Ins and Outs of Secondary Market Transactions with Nelson Mullins
Tax sales law experts Matt Abee and Randy Saunders of the Nelson Mullins law firm joined Brian Seidensticker, CEO of Tax Sale Resources, on a podcast devoted to the nuances of secondary market tax lien and deed sales. Those deals occur after the official county tax sale auction (the primary market) when the auction winner agrees to sell to a buyer through a private transaction (the secondary market). Such transactions are entirely legal in most states, but buyers must exercise caution and perform their due diligence to ensure success.
Understand Your Business Model Before Engaging in Secondary Market Transactions
Before purchasing through the secondary market, create a business model based on your budget, resources, and financial goals. Then, perform your due diligence accordingly. Please do so to avoid costly missteps in the secondary market. For example, in some jurisdictions (Kentucky and Florida, for instance), tax certificates have expiration dates, and if you don’t know that – or don’t know when your certificates expire, it can be a precarious proposition. You could miss that deadline and lose your entire investment if the state statutes say certificates became worthless upon expiration. Consulting a trusted local authority on tax sales, such as a tax sales attorney in that jurisdiction, can help you avoid worse-case outcomes.
Why Would Someone Sell These Secondary Market Transactions?
The seller may be selling their portfolio for a good reason, like if they are retiring from the investment business. But It could be that the seller didn’t fulfill the necessary statutory requirements, so it will be nearly impossible to gain ownership of the underlying property through foreclosure – and they want to dump their investment on you. Unless the seller can reasonably explain why they’re selling their certificates – and it is supported by evidence that the certificates still hold value – you may want to shop elsewhere.
Research on Secondary Market Transactions is Just as Important as Primary Sales!
Abee and Saunders pointed out that some sellers may be trying to offload their certificates because they’ve already maxed out their investment potential. For example, if the certificate is about to expire, that’s a red flag. Do your research and talk to the county officials. Ask them if the certificate they’re selling is transferable and how complicated that transfer process is. Also, remember that just because you have a Bill of Sale for a certificate doesn’t mean that the county will recognize it as a deed – which is a different legal instrument. Plus, even if you have a legitimate deed, it may not include the conveyance of a quiet title – so it could still be challenged, which can be a costly and time-consuming ordeal.
Avoid This Scenario: Don’t Get Caught with Your Head in the Sand!
Nelson Mullins Law cited incidents where buyers paid extraordinary amounts of money to secondary market sellers but never received anything in return. They were expecting tax certificates that were believed to be valuable but were left empty-handed after waiting to hear from the seller for months and years. That underscores the importance of using a trusted, neutral third party to help manage such transactions. The third party – perhaps a neutral attorney – can act as an escrow agent to ensure that no money changes hands until the third party securely holds the tax certificates. Then, upon payment, they will be immediately disbursed to the buyer.
How to Gain Future Cooperation from the Seller
It is also strongly advised that the seller agrees to cooperate with you after the transaction. For instance, you may need additional paperwork or documentation to present to the court when applying for a quiet title. You may not realize what paperwork you need until years later, but you’ll need the seller’s help to acquire it. You may need to know who was served notifications and how. The seller should make a good-faith effort to locate such documents and share them with you promptly, reliably, and professionally. Another thing to note is that if you are responsible for servicing liens, you should be given the entire servicing file and all the associated servicing data when your secondary market transaction is finalized.
Don’t Miss Out on More Information
Investing in the secondary market can be lucrative, but be sure to factor in all the nuances of the transaction and what you’re receiving as part of your price negotiation with the seller. This is just a very brief overview, so to learn more, listen to the full, in-depth podcast interview that Matt Abee and Randy Saunders did with Brian Seidensticker.
