My name is Dave Phillips, member of The Title Squad. This article offers an overview of the tax foreclosure process relating to real property in Michigan.
If you invest in land, chances are good that you will eventually invest in tax foreclosed property, as the opportunities are abundant. Even if you decide not to invest, it is likely that you, or someone close to you, will be affected by tax foreclosure. This is when learning for learning’s sake is valuable, because knowledge of the process may help you or a family member avoid the loss of your home or business.
I receive many questions regarding tax foreclosure, as clients seek to understand the processes and timelines involved. Additionally, for the clients who purchase land at tax auction, they want to know how to qualify and sell such property as marketable title.
I wrote this article in two parts. Part 1 consists of an overview of the tax foreclosure process. Part 2 discusses the quality of title purchased at auction.
Part 1 (Overview)
Property taxes are billed twice annually by the treasurer’s office. There is a collection in the summer and a collection in the winter. They are indeed termed ‘summer’ and ‘winter’ taxes, respectively.
I use 2005 as the example tax year. Let’s assume our property is located in Troy, Michigan, Oakland County. The fee owner of such property is Mr. A.
Mr. A receives his 2005 summer tax bill in the amount of $1,000.00, due and payable on July 1. He does not pay this bill.
Subsequently, Mr. A receives his 2005 winter tax bill in the amount of $1,200.00, due and payable on December 1. He does not pay this bill.
2005 comes to a close and Mr. A has not paid any portion of his 2005 taxes. What happens next?
Mr. A will have until February 14, 2006 to pay the 2005 winter taxes, as well as the delinquent 2005 summer taxes, at the local treasurer’s office. After such date, all delinquent 2005 taxes will be forwarded to the Oakland County Treasurer’s Office. On March 1, 2006, the Oakland County Treasurer receives all delinquent 2005 taxes and the game is on.
It is important to understand that local treasury offices do not forfeit or foreclose tax delinquent lands. This responsibility is transferred directly to the county treasurer of the county where the land sits.
Between June 1, 2006 and February 1, 2007, a series of notices will be sent to Mr. A demanding payment.
2007 rolls around and Mr. A has still not paid his delinquent 2005 taxes. What happens next?
On March 1, 2007, his property is forfeited to the Oakland County Treasurer. A Certificate of Forfeiture is recorded at the Register of Deeds evidencing such forfeiture. The pressure continues to mount.
Does the Certificate of Forfeiture mean that Mr. A loses his home? The answer is no; at least not at this moment. You see, obtaining forfeiture is a procedural method executed by the county treasurer. The forfeiture allows the county to seek foreclosure, via the Circuit Court, regarding such forfeited land. In other words, the county can’t just skip from delinquency to foreclosure. It must follow the necessary steps, and that first step is forfeiture.
The property in our example will remain in forfeiture, subject to payment, from March 1, 2007 until March 1, 2008: one full year. If Mr. A pays all sums due, the county will record a Certificate of Redemption relative to the recorded Certificate of Forfeiture. Once paid, Mr. A will be deemed current on his tax schedule.
March 1, 2008 has arrived and Mr. A has not paid. What now?
Between March 1 and March 10, 2008, the Oakland County Circuit Court will enter Judgment of Foreclosure. Big time stuff here! From the date the judgment is entered, Mr. A has only 21 days to redeem. If he does not redeem within this window, fee simple absolute title will pass to the Oakland County Treasurer. Subsequently, Mr. A will be removed from the property and he will have no further legal rights.
Summary: Delinquent 2005 taxes are forfeited in 2007 and foreclosed in 2008. There is a time span of two years between the original delinquency and the loss of the property.
Part 2 (Quality of Title Purchased at Auction)
Congratulations, you have purchased land at tax auction. But what is the quality of your purchase? The answer is that the quality is in fact unknown.
The foreclosing governmental unit (FGU) receives its title by way of the tax statutes. It’s an end run. When the judgment of foreclosure is issued, the FGU takes its title by way of default. The process, prior to foreclosure, involves notifying all persons who have a legal interest in the property. These people must be given notice and an opportunity to be heard, the basis of due process.
Due process is the legal requirement that the state must respect all of the legal rights that are owed to a person (definition obtained from Wikipedia). If a party with a legal interest is not properly notified, that party will not be bound by the judgment passing title to the FGU. This is the leading reason that title underwriters refuse to insure transfers of land that are on the heels of a tax auction. The title underwriter simply can’t be sure that all parties with a legal interest have had their due process rights satisfied.
At auction, the FGU will transfer land by way of quit claim deed. They will not warrant the transaction. The FGU is transferring only the interest they obtained through the foreclosure process. They will not guarantee the purchaser at auction that all parties were afforded due process. This does not mean that land purchased at auction is not free and clear, it just means that some additional homework needs to be done.
So how can the purchaser at auction offer insurable title to its prospective purchaser?
There are two (2) main approaches that may be utilized.
#1: The tax auction purchaser can file a quiet title action; or
#2: The title underwriter may simply be willing to insure the sale. This is usually accomplished only after a significant amount of time has passed since the auction sale.
When any of the above are satisfied, the seller will be in position to sell insurable title.
And of course, don’t forget, a buyer may be willing to accept a deed from the seller without an owner’s policy of title insurance. In this case, the buyer would be assuming all risk concerning prior interests.
I have practiced title examination for 22 years. I have experience in both the residential and commercial markets. Loss of income is everywhere and has affected just about everyone that I know in one way or another. Be it residential or commercial, or whether the individual is rich or poor, there is no bright line rule anymore. We are all in the soup together.
Title insurance is pragmatic for the land owner, as the risk of dealing in distressed property is enormous. Knowledge is a good thing. Educating investors, as well as the general public, is a necessity.