The Effect Of A Tax Foreclosure Sale On Title
It is often said that nothing is certain but death and taxes. In Washington, property taxes are a critical source of funding for local governments, including local infrastructure such as roads, police, and schools. To ensure the vital collection of property taxes, the Washington Legislature has created a system to allow the local governments (generally a county) to foreclose on properties for which the property taxes have gone unpaid for at least 3 years. This process involves a sale by public auction (either in person or online) if the owner or an interested party fails to cure the delinquent property taxes prior to the scheduled auction.
The bidding will usually start at the statutory minimum price, which consists of the delinquent property tax amount, plus interests and costs associated with the sale. If the highest bidder bids beyond that price, the excess amount is supposed to get refunded to the foreclosed-out property owner. Critically, a tax foreclosure sale extinguishes most other previously existing liens and encumbrances, so that the purchaser usually obtains title free and clear. However, there can be exceptions to this general rule, including, inter alia: (1) easements and restrictive covenants which were recorded prior to the date of the delinquent taxes, so long as they are appurtenant to the property; (2) IRS tax liens; (3) liens from the Washington State Department of Social and Health Services (“DSHS”); (4) liens for utility charges; (5) local improvement district liens; and (6) certain HOA liens for delinquent assessments. Prospective purchasers at tax auctions must therefore carefully research the title history to mitigate the risk of any liens surviving the sale.
Title companies generally are unwilling to offer title insurance to the purchaser at a tax foreclosure sale. One major reason for this is that in rare cases, the property owner who was foreclosed on has a right to redeem the property within three years following the tax sale. However, to do this, the property owner must have either been a minor, or must have been legally incompetent. To exercise this redemption right, the foreclosed property owner must pay to the successful bidder: (a) the amount paid at the auction; (b) statutory interest on that amount; and (c) the reasonable value of all improvements made to the property in good faith following the sale, less the value of the use thereof. To protect themselves, title companies usually wait 3 or more years after the tax sale before issuing a title policy. This means that if you purchase property at a tax sale, you may have difficulty selling it for full market value until several years have elapsed after the sale.
The lawyers at Beresford Booth have a wealth of experience in real estate and title matters. We would be happy to assist you. Please contact Beresford Booth at info@beresfordlaw.com or by phone at (425) 776-4100.