Episode Transcript
[00:00:00] Speaker A: They used to call me the Da Vinci of title. I'd insure things that nobody liked to insure.
[00:00:04] Speaker B: In the startup world we call that a mafia offer.
[00:00:06] Speaker A: I basically became a 35 year career now of insuring things that nobody wants to insure because I think sometimes title can be lazy.
[00:00:15] Speaker B: Aren't you in the insurance business, right? Aren't you in the business of insuring against risk?
[00:00:19] Speaker A: So I like calculated risks and I like wearing a common sense hat. If we've contacted everybody and confirmed that they got notice or they didn't get notice that they don't, they're not adversarial and then I can certify that that why not make that underwriting decision Quick
[00:00:36] Speaker B: note before we continue, nothing we discuss in this podcast should be considered legal, financial or investment advice. Tax lien laws vary significantly by state and every property situation and investor is unique. Always consult with qualified legal and financial professionals in your jurisdiction before making any investment decisions. Now let's get back to the show.
Welcome back to the Innovative Investor Podcast and today's episode is about a problem most tax lien and tax deed investors don't think about until it's too late. What happens after you win the auction? After you try to get title insurance on the property or your buyer needs that? For decades, that was the single biggest bottleneck in this industry.
Investors would win a tax sale, then discover their title wasn't really insurable without a full quiet title lawsuit. Months, sometimes years of expensive legal costs standing between them and a usable asset. My guest today helps solve that problem for the entire industry.
Welcome to the Innovative Investor Podcast, the show where we explore tax liens, distressed assets and property debt opportunities from your very first deal to a fully scaled portfolio. I'm your host Stephen Morrell, founder and CEO of Juristd, and I've spent the last 20 years in real estate title law, including developing a program that transformed over 10,000 blighted Louisiana properties back into commerce after Hurricane Katrina. That work is what ultimately led me here on a mission to democratize access to delinquent property tax lien investing, making it as easy as contributing to your 401k. My guest today is David Schumacher, currently a national commercial underwriter for Chicago Nash Title National Commercial Services in California. Back in 2000, David founded Tax Title Services, Inc. And built a nationwide due process certification process that let title insurers underwrite tax sale derived title without requiring a quiet title action. A genuine innovation that saved investors years and thousands of dollars per deal. He went on to underwrite for First American before landing at Chicago Title, bringing over three decades of experience with complex distressed and court supervised title transactions.
He's also a Harvard Business School certified negotiator, a certified international commercial arbitrator, which means he's seen this industry's disputes from every angle as a business founder, an underwriter. And now David, welcome to the show. Welcome to the Innovative Investor podcast.
[00:03:06] Speaker A: This is great, Steven. Thanks so much for having me. I'm going to enjoy this.
[00:03:11] Speaker B: Me too. We've been looking forward to this episode for a long time.
Dave and I have known each other for a really long time, both on a personal, personal and professional level. So this is going to be fun.
So Dave, take us back to 2000. What was the actual problem that investors and title companies were stuck on that made you start this company in your words?
[00:03:33] Speaker A: Well, when I was a vice president at first American, first 10 years of my career I had, I had basically developed the First Industries national default services group which was specializing in one stop shop for mortgage foreclosures nationwide.
That was very successful.
Started with me, laptop and one man office.
Grew into a 400 employee operation, 50,000 mortgage foreclosing titles a month.
And so because of that I got my name got out there. They used to call me the Da Vinci of title because I was in, I'd insure things that nobody liked to ensure. I'd create products around default titles. So I started Getting calls around 1995 from Wall street mainly back then it was Bear Stearns calling, saying Dave, you know, we're, we're, we're spending billion, a billion dollars nationwide buying up property tax certificates, tax lien basically buying the rights to delinquent property taxes obviously with a statutory return on investment depending on the state.
And then the problem they were having is, and again how I've always created title products is the client calls you and says why won't you insure? That starts the conversation. So when Bear Stearns was calling, they're like Dave, we have to foreclose on these liens. We get title to the property and then we go to try to sell and all of a sudden the title companies say no, we don't like, we won't ensure a tax sale.
And, and this was across the board, it was all underwriters, it wasn't just one in one underwriter, it was, they just saw it as risky title. And to be honest, especially back then, it's gotten a lot better due to your work and my work.
But back then, you know, your due process was always the problem.
So I basically would want to go up. I kept getting these calls and I go up to senior underwriting at first mayor and say, look, why won't we insure these things? And no one could tell me.
So I finally just dove into the case law on my own, on my own time and saw that the issue again was due process.
Basically any attorney or any homeowner or a lender who got wiped out by, lost their property or got lost their lien interest to a tax sale foreclosure, if they didn't get proper notice, they could easily get an attorney to challenge that title and overturn it. Thus, you know, so the, the, the fact that the, the title industry looked at those as, as bad title was not, was not unsubstantiated. It was a real thing. It was very easy to overturn tax sales because the tax collector didn't do enough due process or sentence. Notice got sent and came back undelivered. They didn't do any more. And then you can make the argument that hey, they, they should have tracked me down and my due process rights under the Constitution, you know, wasn't there. So, so that's kind of what led to me starting that process of why won't we insure?
And that led to me developing Tax Title Services where I would have a separate company. First American at the time would recognize the product in lieu of a quiet title.
By the way, there was a class action lawsuit filed by the end by people like Bear Stearns basically and basically claiming antitrust, that all the title companies were in collusion with each other and wouldn't insure. So there was an anti, there's a big antitrust. All the underwriters were involved.
And so I basically, in order to get Tax Title Services approved and the certification process approved, I say, look, I'm going to get First American. First American gets you out of this, I'll get you out of the antitrust lawsuit and you'll get a, you'll get a avenue of business with no cost of sales.
You'll get full claims coverage. If there's a claim, it's on me. I would, I'm indemnifying you through this certification. You just have to recognize this in lieu of a quiet title. And, and, and they said yep.
And that's. So I left First American start a tax title and that was July of 2000.
[00:07:44] Speaker B: In the, in the startup world, we call that a mafia offer. It's too, you cannot turn that down. It's too good. It's too good. Turn it down. Yeah, you don't want to, you know.
[00:07:55] Speaker A: And again so that I became, that started, you know, me becoming a niche as my first, the parent company of Tax Title Services was called niche, Niche Title Services. N I c h e so you know, I basically became, you know, a 35 year career now of insuring things that nobody wants to insure because when, because I think sometimes title can be lazy.
You know, not dive into a court file, why not pull the file and let's, let's look at it and I call it, and you probably remember this from my speaking days, I used to call it let's slap the beehive and see who wants to come out and sting us before we ensure same thing is that's all what a quiet title is doing is you're basically suing everybody again and to see who wants to come out and challenge you. And that's what that quiet title does. So why can't you do that without a court action? Why can't you just call up, you know, hey Steven, you're entitled to get noticed. I see notice was sent to you by my client and you lost your property to a tax sale. You know, what do you think of that? And oh yeah, well, and you know, like I remember my grandparents had this land and they were going to build and they didn't and we knew about it, you know, but you know, and I say well great, well instead of us having to sue in court and deal with this, why don't, would you be open to signing a quitclaim deed or that so that became a curative. Hands on curative. And there's a lot of common sense to this and in our industry there's not a lot of common sense. It's just risk.
[00:09:22] Speaker B: No.
[00:09:23] Speaker A: Well, why not? You know, let's figure that out. You know, aren't you in the insurance business?
[00:09:28] Speaker B: Right. Aren't you in the business of insuring against risk? No. Well you sort of, kind of. But no, we don't want risk.
[00:09:34] Speaker A: So I like, so I like calculated risks and, and I like wearing a common sense hat. You know, if, if we've contacted everybody and, and, and confirmed that they got notice or that if they didn't get notice that they, that they, that, that, that they don't, they're not adversarial and then I can certify to that that's, that's a good, why not make that underwriting decision?
And that's, and in, and in the, in the 15 years that I had tax title services, I didn't have one claim, not even One, because if I didn't, if I didn't feel comfortable to issue the certification, I would steer parties to surplus funds, you know, and that once they claim those funds, they basically validated the sale. So in some instances I didn't issue the certification, but I still cleared the title for the client. Right.
And so that's another way of, again, these are just, you know, you become an, you become, just use common sense ways to, to minimize the risk so you can feel comfortable to insure it.
[00:10:37] Speaker B: And, and if you, if you take it one step further because I, and I'll, and, and this, we're still on question one right now because this to me is the most important question probably in the entire interview and it's for, for the listener's benefit. Like this is if you, if you take it one step further, what, what the problem that you were solving was go beyond what you actually had to do, but what it unlocked for the investor once you did it that they couldn't get before you did what you did.
Right.
[00:11:08] Speaker A: So you can imagine being a tax deed investor, you've gone to the tax sale, you bought the tax lien certificate two years ago, or you're now at the auction and you're the winning bidder at the auction and you're actually getting titled to a property and then all of a sudden imagine you can't do anything with that property. You can't sell it.
You can sell it to all cash buyer because you couldn't. If, if you can't get title insurance, a lender is not going to lend money for you to buy a piece of property.
And, and, and, and any sophisticated buyer is going to go, well, I need title insurance to insure me as the owner of that property. So now you're this investor and you got this property and now you can't sell it.
And so you know, and until, unless you hire somebody like you, Stephen, as an attorney. Title attorney. The old, yeah, that was how you and I met was that that was what you were doing.
And, and so then, now you have to wait six months to a year. And some, some jurisdictions, like New York, you're going to wait two years.
Yeah. You know, before you can get clear title and clear title meaning, you know, it's, you know, title insurance. For those of you on the basics of title insurance. Because a lot of people go, I don't even, I don't. What's title insurance? Yeah, most people don't know the running joke with my kids when they were young and I had tax title services, they're like, so, so, dad, what do you do for a living? I go, well, I clean up dirty titles.
And the kids would go, wait, dad, you cleared titles? Dirty tiles, no titles. Title insurance. So title insurance basically protects you as the owner or as a lender against claims. Whether, you know, if you're a lender, you want to be in first position. You know, you don't want to have any lanes ahead of you because if you had to foreclose, you want to be in senior position. So a title, a lender is going to want title insurance. It's also called marketability. Whether you're an owner or a lender, marketability is you have the ability to sell that property or do what you want with it. Market the title to any title company.
And what happens with tax deeds is because the industry doesn't like them, you know, they, if you don't have back then a quiet title action that's still somewhat prevalent today is, is you, you know, you ought to try to, let's say you got title insurance from you as a title agent back in the day based on whether it was a quiet on a certification from us, you know, that buyer of that tax deed property goes to resell or refinance down the road and they go to some other underwriter that doesn't recognize tax deeds, then you still have a problem.
So anyway, so the answer to the question is, before what you and I were doing back then, you couldn't get title insurance, thus you couldn't sell the property. And the only way to clear that title was go to court, have an attorney sue everybody, all the former owners, all the former lienholders, and sue them in court. That's going to cost you thousands of dollars and a lot of time is wasted. Meanwhile, your property, a lot of these properties are, especially back in the Katrina days, they're all blighted. You got people breaking into them. The weeds are growing up 10ft high. The city's slapping code violations on you. The ripple effects, yeah. Meanwhile, the meter's running on your attorney and the court action and, and your, and your return on your investment. Your IRR on that link is now going down.
And so now imagine within 45 to 60 days, you come to Tax Title Services and you get a certification from us. And then I issue that to you, Steven, as a title agent on a recognized underwriter. Back then it was mainly First American, and then you can issue a policy. So now, instead of waiting two years or plus and thousands of dollars with an attorney clearing title so you can Sell the property to a buyer or get a loan or whatnot.
Now you have within 45 to 60 days you get the same result.
[00:15:16] Speaker B: Yeah, yeah, no, thanks. Thanks for that. I'm glad we did like really went long on that one because that like, that really sets the tone for the. Oh, you know, why is this a thing?
[00:15:26] Speaker A: Right?
[00:15:27] Speaker B: What is this, what is the significance of this, this title issue with tax sales and what has been done with it and what was your role and the whole thing is it was been instrumental and it's a big deal what
[00:15:40] Speaker A: you and I did.
[00:15:41] Speaker B: It's very, very big deal in the work isn't over.
It's, you know, I mean it's an ongoing thing. And you know, your, your point before we started to hit the record button, your comment you made was I'm not sure it's ever going to get to where it really should be, even with AI and technology and maybe an evolution of understanding, etc.
But it might need to find a new baseline, a new happy place where it's more sustainable and we'll have to see how that goes. Certainly the U.S. freedom Court cases recently have helped shape the, the, the boundaries within which that might, what that might look like.
[00:16:25] Speaker A: Right.
[00:16:26] Speaker B: And we'll get, we'll touch on that a little bit too.
But you actually answered some of my other questions and that in that very, very, you know, well, well said response. So, so we can skip over a couple of things, but we, we know that they, the historically like getting insurance at all was just, it was as you put an infamously conservative industry that is an insurance industry that doesn't like to insure, it doesn't like to have risk and would rather just squash the risk and still sell you the insurance than anything else. But which is interesting. So, but it was.
How hard was it for you? Now I know you had this relationship with the First American. So. And they had, they maybe were in a, in a pickle with that, you know, being, being in that Bear Sterns, you know, lawsuit. But, but how hard was it to get the title underwriter in that case, First American or maybe anyone else to trust the certification that you had created for Tax Title services instead of a signed order from someone in a black robe sitting on the court?
[00:17:42] Speaker A: I think, I think because of what I built for First American on its national default group, it was called Leonard's Advantage at the time.
I think that gave me the credibility of being able to go to them and basically like, because these were all attorneys, you know, most underwriters, unlike me, I'm not an attorney as much as I've sat on legislative committees and written help create statutory procedures for tax sales and other things. I'm a court expert witness.
Most of these guys are attorneys. So what you have to do is you have to think, you know, how do you convince a title underwriter attorney? And again, you just address the risk because they don't want claims just.
And that's. So you have to. You have to. It's like anything, any kind of a pitch, no matter what you're selling, you got to speak to the language and the sale of getting them to trust that you know what you're doing and you're addressing the issues first.
You admit those issues and you come up with the solutions.
And fortunately for me, I had their ear because of my work for the 10 years prior to that.
But to be honest, even then, I still would run. There were still times where I, like in Louisiana, you know, that was. That was.
I was told. I remember I was at a conference in Louisiana and at a title conference, and I told them that I was sitting at this tape round table and it was, you know, at a dinner thing and it was big conference room when we're all talking and these guys are all title attorneys.
And they basically one guy leaned into me. So what are you working? I go, yeah, I'm doing. I'm gonna bring title insurance on tax deeds and blighted properties to Louisiana.
And this guy looked at me like, yeah, good luck. Yeah, that's, you know, that's not going to happen. So. So it. That, that, as, you know, I mean, that was not. That was probably one of the hardest things I ever did was to get that done. And we'd got it done, you and me. But so, you know, you. It's because you're dealing with attorneys. Attorneys are trained to one, you know, use risk against as a no Or. Or use it as a way to exploit, you know, not, you know, because basically you're telling an attorney, attorney title agent that, hey, I'm gonna. I don't. You don't need to. I don't need you to quiet the title. And they didn't like that at all. They thought, they looked at it. They saw me as getting in their pocket. You know, that's a good avenue of business for us. And you're taking that away from me. And I go, well, look, you're a title agent of ours, right? Yes. Right. Okay, well, I'm going to. So I'm going to put money in your pocket. You're not you're not going to do the quiet title, but you're going to get the closing work and you get all the future business because nobody else insures. So they're going to come back to you. And then that got them like, oh, we love this, you know, then they got on board. So it's just a matter of, of tailoring, you know, addressing court case, using court cases, using the case law. This is how we get.
This is the issues. Here's the case law. This is how we mitigate that. And because isn't a quiet title, Mr. Attorney, just slapping the beehive and one more time so we all feel comfortable that nobody's going to sue us later and file a claim, well, why can't we do that through out of court? And then that's how it came around.
[00:21:05] Speaker B: I, I had a, A very similar obstacle when I was creating the title insurance endorsement product in Louisiana.
And, you know, eventually it was our, the underwriter that we worked for, that I worked for at the time was wfg.
And, you know, we were just trying to expand the industry, like, and one of the biggest complaints of when we were, you and I were working together was the only way to get to reinsure that was to go back to the same company, right? And a lot of times it's the buyer who wants to choose. And I heard the seller is telling them, but you can't go to over there. You've got to come here. And to your point earlier about marketability, it's like, well, is this really marketable? If I, if you're telling me I can only go here, and it's like, okay, what if we could just get one other underwriter on board with this damn thing, right? Like, let's just get one somebody else. So we say, no, we have two. We have two. You know, and so it became a mission of mine, too, because I'm the one sitting there talking to all the people at the table, right? Like, I'm the one. They're like, you told me that I,
[00:22:12] Speaker A: blah, blah, blah, blah.
[00:22:14] Speaker B: And I can only, you know. And so I'm like, okay, this has got to stop. Well, Commonwealth, as you remember, before they got taken over by Fidelity, was the same people that I worked with who eventually became the WFG in Louisiana office.
They had, I had their ear the same time that you. I was like echoing. And I didn't know very much about this business like you did at the time. This is really early on in my career. And I'm like, I'm like a Sponge, I'm soaking it all up for you. I'm like, hey, I can perpetuate this and let's see if we can expand it. And Commonwealth was almost on board for a short while, but it didn't last because then Fidelity was like, no, not anymore. And so they're like, okay, well here's wfg. And I'm like, okay. When I finally sat down with them and said, look, the state of Louisiana has something we call adjudicated properties. These are the ones that didn't sell the liens that didn't sell at the tax sale. And so they never got paid. It's still delinquent, it's never been redeemed. And they just sat as an uncollected tax on the collector's tax books for years and years and years and years. And so state law gives them a right to, after a passage of so much time to do something about it, right? To, to put it up on an auction block and try to sell it.
But that still requires all the things that you've been talking about on this show, right? Which is, which is due process and notifications and due diligence and checking all the boxes and making an underwriter happy that you've done it all. And because nobody wanted to buy those suckers unless they had clear title and title insurance. It was a non starter city, cities didn't want to touch it, particularly the city of New Orleans. And, and, and then no other, you know, business partners, etc. Nobody wanted to touch it unless you get title insurance. So that became the mission. And when I had to sit down with WFG to say, look, this is really what you're up against here.
Like, this is what everyone's afraid of. Let me explain this to you.
You're afraid of a claim, right? And I had to, like, like for the first time in my, in my career, I was always, I didn't realize how, you know, so naive at the time. Didn't think about, like thinking about the pains or the concerns of the person you're speaking to rather than your own, right? And like, I wasn't worried about paying claims. I don't pay claims. I'm just trying to make a living. I'm trying to make. Right, but like you're asking something from someone who does have to pay claims. And so like, you know, I'm thinking about it with my lens. I'm like, wait a minute, you're concerned about paying claims? Right. Okay, well who would those claimants be? Potentially, possibly in anybody. What would Be that owner, that heir, that lien holder. Right? Okay. All right, well, what if you, what if they, we could eliminate them from being a potential claimant or like, like, except for like the most nonsensical, absurd, below 1% chance.
And you could be the only one in town that sells this excessively expensive endorsement that you're going to make a lot of money from. And there's a inventory in Louisiana of over a hundred thousand adjudicated properties at any given level. Like, how's that sound? They're like, I'm listening, I'm listening. Right? I had their ear finally. And they're like, okay, now you got to go create the whole process. You're going to have to go to the department of Insurance and create an actual insurance product that rate filing and regulators say, okay, and you're going to have to be the only one, the only ones that, doing all this stuff, right? And like, oh yeah, sure, I'll get right back to you on that.
So. But eventually the light bulb went off. This is the reason I'm saying all this is when they were, when they finally realized that, that what we're doing here and what you, you know, pioneered was reducing the risk that they're, that they're concerned about, or so low if not eliminating it, that it's, it's almost less risk than a ordinary title that they would have to worry about. And when they finally realize that, and of course the up side, on, on the revenue side, they were like, I feel like I'm missing something. Like, why isn't everyone doing this? I'm like, because no one has sat down with someone like you this long and explained it like this before. And this opportunity is real. So do you want it or not? They were like, yes, we did. And so that's the rest.
[00:26:37] Speaker A: It's a, it's what I call a knowledge based sale. You gotta be able to speak this language to, whether it's to a title attorney, whether it's to a title underwriter. You spoke their language, you, you talked about claims, you taught. That's what I was talking about is, you know why First American trusted me? Because I was speaking their language and I understood their language and I understood the issues.
And, and then so it's a knowledge based sale. And the other thing that you got them to see is common sense. You, they started looking at it from a common sense. If, if, if you're slapping the beehive and you've, there's no bees in the destinia, why not insure it? The risk is gone. And so, and so you kind of just kept that simple. And that, like you said, they're like, what am I missing? This is, you know, everybody just talks about tax deeds are bad, bad, bad, you know? You know, and like. But that's because no one insured it and no one dove into it and had real practical experiences. How bad are these things? You know?
[00:27:38] Speaker B: Right.
Ready to hear more about this exciting conversation? Don't fret. Part two of the conversation is coming to you next week. Stay tuned, and we'll see you then.
