Property can't qualify for title insurance

16 Replies

There is a property on the local MLS that says it won't qualify for title insurance. The sellers are strictly looking for cash buyers. I had my agent check into this property and I did some additional investigation. We discovered that the LLC that owns the property purchased it on the courthouse steps roughly 7 months ago and is still in the 2-year redemption period. The LLC that owns the property was created roughly 9 months ago and, as far as I can determine, owns no other properties in the local area. I searched the county clerks records and it seems that the previous owners got behind on their taxes a few years ago and wound up getting a tax loan. It looks like that company foreclosed on them in 2020. I have not walked the property yet, but from the MLS photos and description, it seems to be in decent shape and vacant.

So, my question is should I consider buying this property, and if so, how should I conduct my due diligence? I don't know why this LLC is trying to sell within the redemption period, instead of simply leasing it for the 2 years until they can get a clean title and title insurance. Although, if they are motivated, it may be a good buy and hold opportunity. I've never purchased a property from the courthouse steps so I'm not sure if there are additional pitfalls that I need to investigate.

Thank you for any insight you can provide.

I take it this was a tax sale, not a bank foreclosure. You need to keep in mind tax sale laws. The owner has up to 2 years to recoup the house if it was a homestead, repaying what the buyer paid plus 25% interest per year. A possible danger is if the county would give that payment back to the person who bought at the courthouse steps, rather than you if you purchase it now. Also, the former owner could contest whether the tax sale should have even occurred for at least a year. I wouldn't buy a property under those conditions. 

Eric made a good point-was it sold at a tax sale or a bank foreclosure?  If a tax sale, the 2 year redemption period only applies if it has a homestead exemption, agriculture exemption or is a severed mineral lease. However, there is a lot of misunderstanding.  It is not the redemption that causes the inability to get title insurance.  It is the 2 year period in which the former persons who had an interest om the property have the right to contest the sale if they were not properly notified and given an opportunity to pay the back taxes.  Feel free to contact me for more info.

If they bought it at the tax sale, then there could be a two year right of redemption or contestable sale....so you could loose the property or only get paid back a fraction on what you paid for it.

People say the properties don't get redeemed, but that is not right, some do and in my experience sometimes on the very very last day of the redemption period.

Unless you can afford to loose all your money, these are probably not good to go after, even if the deal sounds way too good to be true.

Thanks everyone for your responses.

It was a tax lien held by a 3rd party that was foreclosed upon, so I'm almost certain that the 2-year redemption period applies. Not getting my money back if it is redeemed is definitely a concern, but the 2-year time frame doesn't really bother me since I plan to buy and hold. It sounds like it could turn into a legal mess if the original owners do redeem and then the money goes to the current sellers instead of me.

I was thinking of offering 50% of ARV to the sellers, which is less than what the sellers purchased the property from at auction, just to see how motivated they are. The sellers trying to sell it during the redemption period makes me think that they are. Of course, they could just be trying to make a quick buck while the market is hot. But, I can't afford to lose that much money if things go wrong, so I'll probably just pass on this property.

@Jason Howell Something else to consider. The tax sale does not clear all liens against the property. There could be other liens that need to be resolved. For example I purchased a city building lot at the tax auction only to find it had city weed abatement liens that were higher than the purchase price. Seller may have had a similar “surprise” and wants to unload the liability.

Here's a question for you...why are you still considering this?

If you can't get title insurance, it's not worth owning.  Do you want to buy something that you don't own?  That someone can walk-up at anytime in the next 2 years - or longer - and file a claim?  

My recommendation:  you can always make more money but you can't make more time. BOLT.

Originally posted by @Pete Harper :

@Jason Howell Something else to consider. The tax sale does not clear all liens against the property. There could be other liens that need to be resolved. For example I purchased a city building lot at the tax auction only to find it had city weed abatement liens that were higher than the purchase price. Seller may have had a similar “surprise” and wants to unload the liability.

I considered that. But, buying at 50% ARV on a property that needs very little repair, leaves a lot of cushion to deal with problems like that. I wouldn't even consider the property if I didn't think I could get a substantial equity position in it. I could also require in the purchase contract that the sellers must disclose any liens that they know about. That doesn't keep them from lying, but it provides a little bit of accountability to the sellers, knowing that they could be sued if they don't disclose. There is still a risk, but the longer time passes, the smaller they become. This is a SFH, not raw land. At this point, I likely won't be making an offer on this property, but it's still interesting topic. To me, at least

 

Originally posted by @Patricia Steiner :

Here's a question for you...why are you still considering this?

If you can't get title insurance, it's not worth owning.  Do you want to buy something that you don't own?  That someone can walk-up at anytime in the next 2 years - or longer - and file a claim?  

My recommendation:  you can always make more money but you can't make more time. BOLT.


At this point, I'm not. But, it's not because of the 2 years. In Texas, if the original owners want to redeem the property, they must pay 125% of the tax sale amount in the first year, or 150% of the tax sale amount in the 2nd year, plus any maintenance costs required to keep the property habitable. By itself, that is a pretty good return on investment. However, the investor can also lease the property during that time, and keep all the proceeds. In this market, where the CoC ROI for almost every SFH I see on the MLS is between 4% to 5.5%, I'm simply investigating all my options.

Good question, why are they selling it? Maybe they know something you don't know. If they accept less than they paid, I would be even more worried. Also consider this happened during the pandemic so could there be special circumstances that come into play. Vacant pictures do not mean vacant property.

@Jason Howell

Why would they sell now?  To take advantage of a hot market and let someone else wait out the period until title insurance is available.  Very little(No) chance they are going to sell to you at a loss

Originally posted by @Bruce Lynn :

@Jason Howell  You should still close at a title company and have the title company run a title search for you, even if they won't issue title insurance.

 I probably won't pursue this property, but I was planning to use a title company or a real estate lawyer.  Thanks for the good advice.

Originally posted by @Greg H. :

@Jason Howell

Why would they sell now?  To take advantage of a hot market and let someone else wait out the period until title insurance is available.  Very little(No) chance they are going to sell to you at a loss


That's the $100k question. The LLC was formed 2 months before they purchased this property and has 5 principals. I've checked all the surrounding appraisal districts and the LLC doesn't own any other properties in the area. The principals do own some houses in the area. I have absolutely no evidence, but I'm wondering if they need to liquidate for some unknown reason.

Originally posted by @Jason Howell :
Originally posted by @Greg H.:

@Jason Howell

Why would they sell now?  To take advantage of a hot market and let someone else wait out the period until title insurance is available.  Very little(No) chance they are going to sell to you at a loss

That's the $100k question. The LLC was formed 2 months before they purchased this property and has 5 principals. I've checked all the surrounding appraisal districts and the LLC doesn't own any other properties in the area. The principals do own some houses in the area. I have absolutely no evidence, but I'm wondering if they need to liquidate for some unknown reason.

You seem to want to focus on the LLC formation. As someone who has been doing this for 30+ years, I have bought properties with an LLC I have owned for decades as well as bought a property with an LLC created a week before closing. Neither was out of any desperation. You realize they could own hundreds of properties with hundreds of LLCs or using a Series LLC in Texas? LLC creation is not an indicator.

There is not enough information here to determine their intent but I would guess my initial reaction of trying to take advantage of the current market is correct and this is not a situation where the seller is going to take a loss

Originally posted by @Greg H. :

@Jason Howell

Why would they sell now?  To take advantage of a hot market and let someone else wait out the period until title insurance is available.  Very little(No) chance they are going to sell to you at a loss

Exactly. They aren't going to sell for less than they paid. 

Originally posted by @Greg H. :
Originally posted by @Jason Howell:
Originally posted by @Greg H.:

@Jason Howell

Why would they sell now?  To take advantage of a hot market and let someone else wait out the period until title insurance is available.  Very little(No) chance they are going to sell to you at a loss

That's the $100k question. The LLC was formed 2 months before they purchased this property and has 5 principals. I've checked all the surrounding appraisal districts and the LLC doesn't own any other properties in the area. The principals do own some houses in the area. I have absolutely no evidence, but I'm wondering if they need to liquidate for some unknown reason.

You seem to want to focus on the LLC formation. As someone who has been doing this for 30+ years, I have bought properties with an LLC I have owned for decades as well as bought a property with an LLC created a week before closing. Neither was out of any desperation. You realize they could own hundreds of properties with hundreds of LLCs or using a Series LLC in Texas? LLC creation is not an indicator.

There is not enough information here to determine their intent but I would guess my initial reaction of trying to take advantage of the current market is correct and this is not a situation where the seller is going to take a loss

 Thanks for your insights. You're probably right.  I did some more digging, and at least 3 of the principals have personal residences with tax appraised values over $500k.  Although possible, it's unlikely they need to liquidate at a loss.