I just acquired a treasurer’s deed to a property because the former owner didn’t pay the property taxes. Do I need a quiet title action to sell this property? What if I want to keep it and develop it?
Co-Author: Zac Grey
Some savvy real estate investors know that one way to acquire property in Colorado is to invest in property tax liens. Put simply, if a property owner in Colorado fails to timely pay his property taxes, the Colorado county in which the property is located may assert a lien on the property and then sell the lien to an investor. These tax liens can be attractive investments because the interest rates are generally in the double digits (tax lien rates are set annually at nine points above the federal discount rate). A property owner may redeem, or cancel, the lien by paying the property tax liability along with the accrued interest and some costs.
However, if a tax lien investor holds a tax lien for 3 years without a redemption, then the investor can apply for and acquire a treasurer’s deed from the county. This means that the tax lien investor essentially becomes the owner of the property through a conveyance from the county treasurer’s office – hence the name “treasurer’s deed.”
Unlike a standard warranty deed under which a seller provides to a buyer a warranty, or assurance, about the quality of title, these treasurer’s deeds carry no warranty of title. For this reason, buyers can be wary of buying such a property where the seller acquired title via a treasurer’s deed. Likewise, subject to certain exceptions, Colorado title companies generally won’t insure title based on a treasurer’s deed. Accordingly, a property acquired by treasurer’s deed can be very difficult to sell into the retail real estate market.
Generally, there are two primary reasons that Colorado title companies do not insure properties acquired by treasurer’s deed.
First, for up to nine years following the issuance of the treasurer’s deed, a person claiming a “legal disability” is entitled to redeem or unwind the treasurer’s deed transaction upon the payment of the tax lien amount, along with interests and costs. The determination of whether an interested person possesses a “legal disability” is a fact-specific inquiry that varies from case to case. Title companies do not want to take on the risk of redemption by a person claiming a “legal disability.” However, after this nine year period expires, many title companies will insure title and the property acquired by treasurer’s deed is accordingly much easier to sell into the retail real estate market.
Second, even if an interested party was not under a “legal disability,” a party claiming an interest in the property following the issuance of a treasurer’s deed can still try to unwind the treasurer’s deed transaction by claiming that she did not receive the proper notice of the right to redeem and pending treasurer’s deed. While the legal standards for such notice are relatively low, title insurance companies are nonetheless wary of taking such risks by insuring title to a property acquired by a treasurer’s deed.
Trying to obtain financing for the development of a property acquired through a treasurer’s deed can face the same issues. Lenders will likely want a lender’s title insurance policy before making a loan. Accordingly, it may be difficult to obtain development financing for such a property.
The statutory scheme establishing the acquisition of real estate by treasurer’s deed specifically contemplates a lawsuit to quiet title in the party acquiring title by treasurer’s deed, known as the grantee. The quiet title action is essentially a lawsuit to perfect title so that the property can be sold or financed without waiting out the 9-year post-treasurer’s deed statutory redemption period. At the end of a successful quiet title action, the judge issues the grantee a quiet title decree. With a quiet title decree in hand, an investor can typically obtain a title insurance policy on such property such that the property can be sold into the retail real estate market or collateralized to secure financing for development or some other purpose.
The majority of these quiet title lawsuits are uncontested, meaning that no party answers or defends them. These uncontested quiet title cases generally are completed much faster and are far less expensive than a contested quiet title case. However, even uncontested cases required some care to ensure that the appropriate parties receive notice and the final decree quieting title is accurate, among other key steps. Regardless of the nature of the quiet title action, attorneys at this office can help real estate investors skip the 9-year waiting period by turning a treasurer’s deed into a quiet title decree.