
Whereas deed investing, you’re buying the property outright, and you need to have a team of people on the ground. One would be a realtor. A realtor in that area is going to give you the best real-time data that you can get.
Now, there are certain tools you can use remotely, and I’ll plug this website because I think they’re fantastic. It’s called Velocity REOs. I think their website is bpophotoflow.com.
For $15, they’ll go drive out to any property and take photos of it. You can get those photos to a realtor in the area, and they can give you a rough estimate.
You can’t get to see on the inside. That’s a downside on the tax deed sales: you can’t really see the inside and what the property looks like. I’ve come across some serious surprises before from hoarders.
But you can get a good general idea, based on the outside of the property, what the inside of the property looks like. So, if you can get those photos to a realtor, they can give you a pretty good idea what that property is worth.
Now, the other thing that is a huge part of this is looking at the title, getting title defects. You can go to propertyonion.com, and for $50 or $45, they will do a title search on any property for you, which is a good service, and that’s a really great price for that service.
If anyone is thinking about getting into this, I would have someone train you on pulling your own title searches. I have had title searches pulled before on properties, and they have missed a code enforcement lien from 2008 that is up to about $13,000.
So, there are certain liens that can survive a tax sale. And all of this is state-dependent, but title defects is the other big thing.
So, property condition and title condition are the two main things that you want to look at. And you can make a pretty good decision based off that.
Andrew Chen 18:31
Do people ever go to title companies to pull the title history, or do you really just go to Property Onion or some specialized service?
Phil Kessler 18:46
Title companies are going to charge too much money for a title search. They might charge $500. I’ve seen as much as $3000 or $4000.
And they may pull a title search back to the 1800s, the complete history on the land. Really what we’re looking for is a 30-year search. It’s called an owner and encumbrance report.
It’s like an abbreviated title search, and that’s going to give you all the information that you need, in most cases. So, a specialized company for that would be best.
Andrew Chen 19:17
What’s the significance of 30 years?
Phil Kessler 19:21
That’s a great question. I know the significance of 20 years would be that IRS liens fall off. SBA loans fall off.
There are certain types of liens that fall off after 20 years. Thirty years, I don’t know what the actual significance of that is. It’s just an industry standard.
Andrew Chen 19:43
Got it. I guess it’s the heuristic that if it’s clean for the recent 30 years, it’s unlikely there’s anything that’s older than that that can actually be enforceable. Is that the idea?
Phil Kessler 19:59
Yeah. And there are different types of deeds. When you’re doing research on a title, a lot of times, you want to research back to the last warranty deed on the property.
If you’re looking at the sales history on a property and you see a bunch of what they call quitclaim deeds just stacked up, there’s something fishy there. A quitclaim deed is me just saying, “I hereby give my claim to you, and any liens and encumbrances are now yours.”
A warranty deed, there’s title insurance. Someone has put their stamp of approval on it, saying, “There’s nothing on this title that you have to worry about. We’ll protect it legally.”
Andrew Chen 20:43
I see. What are the types of troubles that can arise when you see a bunch of quitclaim deeds stacked up?
Phil Kessler 20:55
Let’s say Owner 1 bought the property in 1985. Owner 2 bought it in 1995. Owner 3 bought it in 2005.
All three of them were purchased with quitclaim deeds, and then the original owner bought it in 1980 with a warranty deed. You would have to go back, and you want to search the property owner from 1980 to 1985, and look at any liens and encumbrances from 1985-1995, 1995-2005.
And any lien from 1980 until today that was put on that property is not necessarily going to survive the tax sale, but it is attached to the title. So, any lien from 1980 on, even though that property has changed hands so many times, any one of those liens is still on there.
Andrew Chen 21:51
When one goes to buy a home at arm’s length just on the open market, you get a warranty deed. So, how does the quitclaim deed even come into the picture? Is that like a related sale where you maybe are selling it to somebody you know, and it’s not really a market sale at arm’s length?
How does that happen? Why would it not be a warranty deed?
Phil Kessler 22:12
Let’s say I own a home, and I got married this year, and I want to put my wife on the title. I can quitclaim the property from myself to myself and my wife. Most of the time, you’re going to see this as something that’s reserved for interfamily transfers.
You do see it on vacant land quite a lot, for whatever reason. But if there are some liens on there that are pretty significant.
For example, code enforcement is the one I come across the most often because code enforcement liens, a lot of times, will have a $300 fine and then $150 a day in perpetuity.
If we’re talking five years down the road, there’s going to be a really significant lien that’s attached to that title. So, instead of paying the $100,000 that they may owe for that lien, they can just transfer the title with a quitclaim and never have to pay that lien.
Andrew Chen 23:16
I see. That’s the fishiness that you’re talking about that can arise?
Phil Kessler 23:20
Andrew Chen 23:21
Got it. You alluded to this earlier, but is it fair to say you can’t hope to get inside the property to inspect it?
Phil Kessler 23:31
Yeah, probably not. It’s very difficult to get inside the property.
They’re not supposed to do this, but sometimes if it’s a condominium, the condo owners’ association might let you in to see the inside of the property, or let a realtor in anyway. But it’s super rare. That’s a code that I don’t think anyone has cracked yet.
Andrew Chen 23:55
When you hire a photographer (I think you mentioned Velocity REOs for this) to go take pictures of the property, will they walk up to the windows and even snap a picture inside, or is that not kosher?
Phil Kessler 24:08
No, they won’t. They’ll do the outside of the property.
No, they won’t go up. It’s technically trespassing, so they’ll stay on the periphery of the property. And if they can go around back and still stay off the property, or maybe on a public road and get to the back of the property, they will.
Andrew Chen 24:35
You mentioned Velocity REOs. You also mentioned Property Onion. What other online tools are most helpful in the due diligence process that you have found?
Phil Kessler 24:47
Public county records are the best resource that you have. This would be an assessor website or property appraiser, the county clerk or recorder website, even tax collector websites.
Even though we’re at a tax sale, sometimes tax collector websites will have some interesting insights on the property, for example, the sales history or something like that. Those would be the best, I think.
Andrew Chen 25:16
And what are you looking for on a clerk recorder’s website or an assessor’s website besides potential sales history? And not all counties may have that. What other types of insights are useful from these county government websites?
Phil Kessler 25:31
On the clerk or recorder site, that’s where you’re going to find all the title information. When you search individuals on county clerk or county recorder websites, it will pull up every time a title has been transferred, what kind of sale it was.
If there’s been a lien applied to an individual or property, it will be on that website. Even if it’s a federal lien, it will be on there.
You’re looking for anyone else who has been on the title since the last warranty deed. Let’s say someone had passed away, and now the property is owned by four different heirs. You’re going to want to search each one of those heirs and any liens that may be against them because that could stick to the title as well.
Andrew Chen 26:15
So these are things that, it sounds like, are all self-served, but you could pay a specialized service like Property Onion, and they’ll do the same work. Is that right?
Phil Kessler 26:25
Correct. And this is something that I teach my students how to do, and do it on their own. You want to be able to know what you’re looking for and how to look for it.
Andrew Chen 26:36
How do you handle cases where the county website doesn’t actually publish the register of title transfers? For example, in the county that I live in, they used to have it, but they actually took it offline.
Maybe they were getting abusive use of the website. I have no idea. But now, you actually have to go in person to the clerk recorder’s office, and then you have to pay to get information.
Let me just re-ask the question.
What do you do when the county website/clerk recorder’s office doesn’t have title history? Not all counties will actually publish the register of title transfers. For example, the county that I live in, you actually have to go to the clerk recorder’s office physically, and you can look up stuff on their computers, or you can pay to have copies made.
Phil Kessler 27:46
In California, it is difficult to find that information. California is a place I would recommend a title search.
There is information you can find on there. You can see when a deed was transferred. Getting an image of that deed is not something that’s easy to do in California.
For example, I was looking in San Bernardino County. They have an auction going on right now. San Bernardino and San Diego Counties have auctions going on right now, and those are on grantstreet.com.
I’m going through their county clerk page and just getting that information, an actual picture of the deed. Do I know if this is a warranty deed or a quitclaim? Really difficult in those counties.
In those cases, pay for a title search. Find a company that will do it at $50-$100, and get them to pull all of that information.
Andrew Chen 28:50
Makes sense. Any other key tips for doing property due diligence before an auction?
Phil Kessler 28:59
No. Again, you can prepare. At the end of the day, you’re going to have to have a realtor to give you comps that are realistic based on the condition of that property.
And there’s certain things that you want to calculate after that. There are certain fees associated with tax deed sales.
And this is totally state-dependent. It’s one of those things that is state to state. But I’ll give you an example.
In Florida, there is a fee that’s $0.70 per $100 spent on the property. They’re called documentary stamps.
Basically 0.7% of a repay. It’s going to be an additional fee. You’re going to pay a clerk recorder fee, which might be $50-$70.
So, there are certain fees that you might want to prepare for. But as far as the due diligence, it’s mainly going to be title and condition. Those are going to be the two.
Andrew Chen 29:55
By the way, how is the realtor compensated? At an auction, do you need to buy through a realtor? I assume no, so do you just play them a flat fee?
Phil Kessler 30:06
Andrew Chen 30:10
You’ll use them on the sale later?
Phil Kessler 30:11
Correct. That’s the tradeoff. “Help me now, and give me a comp on this, and the property is yours should I win.”
If you used a realtor once, in order to get them on your side, I’ll pay $100. I’ll say I’ll give them $100 to pull comparative market analysis, maybe take photos themselves. And the deal is if I get the property and give it to them, they can pay me back out of closing.
That’s a deal that most realtors will be amenable to. But obviously, their paycheck is on the backend when you’re selling the property.
Andrew Chen 30:49
Got it. I wanted to dive into this little bit more advanced topic that you and I were chatting about just before. Are there ways to acquire tax delinquent properties before the auction, so that you’re not going up against hundreds of bidders?
Phil Kessler 31:04
That’s a really good question. This actually comes back to that quitclaim deed. This is where you would use a quitclaim deed.
We have a list of tax delinquent properties that are going up for auction usually up to 60 days prior to the sale. I’ve seen it longer. But at minimum, you’re talking 30 days.
You can approach the property owner and say something like “Hey, listen, I’m sorry you’re going through a difficult time. I can see that your property is being auctioned off.”
“Something that I want to do: I’m willing to cut you a check today for $30,000 cash, and I just need you to quitclaim, just sign the property over to me. I’ll pay all the tax debt, and I’ll deal with everything from there. You take the cash and run.”
Something that property owners don’t know, and they should, is that they’re entitled to what they call surplus funds after the sale. If their property is sold at auction, the county takes the tax debt.
Let’s say they owe $5000 in taxes. Property sells for $50,000. That $45,000 difference is called surplus funds or excess proceeds, and that money is either applied to any other outstanding liens that may be on the property, or the property owner is entitled to it.
A lot of people don’t know that. But you can make a cash offer on a property and say, “Sign this piece of paper, just quitclaim it to me, and I’ll give you $30,000 cash.”
I’ve tried it a couple of times unsuccessfully, but I do know that it’s something that happens quite often.
Andrew Chen 32:39
Got it. Who is the type of seller in that scenario who would take that deal versus go the auction route and take the surplus funds?
Is it people who don’t know that they can get surplus funds, or is it people who just don’t want to go through all the rigmarole of that, so they’d rather just take the money now and simplify their life? Who is the ideal seller?
Phil Kessler 33:08
I would say both. I would say ideal would be somebody who doesn’t know that they’re entitled to surplus funds, which most people don’t.
But even if they are entitled to surplus funds, there is a process to go through that. To get it, you have to fill out some paperwork, and then you’re relying on the county to make sure that they’re going to disperse the funds properly.
There have been cases in the past where people have fraudulently applied for surplus funds. And that’s a whole other lane of investing. It’s not really investing, but if you can get power of attorney, then you can reach out to individuals who lost their property and say, “Hey, you’re entitled to this $45,000.”
“I’ll get that money for you. Sign this document, and I’ll sign a contract with you, and you pay me 12%.” So, that’s a whole other thing.
But I’d say, as a whole, it’s mostly people who just don’t know that they’re entitled to that.
Andrew Chen 34:07
So, if most people don’t know, then I assume they wouldn’t know how to properly fill out the paperwork with the county, etc. Then what happens to that money?
Does it get held in local government treasury and then eventually escheated to the state? What happens?
Phil Kessler 34:25
You nailed it on the head. One hundred and twenty days, they have to claim it. After 120 days, then it’s escheated to the state, or to the county.
Andrew Chen 34:39
That’s a little bit counterintuitive, but wow.
Phil Kessler 34:44
I have a whole conspiracy theory about this. We were talking earlier about proxy bids, and I can show you examples of this where it just wouldn’t make sense otherwise.
I think that counties are incentivized to get the bid as high as they possibly can because of that surplus fund or those excess proceeds, and that 120-day limit. They get to keep that money.
I see properties where somebody will put in a proxy bid three days before the auction. The one I’m thinking of specifically was in Miami-Dade last month or two months ago, where they put in a bid for $400,000 as part of the auction.
Now, all of the bidding stopped at about $360,000, except for this one account that pushed the bid all the way up to $399,999, and then stopped bidding. So, basically maxed out this guy’s proxy bid. And of course, he won the property.
Now, I think that the counties actually have these ghost accounts that that’s what they’ll do. They’ll max out people’s proxy bids if bidding starts to slow down, it just makes the excess proceeds even larger.
Andrew Chen 36:03
I guess I’m just a little surprised because county governments ostensibly are not there to profit. They’re there to just collect taxes that they’re owed.
And they also have the contact information for the owners, so why don’t they just tell the owner, “Hey, you have money coming to you. You have 120 days to get it. Fill out these forms, otherwise we’re going to keep the money.”
Phil Kessler 36:21
Great question. I also want to preface with this. I’m speaking specifically about Florida when I’m talking about this.
Now, it may be different in other states, but you would think that they would do that. But in reality, counties are businesses.
They collect money. They pay bills. They’re businesses.
So, the more money they get, the larger their budget is, and the more they can do.
Andrew Chen 36:53
I understand that only a minority of properties on the auction list will actually get sold because homeowners will often pay off their delinquent tax bill beforehand. To minimize wasting time on diligencing properties that don’t end up getting auctioned off, and minimizing the cost wasted, how should one analyze the list of properties in order to make an educated guess about which ones are likely to actually sell at auctions versus get settled beforehand?
What heuristics do you look at? Do you look at things like delinquent amounts or ratios or delinquency history? What are the markers of a property that’s very likely to actually get sold at auctions versus one that’s not?
Phil Kessler 37:36
The only thing that I could really say for this is if someone passes away. If someone passes away, that’s a marker that it will probably end up going through to auction.
A lot of times, estates get mishandled. If someone is left a property and they don’t know how to handle the estate, you’ll see that where they’re not going to have the funds to pay the taxes because they mishandled, whatever it may be.
That’s one. The other thing I’ll say, this is one of the very few things I can think of where procrastination is an asset in tax deed investing.
Here’s the thing. Let’s say a property comes out of a list of 50 properties. I might narrow those properties down based on budget.
I want to be above a certain number, below a certain number. I want to be on the sweet spot here. So, I’ll create a watch list of those properties two or three weeks out.
But legitimately, I’m not doing any other research. Maybe I’ll look at actual market values and things like that, but I’m not really doing any title research or sending anything to a realtor.
I order my photos about three days before. I do the title work five or four days before. And I’m sending them to the realtor two days before.
So, the day before the auction, I have everything ready to go. That’s usually the timeframe that I’m doing this. So, procrastination is going to save you time and money in that regard.
Andrew Chen 39:08
So, it sounds like where you start to spring into action is about t minus five days. In those five days, in your experience, do the majority of properties actually go to auction, or do, still even then, within the last five days, a lot of them end up settling?
Phil Kessler 39:27
A lot of them end up settling. I’d say two-thirds probably end up settling.
Andrew Chen 39:34
Wow. So, even by procrastinating, you still would only see (ballpark, of course, but in your experience) a third of the properties that you actually spent time and resource on, due diligence, actually go sell at auction.
Phil Kessler 39:46
Yeah. Once you get to two days before the auction, maybe even less than half will redeem or pay their taxes.
But a lot of those are from those quitclaim deeds where people are buying those properties and they’re paying the taxes. You’ll see that a lot.
Andrew Chen 40:05
You mean like people who approached the owner ahead of time and bought the property ahead of time?
Phil Kessler 40:12
Right. They’re doing this. The owner agrees two weeks before the auction, and they have a very small window to get all that stuff done.
That’s why you’re seeing that happen so close to auction in a lot of cases too: someone buying the property and paying the tax bill themselves.
Andrew Chen 40:26
Got it. You also mentioned that when somebody passes away, that property tends to go to auction. But how would you know that?
Because the list of properties won’t say (or will it?) that this person has passed away.
Phil Kessler 40:38
It will. It will be in the estate of, or the so-and-so estate. That’s who will be on the title.
Sometimes the death could be five, six, seven years ago. Sometimes it could be as recent as two years ago or something like that.
Andrew Chen 40:57
Do you then spring into action on estate sales sooner because those are very likely to go to auction, or do you still follow the same process?
Phil Kessler 41:07
I still follow the same process. I’ll treat every property as if it’s the same. When I get into that five-day window, that’s really when I’m hunkering down and focusing.
Andrew Chen 41:20
Do you pay special attention to the estate sales?
Phil Kessler 41:23
Andrew Chen 41:24
Phil Kessler 41:25
There’s a downside to those too, and I’ll tell you: quiet title action. Quiet title action is a process where you are turning what the county gives you, which is a tax deed, into a warranty deed, something that is a marketable title. You could resell it as a warranty deed anyway.
When there’s someone who passed away and there’s heirs involved, let’s say somebody was someone’s great-grandparent, and now there’s 47 heirs involved, part of the quiet title action lawsuit is they have to contact every single one of those heirs with a certified letter and a summons, and give them 20 days to respond. And if people don’t want to be found, if they live off the grid in the Arizona Desert, that’s going to be a really tough one to get.
That quiet title action process can take up to a year, can cost $9000, whereas, in most cases, it just costs less than $3000 and maybe take 120 days at most.
Andrew Chen 42:34
I see. I want to loop back to quiet title here in a moment because I think that’s really interesting, and it sounds complicated. I would love to get a little bit more insight on that.
But just to close out the auction topic, what are some tips for determining your maximum bid price? When it comes to determining the max bid price, what’s a good rule of thumb for estimating, for example, expected rehab costs, so that you can factor that in? How do you personally tend to estimate this?
Phil Kessler 43:06
Funny enough, I’ve never done a rehab. I will sell to individuals who want to do rehabs, and they can rehab the property and get it up to full market value. One of the things that, if anyone is getting into deed investing, you don’t want to be greedy.
Let’s just say we have a hypothetical property. Let’s say we paid $50,000 for it. Maybe its ARV, its actual fair market value is $100,000, but in the condition it’s in, maybe it’s worth $78,000.
That’s something that you might want to sell for $68,000. They’re getting it at a discount. They’re getting it at a wholesale price.
They can put $20,000 of work into it and then sell it for $100,000. Let them take on that 6- to 12-month process of rehabbing it.
If you can get in and out in less than 90 days, take your profit and move on to the next investment, you can turn it over faster. And I’d rather be the person who’s turning my money over faster at a lower return than waiting 12 months for a larger return.
Andrew Chen 44:14
Got it. I wanted to talk a little bit about redemption periods.
What are they? What states have them? Especially if you could call out the large tax deed markets that have redemption periods.
Phil Kessler 44:33
Sure. There are a handful of states, and it’s a very small number. In fact, it’s only four that I can think of that are what they call “redemptive deed states.”
Now, earlier, I had mentioned that we have tax lien states and tax deed states. There are a couple of them that are what they call hybrids, where they do liens and deeds. That would be Florida, New York.
And then you have redemptive deed states. On a high level, it’s just considered a tax deed state, but you’re buying a property at auction.
And then there is a redemptive period. There’s a mandatory wait period before you can take full title to that property. You have immediate possessory rights in most cases, so when you buy it at auction, you can file a writ of unlawful detainer to get individuals out of there if they choose not to leave.
And you can rent it out. There’s always things that you could do. But you don’t really own that property on record until the end of that redemptive period.
For example, Texas is the big one. Everyone who understands a little bit about tax lien or deed investing, Texas is always a state that’s thrown out there. And it’s because they offer a 25% penalty on your investment on day one.
For example, if we buy a property, let’s just say we bought something for $10,000, property owner pays us back tonight. They’re going to have to pay us $12,500.
The redemptive period in Texas is dependent on what type of property it is. In most cases, that redemptive period is going to be six months.
We buy a tax deed today. Six months later, you’ll take title to that property. In between, you’ll get something called a “sheriff’s deed,” which is, you are on record as having an interest in the property, but you are not the owner of the property just yet.
Six months go by, then you have to pay the recording fees and all that. You’ll take title to the property.
So, it’s six months in Texas, unless it is a homesteaded property or agricultural property. Homesteaded meaning it’s someone’s primary residence and they have filed for homestead exemption. Agricultural meaning it’s agricultural.
In Texas, that would make it two years in that case. That would be a two-year redemptive period, quite a bit longer. And it’s 25% for each year, so you could end up making 50% on your investment, but it would be minimum 366 days until you get that 50%.
The other states that do this (and they all have similar things) would be Tennessee is one year at 12%. Actually, Tennessee is interesting because their redemptive period changes by how many years of taxes erode.
It can be as little as…I think 30 days is the minimum if they have eight years or more of taxes outstanding, and it can be as long as a year. It’s like 60, 90, 180, and then one year, depending on how many years of taxes are outstanding.
I would encourage anyone to Google that because I’m not sure if it’s 30, if it actually goes that low. I think it might only go to 60.
Georgia does one year at 20%. You’re not required to take title at the end of that one year, so you can wait a second year if you want, and earn another 20%.
The fourth state is Hawaii. Hawaii is a redemptive deed state. And I also think it’s 12% interest in one year.
Andrew Chen 48:26
These interest rates, are they a percentage of the taxes owed or a percentage of what you paid at auction?
Phil Kessler 48:33
Percentage of your bid.
Andrew Chen 48:37
Got it. So, it sounds like the redemptive periods vary by state. Some of them are even elastic.
At least in Texas, I think what I heard was what you actually win at auction is a sheriff’s deed, not the actual deed to the property. Is it fair to say something similar in the other states, or some kind of “subject to” deed, etc.?
Phil Kessler 48:58
Andrew Chen 49:02
What happens then if the homeowner ultimately pays off the tax delinquency, pays off the mandatory penalties, etc. within the redemptive period? Mechanically, what happens? The steps.
Phil Kessler 49:14
They don’t have to just pay the taxes. They have to pay your full bid amount plus the interest owed, and in some cases, any fees that brought the property up to code. If the property was not up to code for rental use, and you had to fix water, sewage, they’d have to pay that amount as well.
Should they pay within the redemptive period, they will have to pay to the county clerk office. The county clerk takes the money; they send you a check. Mechanically, as far as I know, that’s the whole process.
Andrew Chen 49:51
Got it. I’d love to talk a little bit more about quiet title actions, title certification process that happens after you win a deed property at auction.
First, at a high level, what is this? Who do you hire to do it? How much does it cost to get done?
Phil Kessler 50:14
Quiet title action is a legal procedure in which you are taking an unmarketable title, for example, a quitclaim deed or a tax deed, and you are making it marketable. Now, the legal procedure is it is a lawsuit. It’s called a quiet title action suit, and you would have to hire an attorney in order to do this.
I work with two fantastic attorneys out of Florida, and I’ll plug them right now because I think they’re great. If I am in Northern Florida, north of Tampa, my attorney is a woman named Natalia Ouellette, and she is fantastic.
She’s the smartest woman I ever met. She really is. She’s super sharp.
And if I’m in Southern Florida, a gentleman named Owen Sokolof out of Palm Beach. He’s really good at what he does too.
Either of them is who I’ll use, depending on where. Certain attorneys only work in certain counties.
But that being said, I’ll contact the attorney. For a fee, they’re going to pull a full title search on the property, not just that owner and encumbrance report. They’re going to pull a full title search.
They’re going to find out anyone who has a claim to this property. Even if the claim is 150 years old, they’ll track down the descendants of the people with that claim, and they’re going to mail them this lawsuit.
It’s going to give them 20 days to respond, saying, “If you want to verify your claim, if you want to try and overturn this tax sale, appear before the judge with your claim to the property.”
It’s very difficult to overturn a tax sale. And there are cases that I’ve heard of, and I’ve never experienced personally, where someone has passed away and there’s a secret will that left it to the great-nephew or whatever it may be, and that person does have a legitimate claim, and they will overturn the tax sale.
Now, if the tax sale is overturned, you do get all of your money back. There’s nothing to worry about there.
But once the quiet title action suit has gone through, say they’ve contacted everybody on the title who has a claim, nobody has responded or nobody is going to show, and they’ve signed over their rights essentially, then your attorney will appear before a judge, and the judge will sign off. From that point forward, none of those claims can come back forward.
Andrew Chen 52:42
Got it. How much does it cost to hire an attorney to complete this lawsuit action?
Phil Kessler 52:49
You would want to set aside a minimum of $2500. One of the cases we had talked about earlier is with multiple potential heirs to properties. That’s something that can cost thousands, tens of thousands even, depending on how long it is.
But in most cases, you’re going to stay under $3000 or $4000.
Andrew Chen 53:16
I think you alluded earlier that you should budget something like 90 days for this, but in these estate sale cases, it might be a year or more perhaps. Is that accurate?
Phil Kessler 53:26
Yes. I’d say 120 days is pretty common. Ninety days is also common.
But depending on the property and what that title looks like, if someone has passed away, I wouldn’t even know what to guess. So, you just roll the dice with those sometimes.
Andrew Chen 53:49
You mentioned that even though tax sales are difficult to overturn, if it does happen, you get your money back. The county pays you back.
But what happens if you pay the money to the county, like in your example, a $50,000 home, for a $5000 delinquent tax bill, the owner knows enough to go get the surplus funds that they’ve taken, and if they’ve left, they’ve fled, and then sometime later, the tax sale is overturned?
Somebody is going to be holding the bag, going to be paying that. Is it the county? Who pays that?
Phil Kessler 54:21
The county does wait. I think they wait 120 days. That’s actually a great question.
I don’t know. This is something I would actually defer to an attorney on.
If they had taken the excess proceeds, I know there’s that 120-day window. But let’s say 120 days goes by, and then eight months later, someone comes forward.
That’s a great question. That’s a really good one. I’m going to find out the answer and email it to you.
Andrew Chen 54:51
Ask your attorney, then.
Phil Kessler 54:54
Natalia. Yeah, I’m going to text her as soon as we’re done.
Andrew Chen 54:59
When should an investor begin the quiet title process? Because I assume that, like in a redemption state, you should probably wait until the redemption period before paying the cost of doing this.
Phil Kessler 55:10
You would have to in a redemptive deed state, whereas in just a traditional deed state, I would start immediately. And I tell this to everyone: you should always quiet title. There’s no reason not to.
If you have a buyer for a quitclaim deed, then it’s going to be quick. Typically, you’re going to make less money, but if you can do it 10 days after the sale, then I get it. It makes sense.
But quieting title is not just about getting a marketable title. It is about preventing anyone from coming forward and putting a claim on that property.
And I’ll tell you, one entity that’s notorious for trying to fight these tax sales is Wells Fargo Bank. If Wells Fargo has a mortgage against the property and they’ve been notified of the sale, they have the ability to pay those taxes to keep their position as a lien holder on the bank.
Should they not, then they’re giving up their right to the property. They’re giving up their claim to the title.
So, what you’ll see Wells Fargo do is not respond, not pay the taxes, and then after the sale, say, “No, we didn’t get notice, and we want to fight this tax, or we want it overturned.”
Andrew Chen 56:28
So, if they paid a tax bill but they’re still not the property owner, just to retain their first position lien, are they just going to keep paying the delinquent bill over and over again? They want to get out from under that too, I imagine.
Phil Kessler 56:43
Probably. I would imagine that if someone is not paying their property taxes, eventually they’ll stop paying their mortgage, and Wells Fargo will get paid regardless.
Whatever they’re paying in those taxes, they’re adding onto the end of that loan with interest, so they’re going to get paid back one way or the other.
Andrew Chen 57:01
I see. So they’ll just end up foreclosing, it will become an REO property, then they’ll auction it off themselves?
Phil Kessler 57:06
Andrew Chen 57:07
Got it. In the case of the state sales that we were talking about earlier, there might be many errors that are spread out. People living off the grid, I think you alluded to.
When you’re doing the quiet title action, if you just can’t get a hold of people, then are you just rolling the dice and taking a risk that maybe, in some future time, somebody will come out of the woodwork and challenge the sale?
Phil Kessler 57:40
Natalia used the term “ad litem.” I don’t remember exactly what it means. My Latin is not that great.
But essentially, if she can prove to the judge that she’s taken every reasonable step to contact this individual, they can essentially have a stand-in for that individual to sign on. So, you have to exhaust every possible resource that you can, from tracking down what state they’re in, having people knock doors, emails, phone numbers, everything.
Attorneys have access to things like LexisNexis and Accurint, so they could track people down with certain skip tracing tools that the general public doesn’t have. They’ll exhaust every measure before they go the “ad litem” route.
Andrew Chen 58:36
Just for folks who don’t know, can you define what is a skip tracing tool?
Phil Kessler 58:41
Sure. Skip tracing tool is just essentially a software that will track people down based on if they’ve ever been recorded in public record, or it can go as far as something like Google selling information to a skip tracing company. If someone has an email and they put an address under this email, a skip tracing tool could find the address that they used for the email associated with a certain name.
Andrew Chen 59:16
Got it. So it’s just meant to locate individuals who might potentially have an interest in the property?
Phil Kessler 59:22
Correct. Or locate individuals for whatever reason. I know a debt collection agency would be one industry that would use skip tracing to try and track people down.
Andrew Chen 59:38
We were talking a little bit around this a few moments ago. We were talking about Wells Fargo. But I would love to just make it clear.
What happens if a tax deed property still has a mortgage on it? It sounds like it’s going to get wiped out by the auction process.
I would love to get your thoughts. Is that correct, first of all?
Phil Kessler 1:00:00
State-dependent. In general, yes.
Andrew Chen 1:00:05
What happens if the winning bid is actually less than the mortgage owed? Does the lender just take a haircut on the principal, and then the mortgage lien is wiped away? How does that work?
Phil Kessler 1:00:18
Hypothetical again. We’ll use some examples here.
We have a property that is worth $100,000. There is a $90,000 mortgage on it. For whatever reason, the bank did not pay the taxes.
Property goes up for auction. The taxes outstanding are $10,000, and it sells for $40,000. There’s $30,000 in excess proceeds there.
Now, the bank is going to lose any claim they have to the property, but they can apply for that $30,000. So, they’re basically taking a $60,000 hit, if not more, for the interest and everything.
Andrew Chen 1:01:01
Got it. Similarly, I assume that the lender gets paid back after the taxing authority is made whole, and then the lender either takes a haircut and the homeowner gets nothing, or they’re made whole and then the homeowner would then get any residual surplus after that. Is that correct?
Phil Kessler 1:01:22
Correct. And there’s a hierarchy to these liens. Based on the priority of the lien, it will get paid first.
Up top, you have government liens. This is going to be tax liens, number one. That’s the whole reason this sale is even happening: to pay off the tax liens.
Code enforcement violations, IRS, child support arrears, things like that. You’ll see, typically, even though government liens all technically have the same priority, there are certain government liens that are just a little bit lower in priority. That would be federal, so IRS, SBA.
Even though all other government liens should survive a tax sale, the IRS and federal liens will not. And I’ll go into that. They basically have a redemptive period, and I’ll explain that in just a moment.
So, you have these top tier government liens. They get first pickings with all of the excess proceeds. Under them, you have purchase money mortgage.
Then you have HELOCs. Under that, you have homeowners’ associations, credit card judgments, and mechanic’s liens.
Based on where they are in that pecking order, they can fight for the excess proceeds. And if anything is left over, then you have the property owner at the bottom.
Andrew Chen 1:02:46
Got it. I think I heard you say that most government liens will get wiped out, but some will not. What are the ones that will not, and for your troubles of winning the auction, you now inherit these liens?
Phil Kessler 1:03:04
In fact, it’s the other way around. Most actually survive the sale. It’s the IRS and the federal loans that do not.
I’ll start with government liens first. Government liens are going to stick to the title because they have the same priority as a tax lien, so technically, they are going to survive the sale.
A tax deed is a unique type of deed because it’s considered a brand new title to a property. It’s not like a title that’s changed hands a couple of times. It’s being issued by a government agency, so it’s considered a brand new title.
And unfortunately, there are government liens that will survive that. The most common that you’ll see: code enforcement violation. If someone doesn’t cut their grass for six months, the county hits them with a fine.
Child support arrears. Any fines associated with criminal, whether state or federal criminal fees. I’ve seen some pretty crazy stuff there.
Municipal liens, like water and electricity, that’s something you’ll see quite often. Those will survive.
Now, the IRS is really an interesting one. If the IRS has a lien to a property, or a lien on an individual who owns a property, for example, a $60,000 lien, we pick up this property at an auction for $40,000, and maybe it’s worth $120,000. The IRS has the ability for 120 days to pay us our $40,000 plus 6% interest.
So, they can actually redeem the tax deed. They can pay us our $40,000 plus 6%, and then they’ll take it, put it on the market to make themselves whole.
Really interesting how that works with the IRS. They actually have a redemption period in states that don’t do redemption periods: 120 days.
Andrew Chen 1:04:58
I don’t think of the IRS generally as a home buyer and seller, so do they do this commonly?
Phil Kessler 1:05:03
I don’t think it’s common, but I know it’s been done. The advice that my attorney gave me is that if there’s an IRS lien on the property, don’t rehab it. Don’t do anything for 120 days, because if you rehab it, the IRS takes it, and you’re going to lose that money.
There’s also a form. You just Google “Form 14135,” it will pull up the IRS’ website. It’s a form to discharge a tax lien from a property as well.
Andrew Chen 1:05:35
I see. Have you personally heard of examples of the IRS actually enforcing this?
Phil Kessler 1:05:40
Only through my attorney. She deals with a lot of stuff, but not through me personally.
Andrew Chen 1:05:46
Got it. So, I assume that liens that survive the tax sale, that would only happen, it seems like, if there were no bids that would cover all of the outstanding taxes and fees and penalties owed, right?
Phil Kessler 1:06:06
And that’s the importance of looking at this title information the right way, because you essentially want to take the minimum bid, the starting bid is going to be all the past due taxes, and then you want to add all of the surviving liens to it. And if that number is less than your intended bid, then you’re okay.
Whatever you’re willing to spend for the property, you want that number to be more than all past due taxes, fees, penalties, plus any surviving liens. So, even if you end up getting a steal on the property, you’re still going to have to pay for those.
And a lot of those types of liens that have daily fines, those are negotiable. You can call the county and say, “Hey, listen, is there anything you can do for me? Can you lower this number?”
They can negotiate those numbers down, but you want to get stuff in writing with that.
Andrew Chen 1:06:55
Who would you negotiate with that? You pick up the phone with the receptionist and you say, “I want to pay my fees, but I want to get a discount. Who can I talk to?”
Phil Kessler 1:07:05
You definitely want to approach them as an individual, not as “Hey, I’m this big shot investor” because they’ll make you pay every penny. Say, “Hey, my name is Andrew, and I bought this property at auction.”
And you’re calling the municipal code enforcement office. It’s usually the city code enforcement office.
Say, “I just bought this property at auction, and I see that there’s a $12,000 lien for municipal code. It’s uncut grass.”
“First, I want you to know I’m going to fix the property. I’m going to fix the problem immediately. We won’t have this problem again.”
“I want to make the neighborhood better. Is there anything you can do to work on this with me?”
Enable anything that’s not a fixed cost, like if they send someone out there to cut the grass or they send people back and forth to check on the property to see if the violation had been fixed. Those fixed costs, they’re going to want to get paid on those. But the daily fines and things like interests, they’ll wipe those off if you ask the right way.
And I don’t want to say that happens every time because I’m sure there are examples where it doesn’t. But I’ve never had a problem negotiating that number down.
Andrew Chen 1:08:14
Got it. It sounds like the trick is to get it in writing, at least in an email format or something like that?
Phil Kessler 1:08:20
Yeah. And the reason you want to get it in writing too is because they’re going to apply for excess proceeds. When they get that excess proceeds money, if you don’t pay them first or take care of it, they’re going to apply the excess proceeds to the daily fine amount.
And then they’re going to say, “No, but you still owe us for the hard costs.” So, you want to get in writing that they are going to take off those fines.
Andrew Chen 1:08:46
I see. Is email sufficient, then, or do you need to go to the office and get something signed?
Phil Kessler 1:08:51
Email is sufficient.
Andrew Chen 1:08:53
Got it. So, it sounds like when you’re valuing what your max bid is going to be, you actually have to look at two numbers. You’ve got to figure out what you want to pay, just on a market basis, what you can sell it for, etc., but then you also want to compare it to all the outstanding taxes, fees, penalties, other liens that stakeholders have.
And you want to make sure that the latter number is smaller than the former number. Have I got that right?
Phil Kessler 1:09:21
Yeah. And the liens that survive the sale, it’s a pretty short list and you’re not going to come across them that often.
Code enforcement violations are probably the only one you’ll come across. Maybe one out of three will have them. But other than that, it’s common than maybe I’m making it sound.
I’m more the cautious type, so I’m always looking for them. But yeah, you have that right.
Andrew Chen 1:09:50
Got it. You mentioned, because we were talking earlier about quiet title actions, to make the title marketable, to turn it into a warranty deed.
It sounds like, then, you don’t actually get a warranty deed when you win the sale. What kind of deed do you get?
Phil Kessler 1:10:09
You get a tax deed. It says “tax deed” at the top, and then it will have the legal address.
Andrew Chen 1:10:15
But that is not considered marketable because the county didn’t do any work to actually clear out past interests?
Phil Kessler 1:10:24
Correct. And you can’t resell it because a tax deed can only be issued by a government agency, so you’d have to either quitclaim it to someone or…. Wisconsin, for example, issues a quitclaim deed at a tax sale, which is even worse than a tax deed when we’re talking about marketability. So, all liens would survive that sale in Wisconsin. Really rare.
Andrew Chen 1:10:50
Got it. Interesting.
Phil Kessler 1:10:53
Just so you know, on the converse of that, there is Virginia. Virginia has two types of tax deed sales. They’ll tell you it’s either a judicial or a non-judicial sale.
But the judicial sale in Virginia actually gives you a warranty deed out of the sale, so that’s a good place to invest for that if you don’t want to deal with the title stuff.
Andrew Chen 1:11:18
First of all, if you could define judicial versus non-judicial sale. And how does the sale go down one route or the other?
Phil Kessler 1:11:25
That’s a good question. I don’t quite know the answer to why one ends up in one or the other, but I do know that when the suit is being filed to foreclose on it, there’s certain verbiage in the lawsuit that clears out any previous title deed defect.
Similar to if you’re foreclosing on a tax lien in Arizona. As much as I know about Arizona, I’ve recently learned this where, when you foreclose to a tax lien, my attorney was telling me this.
I’ll plug him too. His name is Ryan Kessler of Kessler Law Firm. No relation.
But they’re saying that he puts verbiage in the lawsuit that gives you a warranty deed out of a sale. So, it’s just about the way they phrase things in the actual suit.
Andrew Chen 1:12:19
I see. And what’s the difference between a judicial and a non-judicial sale?
Phil Kessler 1:12:24
The non-judicial is just going to be a regular tax sale. So, this is going to be they owe $4000 in taxes, so we’re going to put this up here, start bidding at $4000, whereas the judicial will have gone through a lawsuit first.
Andrew Chen 1:12:40
Got it. And then you mentioned that whether the mortgage survives the tax sale state by state, what are states where the mortgage lien will survive the tax sale?
Phil Kessler 1:12:58
As far as I know, pretty much just Wisconsin. Wisconsin is the one where a mortgage lien survives. And I can’t say that as a whole because I haven’t read every state’s tax code.
But just the states that I have read and the states that I do know, they’re issuing you a tax deed, so they’re clearing any private claims, which would be banks, mechanic’s liens, HOA, things like that.
Andrew Chen 1:13:24
Got it. Those are pretty much all the questions I had. Thank you so much for taking the time to share your thoughts.
It was very extensive. I think this will be super informative for listeners. Where can listeners find out more about you and what you’re up to?
Phil Kessler 1:13:43
Propertyonion.com. I write articles with them, and I do one-on-one trainings with them, so you can always find me there.
I’m starting a company called the Deed Feed, and essentially we’re going to do just a continuous feed on different tax deed information, things that are coming up in the tax deed world. If anyone is interested, that will be at thedeedfeed.com. Working on that right now.
Andrew Chen 1:14:09
Got it. When is that live? Folks can check it out.
Phil Kessler 1:14:14
It’s recently conceptualized. I bought the domain, working on it. Hoping in the next 90 days that we have it up and running.
And there’s a lot of good stuff we’re going to have. And we’re going to be doing title searches on properties going up for auction, and listing them on the site, and things like that.
Andrew Chen 1:14:29
Got it. All right. We’ll be sure to link to all those things in the show notes.
Phil, as always, this was super insightful. I learned a lot, and that’s after I did a bunch of research to even prep for this. So, I really thank you for taking the time to share your thoughts with us.
Phil Kessler 1:14:46
Always my pleasure, Andrew. Happy to do it.
PS – after our interview, Phil followed up with his attorney who wrote back this:
“Florida statute 197.602 deals with overturning or undoing a tax sale. If a person or entity wants to undo a tax sale they would be required to pay; the full bid amount +12% interest, any taxes the purchaser paid +12% interest, any rehab and maintenance fees, and any HOA or costs to keep the property so the process is extremely expensive. Natalia has only dealt with it 4 or 5 times in her career and they have always been banks with the exception of one time which she is currently litigating which is from an HOA.
“The person who received the surplus funds, is not required to pay anything back. If the sale is overturned, the bank can go after the surplus funds through a process called “adjust enrichment” or “conversion” to recoup some expenses.”
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