Many investors are interested in purchasing real estate via city or county tax sales to take advantage of a below-market sales prices, which can be significant. However, because this process ultimately leads to taking possession of another’s home, governing bodies want to ensure that the process is done properly, which creates some hoops for buyers to jump through they might not be expecting.
To make this process even more confusing, local tax-sale investors must also understand that St. Louis City and St. Louis County (as well as other counties) follow very different processes. This blog post is going to focus on explaining how St. Louis County prepares for and conducts its tax sales and what steps investors need to take in order to ultimately get title the property.
St. Louis County (as well as many others in Missouri including St. Charles and Jefferson Counties) operates under the non-judicial formula prescribed by the Jones-Munger Act (RSMo. Chapter 140). 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. 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, starting about five weeks prior to the tax sale. The list can also be obtained at the Collector’s Office.
Properties being auctioned at tax sale can be auctioned up to three times (i.e., once per year for three years). If the property does not sell at the third auction, title to the property will revert to the County. Properties that have reverted to the County post-third tax sale are often referred to as “on the shelf” by investors. This is because once the property has reverted to the County, investors can purchase these properties from the County without having to bid at live active auction.
To recap, the steps of the process discussed so far looks like this:
- Property Owner fails to pay property taxes (usually for three consecutive years);
- Property is auctioned at the St. Louis County Courthouse;
- If not sold, the property is auctioned again the following year;
- If not sold, the property is auctioned yet again the following year; and
- If not sold, title to the property reverts to the County.
Investors can purchase rights to the property at any auction or after Step 5 directly from the County. When a successful bidder pays for the property at any of the three auctions, the Collector will issue a Certificate of Purchase which will be recorded with the recorder of deeds. The Certificate of Purchase does not prove ownership or title to the property because the current owner has a right to redeem the property by paying the taxes owed plus expenses and interest.
- If the investor successfully bids on the first or second year tax sale (i.e., at Steps 2 or 3 above), the property owner who failed to pay their taxes has at least 12 months to redeem the property.
- If the investor successfully bids on the third and final sale or purchases straight from the County “off the shelf,” (i.e., Steps 4 or 5 above), the current owner has only 90 days to redeem the property.
In order to complete the process and receive a deed, the investor must provide Notice of the Right of Redemption by sending a certified letter to each party with an interest in the property. The letter must be sent no earlier than 90 days prior to the date the investor is eligible to receive a deed.
This begs the question, “What does it mean to redeem a property?” When an owner’s property is auctioned off for failure to pay property taxes, that owner is given a period of time to redeem or make good on the taxes owed. He or she can keep their home by paying the amount that was bid at auction plus the cost of allowed expenditures (e.g., the cost of a title report and certified mail) plus 10% Annual Interest on the delinquent taxes. This money goes to the successful bidder/investor so that the investor still receives a positive return on investment. Note, however, that investors can bid more than the actual amount of the taxes owed (e.g., because they really like the property and want to own it). Investors will not receive 10% on the surplus portion of this bid should the delinquent owner redeem. A visual of this calculation is provided here:
$ Amount Bid
+ $ Amount of Allowed Expenditures
+ $ 10% annual interest on Amount Bid or Taxes Owed (whichever is less)
= Investor’s Return on Investment
What if a delinquent owner does not redeem? If a property is not redeemed, the investor 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.
Once you have a Collector’s deed to the property, you are considered the owner of that property, but that does NOT mean you have clear title to the property. In our experience, most reputable title companies will not provide title insurance at this point due to concerns that this process might not have been perfected. This is because 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. For example, 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. The tax-sale investor does not have to confirm that each party actually received the notice – only that the notices be sent. This creates a risk to title insurers as these parties could file a lawsuit to set aside the tax sale and collector’s deed claiming that due process was not followed. So how do investors get title insurance and ultimately the ability to own, rehab, and later sell the property? There are a few 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 which offers title companies protection, and many will be willing to offer title insurance after ten years.
- Quit Claim Deeds and/or Lien Releases from interested parties. The tax sale purchaser can negotiate with the interested parties (those they previously sent notices to) to obtain documents to remove their interest. The tax sale purchaser may offer compensation to the interested parties in exchange for this release.
- A Quiet Title Lawsuit is the most common path to clear title for tax sale purchasers. The purchaser will retain an attorney who will file a lawsuit 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.
If you are wanting to invest in tax sales or need to quiet title on a property, please reach out to us and take advantage of the flat fee pricing we can usually offer in this area. Contact us today by clicking here, or by calling us directly at 314.862.2237.