In this current economic climate, property owners are falling behind in not only their mortgage and association payments, but also in their annual real property taxes. While historically, this issue has not been significant to associations foreclosing on their assessment liens, the current conditions have demonstrated the occasional need to pay closer attention to this potential problem when the association takes title at its own foreclosure sale.
If a property owner fails to pay the real property taxes for a given year, the delinquent taxes can become a lien on the property after January 1 of the following year. If the taxes are then not paid by April 1 subsequent to the year for which they are assessed, the tax collector for the County is authorized to issue a tax certificate against the property. After proper notice and publication, the tax collector will sell the certificates at a public auction. This typically occurs on or about June 1 each year.
At the auction, any such certificate is bid on by interested potential purchasers for the tax amount due and accrued interest. The person bidding to purchase the certificate at the lowest interest rate will be the successful bidder. The successful bidder will then hold the certificate and is entitled to charge interest thereon at the rate bid by that purchaser during the certificate bidding process. If the certificate is not bid upon, the certificate is issued to the County in which the property is situated.
Prior to the certificate being subject to a tax deed sale, a certificate can be redeemed by the property owner or any other interested party. A first mortgage lender on the particular property is considered an interested party. A first mortgage lender would generally seek to protect its secured interest in the property by redeeming the tax certificate. This would prevent a third party from purchasing the property at a tax deed sale, which would eliminate the lenders interest in the property. The association would also be considered an interested party by virtue of its interest under the governing documents for the community.
If the tax certificate is not redeemed, the certificate holder may proceed to apply for a tax deed sale after a specified holding period. This can occur no earlier than two (2) years after April 1 of the year of the issuance of the tax certificate, but no later than seven (7) years after issuance. The seven (7) year limitation can be extended if the property owner filed for bankruptcy and the property was within the bankruptcy estate and therefore subject to an automatic stay. Upon the application for the tax deed, the individual applying for the tax deed must redeem all other tax certificates on the property, including the fees and interest that have accrued.
On a date posted by the County in its Public Records, individuals can bid on the tax deed. The amount set as an opening bid depends on whether the property is subject to homestead exemption. The opening bid for non-homestead properties includes the amount paid upon application for the tax deed, the amount to redeem the certificate, and all costs and fees paid by the tax deed applicant. If the property is homestead, the opening bid also must include at least one-half of the latest assessed tax value of the property. The highest bidder will obtain the tax deed and is required to pay the Clerk within 24 hours of sale If payment is not timely received, the sale will be cancelled and re-auctioned at the next sale.
Once a tax deed is issued, all subordinate liens are eliminated with the exception of certain federal tax and city liens. However, the covenants running with the land contained in the declaration of covenants for the community are not extinguished by the tax sale and remain fully in force and effect. The tax deed holder takes the property free and clear of all mortgages and past due assessments, and is entitled to immediate possession of the property. To prevent being divested of property that the association acquired through its own foreclosure, an association may consider paying existing tax certificates. This would ensure that the interest of the association remains intact. The payment of the certificates would be the less costly option as opposed to waiting for a tax deed sale application. However, redeeming the tax certificate does not equate to purchasing the tax certificate nor entitle the association to seek a tax deed. The individual or entity that redeems the tax certificate is only paying off the delinquent taxes and does not obtain additional rights in or to the property.
Should the association determine that it may wish to bid at a tax sale, title insurance issues should then be considered. As noted above, the property will transfer to the association subject to all federal tax, city and municipal liens. Should the association take title by tax deed, it could later face problems when attempting to sell the property. Generally, national title insurance underwriting guidelines will not insure the title to the property for a period of twenty (20) years after the issuance of a tax deed. In some limited instances, a title insurance underwriter will insure a sale transaction upon the successful conclusion of a lawsuit clearing title to the property (a quiet title action). This however, cannot not be done until the property is held by the tax deed owner for four (4) years.
The benefits and negative results of payment of tax deeds and certificates require a careful and thorough analysis. A complete title examination and valuation of the property must reflect that the benefits outweigh the potential consequences, as well as the inability to insure the title, which will affect the ability to sell the property. Each property should be viewed on its own circumstances.
