Peeps in my Tax Lien Property?!

[Chris Jackson]

Hey BP world!  Here is probably a common enough question in the world of buying properties at a tax sale:  What do I do when there are people living in a property that I buy at the tax sale in Pennsylvania?  I haven't bought anything yet - but there are 4 properties I was interested in, two of which are currently occupied despite the fact that the properties on this list have been behind in taxes for at least 3 or 4 years!  So I assume I buy the property, then immediately begin the eviction process?  I guess it could conceivably be anybody in these properties, right?  The actual owners, renters or squatters? Does anybody know for PA if there is going to be an easier/quicker way to get the people out?

[Chris K.]

@Chris Jackson

1. @Steve Babiak is correct that you will need to bring an ejectment action in most cases. Depending on the county and the "feistiness" of the defendants, it can easily drag on for year or two.  

2. When buying tax-sale properties, remember your end goal. As an investor, you either want to sell it to another person or use it as a buy-and-hold property. In the later option, many people want to refinance it with a bank. All this requires you to have a marketable title. 

Getting a marketable title with a tax-sale property is not so easy in Pennsylvania. So aside from looking at whether the property could become a profitable investment, you also need to look into your chances of getting a marketable title. Now sometimes you can take risks (e.g. buying a property with an ARV of $750k that you buy for $5,000 at a judicial sale). But just know what you need to do to get a marketable title.

3. Not to repeat myself, but really do understand the process of getting a marketable title. I've noticed that many newer investors like to jump into investing in tax-sale properties because they are "cheap." But the reason why they are cheaper than MLS properties or foreclosure properties is not because other investors are dumb. Rather, many investors don't want to deal with the risks involved in tax-sale properties.

Also, note that many professional can take advantage of newer investors when it comes to tax-sale properties. Maybe I'm being too harsh, but the following scenario is all too common: 

• An investor finds several properties they like. They thus ask the title company to do a search. What the investor doesn't realize is that a title company's do not face a lot of liability when they are just performing a search. Instead, most of their liability comes from issuing the title insurance. 

• In most cases, the title companies cannot issue a title insurance for a tax-sale property due to underwriting rules. So instead, the title company just offers the investor to do a search. The ultimate liability for a defective search is just returning the fees that the investor paid to the searcher (a few hundred dollars). Because the liability is so low, the title company has little incentive to look at the title carefully. Even if they want to look at the title carefully, there is often not enough time since the investor is in a rush. 

• Relying on that rushed title searcher, the investor goes and buys a property at a judicial sale. The investor then finds an attorney that handles quiet-title actions. The attorney tells them that he will gladly bring a quiet-title action but that he can only rely on the title report/search that the title company did. Unfortunately for many investors, many attorneys treat these quiet-title actions as commodity work. Indeed, they know that their client base is not some large company, but an individual investor that may "give up" or "fail" in the near future. So many just do enough work so that they can avoid malpractice claims, but don't do enough to actually deliver a marketable title to the investor. 

• So what happens when a title issue comes up? The title company says "mea culpa" and offers to return the fees. The attorney's reaction depends on the stage. If the title issues come up during the quiet-title action, the attorney may say you need to pay me a lot more if you want me to finish this case. If it is after the quiet-title action, the attorney will argue that the fault lies with the title company that did the search. And since bringing a malpractice claim against an attorney is very difficult, your best case scenario might be receiving a partial refund of the attorney's fees.  

Depending on what you ended up doing with this judicial sale property, you may end up with a significant loss. I'm not saying that you shouldn't or can't invest in tax-sale properties. I'm just saying that it's probably one of the trickiest ways to invest in Pennsylvania real-estate. Now people with a lot of money are willing to take the risk and can tolerate a loss of several thousands or even tens of thousands of dollars. But many newer investors jump into tax-sale investing because they think it is cheaper. A comparable loss to them could be a disastrous financial event. 

Excuse any typos since I'm typing this on my phone! 

Disclaimer: While I’m an attorney licensed to practice in PA, I’m not your attorney. What I wrote above does not create an attorney/client relationship between us. I wrote the above for informational purposes. Do not rely on it as legal advice. Always consult with your attorney before you rely on the above information.