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Why Would You Ever Foreclose on Yourself?

November 11th, 2008 · 8 Comments

Perusing the web recently, I found a post about the Anne Arundel Tax sale. It reminded me of something you will sometimes see at a live tax auction. Anne Arundel’s tax lien sale instructions say that if someone is there to “clear the family title” they should speak up and others are asked not to bid against them. This is often misunderstood even by experienced bidders. I remember one obviously experienced man at the Anne Arundel auction that made snide comments like “why don’t you just pay your taxes”, every time someone stood up to do this. He clearly didn’t understand the concept.

Property title can get screwed up because of inheritances, divorces and broken partnerships etc. If one party who has a claim on the property abandons it, becomes uncooperative, dies and heirs disagree on what to do with the property, etc., any other owner can’t sell the property. This can go on for years, even generations, and leave the property with bad title. While it doesn’t happen often, there are a myriad of reasons that title can get clouded.

The usual process for clearing up a  clouded title or a bad chain of title, is to get quit claim deeds from any party that may have an interest clouding the title. Clearing up this bad title can be very tough as some parties may be dead or otherwise unreachable. If there was a John Smith on the deed many years ago, which John Smith, where is he now. This is especially common with ground rents. The ground rent holder becomes unknown.

Clearing Title With a Tax Lien

By buying the tax lien on your own property, you can foreclose on yourself and thereby clear up the title. You will have complete clean title after the foreclosure as all other interests are wiped out. Unfortunately, as many counties start to go to online bidding, the ability to stand up and ask others not to bid against you goes away.

There are pitfalls to this strategy. You are depending on the ability to buy back your own lien. That may not happen in all cases, remember liens are sold at auctions. This would mean you would have additional fees and interest for no benefit.

Keep this tucked away in your toolbox. It certainly shouldn’t be the first tool you grab, it won’t be a commonly used tool and frankly it’s not even the most reliable tool. However in some cases it might be the only tool that works. Sometimes buying a tax lien on your own property can be useful.

Happy investing,

Ned

Tags: Advanced tips · real estate · Tax Liens

8 responses so far ↓

  • 1 Tony Orlando (1 comments.) // Nov 11, 2008 at 5:01 pm

    I found your site on technorati and read a few of your other posts. Keep up the good work. I just added your RSS feed to my Google News Reader. Looking forward to reading more from you down the road!

  • 2 Law (1 comments.) // Nov 12, 2008 at 3:53 am

    Ned,

    So what you are saying is that if you have a title problem – clouded title can’t find heirs etc. You can possibly buy the tax lien and foreclose on it to clear title? I have a prop. Where I bought – later found out their was a wife on title. I can buy tax lien and foreclose on it to clear title? FYI – no title insurance. Thx.

    Law

  • 3 Ned // Nov 12, 2008 at 4:03 pm

    Tony, thanks for stopping by.

    Law,
    Thanks for stopping by, good to hear from you.

    Yes you can forclose on the tax lien. This will wipe out any other interests except IRS iens. However generally everyone on title needs to be notified. If the wife wanted to cause problems she could simply pay off the lien and you are back where you started. My guess is that is probably not likely.

    If people in the chain of title can not be reached there is usually a process to claim that a good faith effort was made to reach them and that is sufficient.

    By the way shame on you for not getting title insurance. Kitchen table closing??

    Take care Law,

    Ned

  • 4 Law // Nov 12, 2008 at 4:25 pm

    Ned,

    We had to close the deal in 2 hours. It was pretty sweet. The guyed owed 25k. House worth 150k “as is”. I think I am going to let the taxes lapse so I can buy the tax lien. I can find the wife via accurint. She has no money

  • 5 Visitor // Nov 13, 2008 at 6:19 pm

    This “tool” doesn’t seem like much of a tool to me.
    In my jurisdiction, the county doesn’t sell liens, they foreclose and sell deeds. But even in a lien jurisdiction, this is a harebrained idea. If title is clouded by actual encumbrances, the interest-holders are free to pay the taxes and come after you for themor for their interest in the property.
    Moreover my mind boggles that the auction terms would actually advise bidders not to bid on properties where some bidder claims they are buying for ‘sentimental’ reasons or to ‘clear up family title.’ What, does the county actually not WANT revenue? Isn’t this a violation of the officer conduction the auction’s fiduciary duty, once the lien comes up for auction?

    There’s no guarantee anyone will abide by this. If someone really wants the property, or the lien, they will bid on the fair price. If you scoffed your taxes to ‘clear up title’ and someone bids 80% of value, you’re out of the home and lose everything. Great strategy. In my jurisdiction, anyone buying for on on behalf of the defaulting taxpayer has to announce themselves and is required to bid at LEAST the amount of taxes and penalties owed PLUS any other unrelated local taxes PLUS closing costs immediately at auction, thus actually putting them at great disadvantage to other bidders. And why not? The point is to put the property in the hands of a responsible taxpayer and and raise revenue, not to put the property back in the hands of the flaky taxpayer and enable them to draw out the process even longer.

    The proper route to clear up title is to keep paying your taxes and get (or buy) and record quitclaims from the interest-holders, as you say. This may be hard, but it may be cheaper than all the penalties you would have to pay.

    The most common situations you describe–death and divorce–should not be that difficult to clear up. Old or ancient encumbrances are often insurable, and if not, they can always be written into a policy as exceptions. If you’re so sure that these putative interest-holders don’t have and won’t try to exercise any rights, then why are you so worried? If not, why on earth would you let the property go to tax auction?

    There is one and only one proper way to clear up title when there defects that cannot be cleared through deed, and that is through a quiet title or similar action in court. It’s not any harder than a foreclosure of a lien, in fact it can be easier.

  • 6 Ned // Nov 15, 2008 at 7:20 pm

    @Law,
    Yea I know what you mean Law, sometimes deals are so good you take the risks and clear up the details later. I would look into how tax liens are handled in your state before trying this. As “Visitor” points out their can be pitfalls to this strategy.

    @Visitor,
    Thanks for stopping by and taking the time to write such a long comment.

    The technique may be a “harebrained” idea as you say, but it can work. I know people who have done it. You are right to question me and I will edit the post somewhat.

    I said it should be in your toolbox. It should not be the first tool you reach for. It is a very specialized tool and not a reliable one. But sometimes it’s the only one that will work.

  • 7 Carnival of Real Estate #117 » Real Estate News Sphere // Nov 17, 2008 at 4:09 pm

    […] Carey presents Why Would You Ever Foreclose on Yourself? posted at Baltimore Real Estate Investing […]

  • 8 Sire (53 comments.) // Dec 20, 2008 at 7:22 pm

    Man, things sure are complicated over there in the States. I’ve never heard of anything like this here in Australia. Of course that doesn’t mean it doesn’t exist, just that in my 50 odd years I have never come across it. I suppose if you are ever buying a property you really need to deal with someone who knows what they are doing so that you don’t get encumbered with any major problems.

    Sire´s last blog post..How To Deal With Rude And Obnoxious Commentators

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