August is here, and for many real estate investors in St. Louis County, St. Charles County, Jefferson County and beyond, this means it is time to begin preparing for the annual property tax sale.
A tax sale – when the county auctions off real estate parcels with unpaid property taxes (generally three or more years of unpaid taxes) – offers the opportunity to acquire a parcel at a price substantially below the value; however, there are many complexities with the tax sale process that can trip up a novice investor. Among the complexities is the insurability of title – after a tax sale purchaser receives a Collector’s Deed (more on that below), can the investor sell it to a bona fide purchaser or obtain a loan, and can that purchaser or lender get title insurance?
In order to answer this question, it is important to understand that there are two distinct tax sale procedures in Missouri.
First, the City of St. Louis has a separate procedure required under the Municipal Land Reutilization Law (Ch. 92, RSMo.) We wrote about the city process recently – check out the details here.
Second, the Jones-Munger Act (Ch. 140, RSMo.) which most Missouri Counties, including all of the St. Louis area counties, operate under. We’ll be focusing on the Jones-Munger Act process in this article as it’s more widely used.
Tax sales under the Jones-Munger Act occur on the fourth Monday of August each year, and are held by the County Collector’s office (in counties with a high number of properties to be auctioned, the tax sale may last more than one day). The Collector’s office will prepare a list of the properties with delinquent taxes to be sold at the auction, and this list will be published in a local newspaper for three consecutive weeks, beginning approximately five weeks prior to the tax sale. As an example, most publications in 2021 began July 19th. in 2021. The list can also be obtained at the Collector’s Office.
Due Diligence Is Critical
Prospective investors will use this list to identify potential properties they wish to purchase, and begin their due diligence. Before expending a significant amount of time, investors should be aware that many of these properties fall off the list as the owners pay down their delinquent taxes to avoid the tax sale. The due diligence is important, as investors do not have the ability to enter onto the property and inspect the buildings or improvements, and will likely have to deal with title issues (more below) in the event they obtain the deed to the property.
When Does the Tax Sale Auction Take Place?
On the fourth Monday in August, the auction will be held. Investors/bidders will need to register with the Collector’s Office ahead of the bidding (each Collector’s office will have information available on how to register – visit their website or contact them for registration information). The auction works like any other auction; parcels are called off one-by-one, with the opening bid being the amount of the delinquent taxes. Bidding will increase so long as there is competition, and some properties can go for tens of thousands of dollars more than the opening bid!
Winning bidders must make payment the day of the sale. Certain counties will require a cashier’s check, while others will accept business or personal checks – be certain to check with the county prior to the sale to know what type of funds will be required. Loan funds may be used, but must be available on the day of closing – this means that you won’t likely be able to obtain a loan specifically for that property, but would need to draw upon a line of credit or some other form of loan available to you.
What’s Next? Understanding Certificate of Purchase and Right of Redemption
Once the successful bidder has paid for the property, the Collector will issue a “Certificate of Purchase”, which will be recorded in the land records. Important note – the successful bidder does not receive the title to the property at this time! The reason for this is that the current owner has a right to redeem the property by paying the back taxes. How long is the right of redemption? If it is the first or second sale, the current owner has at least 12 months to redeem the property. If it is the third and final sale, the owner has only 90 days to redeem the property, provided the proper steps are taken. (If a property does not sell at the first auction, it will be re-auctioned a second time the following year, and if still not sold, it will be re-auctioned a third-and-final time the year after that. If it does not sell at that point, title to the property will revert to the County.)
In order to complete the process and receive a deed, the tax sale purchaser must provide Notice of the Right of Redemption to all parties with an interest in the property by sending a certified letter to each party. The letter must be sent no earlier than 90 days prior to the date the purchaser is eligible to receive a deed. Tax sale purchasers are eligible to receive their deed:
- 1st or 2nd sale: one year after the date of the sale, and no later than eighteen months after the date of the sale.
- 3rd sale: 90 days after the date of the sale and no later than eighteen months after the date of the sale.
As most tax sale purchases occur on the 1st or 2nd sale, this means that the tax sale purchaser must send the Notice of the Right of Redemption just after 90 days prior to the one year anniversary of the tax sale. The actual right of redemption expires on the 90th day after the letter is sent. In order to identify the parties entitled to the notice, the tax sale purchaser must obtain a title report from a licensed title company in the state of Missouri, with an effective date (good-through date) no more than 120 days from the expiration of the right of redemption. The parties who will be entitled to such a notice include: current owner(s) and any and all lienholders, such as the mortgage lender and judgment creditors. Most mortgage lenders will not allow a property to be lost for unpaid taxes, so any purchaser with a current mortgage should expect the property to be redeemed.
What happens if a property is redeemed?
The tax sale purchaser will receive a complete refund of their purchase price and allowed expenditures (such as the cost of the title report and certified mail, provided those receipts are provided to the county collector’s office). In addition, the purchaser will receive interest on the delinquent tax portion of their bid in the amount of 10% per annum – but no interest will be paid on the “surplus” portion of their bid – just a straight refund of that amount.
When is Collector’s Deed Issued? If redemption does not occur, the tax sale purchaser must apply for a Collector’s Deed by providing a copy of the title report, the Notice letters and the certified mail receipts to the Collector’s office. Upon review and confirmation that the process was properly followed, the Collector will issue and record the Collector’s Deed, finally putting the tax sale purchaser in title.
This Is Where Title Comes In
Title Insurance issues now exist – title insurers in Missouri (and throughout the country) will not authorize the issuance of title insurance policies on a Collector’s Deed alone. This is because of Due Process – the constitutional right of the property owner (and others with an interest in the property) to receive notice of the sale and right of redemption may not have been sufficient. There are several reasons for this – among the many reasons that exist, the certified letter with the right of redemption may not have been delivered, or may have been accepted by someone other than the property owner, or the property owner may be deceased. There is no obligation of the tax sale purchaser to confirm that each party entitled to notice actually received the notice – only that the letters be sent.
This is a risk to title insurers as these parties could file a suit to set aside the tax sale and collector’s deed claiming that due process was not followed. This has happened in the past, and a few cases have been heard by the U.S. Supreme Court – confirming that the notice sent in a tax sale may not be sufficient.
How do investors get clear title to property?
Title insurers offer a couple of different paths to insurability:
- Passage of ten years from the recording date of the collector’s deed – the passage of time removes the risk (and allows for an “adverse possession” counterclaim by the tax sale purchaser – a topic for another day, but which offers title companies real protection).
- Quit Claim Deeds and/or Lien Releases from those parties with an interest. The tax sale purchase can negotiate with these parties with an interest in the property to obtain documents to remove that interest. The former owner could execute a quit claim deed, and lenders or judgment creditors can execute releases. The tax sale purchaser may offer compensation if they so desire.
- A Quiet Title Suit is the most common path to clear title for tax sale purchasers. The purchaser will retain an attorney, who will file a suit to establish title is only in the name of the purchaser. In this suit, each party with an interest will receive personal service – meaning those parties will have the opportunity to make their case that Due Process was not given – and then ultimately obtain a judgment “quieting title” in the name of the purchaser. Once the applicable appeals period has expired, assuming no appeal was filed, the title to the property will be fully insurable, and the purchaser may obtain a loan or sell the property at that time.
We recognize that not all properties need title insurance – you may be acquiring the vacant lot next door, for instance, and have no intention of selling it. Or perhaps the purchaser intends to rent the property. As soon as the purchaser obtains the Collector’s Deed, they obtain possession of the property, so they may use it as they wish, including renting it to other parties. They simply do so with the risk that the prior owner or lienholder may file suit to set aside the sale, and they could potentially lose that property.
The foregoing article covered tax sales at a very high level, and does not address the many nuances and complexities that can arise in the process. We recommend that any new or novice investor retain an experienced real estate attorney to help navigate through this process and minimize their risk. We are happy to refer folks to a reputable attorney – feel free to reach out with such a request!
We wish all investors luck at the tax sale, and we’re here to help with your title needs as they come up!
If you have specific questions or want to learn more in depth about this particular process, you may also wish to review the State of Missouri’s Tax Sale Procedure Manual by clicking here.