Tax lien sale
||It has been suggested that this article be merged into Tax sale. (Discuss) Proposed since September 2012.|
||It has been suggested that tax deed sale be merged into this article. (Discuss) Proposed since August 2012.|
A tax lien sale is the sale, conducted by a governmental agency, of tax liens for delinquent taxes on real estate. It is one of two methodologies used by governmental agencies to collect delinquent taxes owed on real estate, the other being the tax deed sale.
In a tax lien sale, the lien (for delinquent taxes, accrued interest, and costs associated with the sale) is offered to prospective investors at public auction. Traditionally, auctions were held in person; however, Internet-based auctions (especially within large counties having numerous liens) have grown in popularity as this method allows for bidders from outside the area to participate.
In the event that more than one investor seeks the same lien, depending on state law the winner will be determined by one of five methods:
- Bid Down the Interest. Under this method, the stated rate of return offered by the government is the maximum rate of return allowed. However, investors can accept lower rates of return, including zero percent in some cases (though this is rare in practice). The investor accepting the lowest rate of return is the winner. In the event more than one investor will accept the same lower rate, a random or rotational method (see below) will be used to break ties. (Florida and Arizona use this method)
- Premium. Under this method, the investor willing to pay the highest "premium" (or excess above the lien amount) will be the winner. The premium may or may not earn interest, and may or may not be paid back to the investor upon redemption of the lien. (Colorado uses this method)
- Random Selection. Under this method, a bidder will be randomly selected from those offering a bid. Usually a computer is used to make the selection, but in smaller jurisdictions more rudimentary methods may be used. Nevada uses Random selection since it is supposed to be the first buyer but it is hard to determine who was the first person to the sale.
- Rotational Selection. Under this method, the first lien offered for sale will be offered to the investor holding bidder number one, who has the right of first refusal. If bidder number one refuses the lien, bidder number two may then bid. However, bidder number one will not be offered another lien until his number comes up again in the rotation. The next lien will go to the next number in line. Under this method, the investor has virtually no control over which liens s/he will obtain in the bidding, except to take or refuse what is offered.
- Bid Down the Ownership. Used in Iowa and few other states, the investor willing to purchase the lien for the lowest percent of encumbrance on the property will be awarded the lien. For example, a bidder may agree to take a lien on only 95% of the property. If the lien is not redeemed, the investor would only receive 95% ownership of the property with the remaining 5% owned by the original owner. In practice, few investors will bid on liens for less than full right to the property or sale proceeds. Therefore, with multiple owners bidding on 100% encumbrance, the process then generally reverts to the random selection.
Liens not sold at auction are considered "struck" (or sold) to the entity (usually the county) conducting the auction. Some states allow "over the counter" purchases of liens not sold at auction.
The investor must wait a specified period of time (referred to as the "redemption period"), during which time the lien (plus interest and any other fees) may be repaid. Usually the lien holder is not permitted during this period to contact the property owner (or anyone else having an interest in the property, such as the mortgage holder) to demand payment or threaten foreclosure, or else the certificate can be forfeit.
In some jurisdictions, the lienholder must agree to pay subsequent unpaid property taxes during the redemption period in order to protect his/her interest. If the lienholder does not pay such taxes, a subsequent lienholder would "buy out" the prior lienholder's interest.
Once the redemption period is over, the lien holder may initiate foreclosure proceedings. The proceedings (the costs of which must be paid by the lien holder, though a redeeming property owner may be required to pay them as part of redemption) may result in either acquiring title to the property (normally this will be in the form of a quitclaim deed) or a tax deed sale of the property where the lien holder has the right of first bid (and may participate by making additional bids if s/he so chooses). In Illinois a "Tax Deed" delivers a clean title as the court removes all clouds on title in the order directing the issuance of the deed. During the period between the initiation of proceedings and actual foreclosure, the property owner still has the opportunity to repay the lien with interest plus the costs incurred to foreclose.
If the lienholder does not act within a specified period of time, as defined by state law, the lien is forfeited and the holder loses his investment. This period of time ranges anywhere from 7 to 10 years and cannot be extended unless the taxlien is officially in the process of a tax deed application of Judicial Foreclosure.
A lien issued in error of state law is repaid, but usually at a far lower interest rate than had the lien been valid.
Benefits of tax lien investing
The maximum rate of return on a tax lien can be far higher than other investments. For example, Florida offers a maximum rate of 18% (1.5% per month, with a guaranteed 5% return regardless of time held), while Arizona offers a maximum rate of 16%. Iowa offers a guaranteed 2% per month (or 24% annual return).
Pitfalls of tax lien investing
- Payment is usually required at purchase or within a very short time afterward (often no more than 24–72 hours). Failure to pay the full amount results in all lien certificates purchased by the investor being cancelled, and may result in the investor losing his/her deposit and/or being barred from future sales.
- In many states, further actions must be taken to protect the lien holder's rights after purchase of a lien, and generally within a certain period of time; failure to comply exactly with such requirements may make the lien worthless.
- In "bid down the interest" jurisdictions, valuable properties are usually bid to the lowest rate possible greater than zero percent. (For example, Florida permits the interest rate to be bid down to a minuscule 0.25% – though it guarantees a minimum 5% return – while Arizona allows the bid to be as low as 1%.) Similarly, in "premium" states, valuable properties are bid up above the means of an average investor.
- Unlike a certificate of deposit, tax liens are illiquid. They cannot be "cashed in" (resold to the taxing authority), but must be held until either they are repaid or the holder takes action to foreclose. (It is possible, however, to assign one's interest in a tax lien to another party.)
- Tax Lien properties sold in non-Judicial Foreclosure states are conveyed to the highest bidder via a tax deed. The holder of the tax deed would then have to file a quiet title action, in the county where the property is situated, to clear of title defects. Although properties sold on tax deeds can be transferred, all financial institutions require a marketable title on property they will be financing.
- Tax Liens that you hold on properties may become worthless due to municipal liens and assessments on the property. These liens and assessments (and their related interest) can increase the monies owed to a point that the property is deemed worthless.
- Larry B. Loftis,. Profit by Investing in Real Estate Tax Liens : Earn Safe, Secured, and Fixed Returns Every Time. Dearborn Trade, a Kaplan Professional Company. ISBN 0-7931-9517-9.
- Don Sausa,. Complete Guide to Real Estate Tax Liens and Foreclosure Deeds : Learn in 7 Days. The Vision Press. ISBN 0-9788346-8-2. OCLC 77059156.
- Steven E. Waters,. Creating Wealth Without Risk : Discover a simple 10-Step System for Building your Personal Fortune with High-Yielding, Government Issued, and Real Estate Secured Tax Liens and Tax Deeds. Tax Lien University. ISBN 9780615543574.