Investors need to understand that SBA mortgages county foreclosure auction properties carry federal protections that can cause these liens to survive the sale in ways that conventional mortgages typically do not.

Investors who buy at county foreclosure and tax deed auctions need to understand that SBA mortgages at county foreclosure auctions carry federal protections that can cause these liens to survive the sale in ways that conventional mortgages do not.

In 1953, the federal government established the Small Business Administration (SBA) with the goal of supporting small businesses across America. The SBA does not make loans directly to business owners except through the Disaster Relief Loan Program and PRIME program; instead, it partners with banks and credit unions to encourage lending to small businesses. The SBA guarantees these loans for private lenders. It’s like VA-, FHA-, or USDA-backed financing, but for business loans.

Small businesses that wish to expand usually acquire real estate. That means property buyers are bound to find SBA loans in the chain of title for commercial property that is being foreclosed on by superior mortgages or foreclosed for non-payment of property taxes. And, because many small business owners’ greatest asset is their home, you will also find SBA loans in junior positions on the chain of title for residential property used as collateral for small business loans.

If an SBA loan turns up during your due diligence, what does that mean for you? There are a few important things to keep in mind:

• The United States has a one-year redemption period after the sale of foreclosure and tax deed properties previously used as collateral on an SBA loan
• While the SBA can redeem properties, they will likely agree to a release if there is not enough equity to satisfy a superior mortgage as well as their own

It’s not all black and white, however. Keep reading for more on why SBA loans work this way and what it means for you.

Where Do SBA Mortgages Fall on the Priority Ladder?

The priority of these federal mortgages is largely debated. State statutes, such as Florida’s notice recording statute, declare that liens recorded after other liens are junior in priority. This conflicts with the Supremacy Clause of the United States Constitution, which clearly states the following.

“This Constitution, and the Laws of the United States which shall be made in Pursuance thereof; and all Treaties made, or which shall be made, under the Authority of the United States, shall be the supreme Law of the Land.”

You’ve got the federal government saying federal laws (and therefore instruments created pursuant to federal laws) are superior and the Florida government saying taxes applied in accordance with state laws are superior.

Which is it? Is the SBA mortgage superior to a tax deed? Is it superior to a previously recorded mortgage that is foreclosing? In Sherman v. United States, the 5th Circuit Court of Appeals concluded that 15 U.S.C. § 646 (which governs the SBA) replaced conflicting federal laws that appeared to give the SBA mortgages priority over state liens. In layman’s terms, SBA loans do not get automatic superiority over state liens.

15 U.S.C. § 646 says that SBA loans are usually superior. However,

in the case of state taxes, the federal government has declared that SBA loans are inferior to state tax liens so long as the state has declared those liens superior. This is the case in Florida in respect to tax deeds.

Smart Property Buyers Prepare for the Intricacies of SBA Mortgages

If the clerk fails to send certified mail notice of the upcoming tax deed sale to the SBA, I strongly discourage you from bidding at that sale. If the SBA is sent notice of the sale, you can request a discharge or release of the mortgage from the secretary of the SBA, the SBA is likely to agree to a release if there isn’t enough equity to satisfy both a superior mortgage and their own. You can also file an action to quiet the title as soon as you have the tax deed and name the SBA as a defendant

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Ideally, after formally serving the SBA with the lawsuit, they will file a disclaimer of interest to the property. They generally do within 30-45 days. You would then record a certified copy of the disclaimer or release in the official records of the county where the property is located.

What happens to an SBA mortgage in a traditional purchase money mortgage foreclosure? It depends.

A straight SBA 504 loan, made by a business to acquire business property, generally declares itself inferior to the private purchase money lender. But that superior lender needs to make sure that it has sent to the Certified Development Company and the SBA:

• Written notice of the borrower’s default (within 30 days after the event of default)
• 60 days’ notice of foreclosure upon the mortgaged property

Without these prerequisites, the SBA can seek to undo a certificate of title issued at a foreclosure sale, making the certificate of title uninsurable.

In the case of residential property that was used as collateral for an SBA loan and for SBA 504 loans (whether it is a mortgage foreclosure or a tax deed sale), the United States has a one-year right of redemption from the date of sale. In this situation, you should reach out to the SBA to issue a release or plan to hold and rent the property for a year in case the SBA decides to redeem the property and secure their lien.

What if the SBA decides to redeem the property? What do you get in return? The redemption sum the SBA pays is the sum of the actual amount the buyer paid at the sale, plus 6% interest a year, plus costs resulting from protecting the property, less income from the property. A reasonable rental value will be determined by the SBA to reduce the expenses an investor would be refunded.

Don’t Underestimate the Impact of SBA Loans

The complexity of the interaction of federal statutes and the hoops the federal government requires to discharge its liens can intimidate even the most seasoned of real estate investors.

When a title report shows that there is an SBA loan on the property you want to bid on, consulting with an experienced title real estate attorney can save you from losing hundreds of thousands of dollars, as well as your sanity. And when you succeed, the federal purse will thank you for your contribution.

How SBA Mortgages Survive County Foreclosure and Tax Deed Auctions

SBA (Small Business Administration) mortgages are federally backed loans that carry special protections under federal law. Unlike conventional mortgages that are extinguished in certain foreclosure scenarios, SBA liens can survive county auction sales in ways that catch unprepared investors off guard and create significant financial liability.

The key issue with SBA mortgages at county auctions is that the federal government’s interest is not always clearly visible in standard county title searches. SBA loans are recorded at the county level but are also backed by a federal guarantee, which means the government has independent rights to protect its interest that go beyond what a standard lien search might reveal.

Investors who purchase properties at tax deed auctions where an SBA mortgage exists on the property may find that the SBA asserts its rights even after the tax deed is issued. This is particularly concerning because tax deed sales are generally thought to extinguish most junior liens, but federal liens operate under a different legal framework.

Before bidding on any commercial or mixed-use property at a county auction, conducting a UCC lien search in addition to the standard title search helps reveal SBA and other federal lien positions that would not appear in county deed records alone. This extra research step is non-negotiable for any property that may have had SBA financing during a prior period of commercial use.

The SBA mortgage issue is just one reason why thorough florida title search research is critical before bidding at any county auction, particularly on commercial or mixed-use properties that may carry federal liens.

Investors who want to understand the full landscape of what liens survive county auctions should review our guide on tax deed vs foreclosure auction sales to understand how each sale type handles competing lien claims.

The SBA lien issue is related to the broader challenge of removing lien after county auction, which covers the legal process for resolving surviving encumbrances that the auction did not extinguish.

Understanding all the risks before you bid is part of thorough due diligence real estate that experienced investors apply consistently to every auction purchase regardless of how straightforward the deal appears on the surface.

Investors who want comprehensive guidance on researching auction properties should also review our county foreclosure auction tips to build a systematic research process that catches SBA and other federal lien issues before auction day.