Tax sale

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Pima County, Arizona delinquent property tax list for auction by the County Treasurer Delinquent property tax lien list.jpg
Pima County, Arizona delinquent property tax list for auction by the County Treasurer

A tax sale is the forced sale of property (usually real estate) by a governmental entity for unpaid taxes by the property's owner.

Contents

The sale, depending on the jurisdiction, may be a tax deed sale (whereby the actual property is sold) or a tax lien sale (whereby a lien on the property is sold) Under the tax lien sale process, depending on the jurisdiction, after a specified period of time if the lien is not redeemed, the lienholder may seek legal action which will result in the lienholder either automatically obtaining the property, or forcing a future tax deed sale of the property and possibly obtaining the property as a result.

General

The governmental entity can be any level of government that can assess and collect property taxes or other governmental debt, such as counties (parishes, in the case of Louisiana), cities, townships (in New England and other jurisdictions), and school districts (in places where they are independent of other governmental jurisdictions, such as in Texas).

State law offers the governmental entity a method of collecting its tax on the property without financially binding the nonpaying person or business, by placing a lien on the property which, if not paid, will result in future cost during a specified grace period wherein, to recover the property, the owner can be charged interest and/or penalties as well as other costs; and if completely non-paid, ultimately the seizure and selling of the property. In most places in the US, a tax lien takes priority, eclipsing other liens such as mortgages.

The requirements to begin the foreclosure process (and to avoid it) must be strictly followed; otherwise, the property owner will lose all rights to the property (or the governmental entity will lose its right to collect the outstanding debt). Common requirements include:

Once the process begins, the property owner can still avoid foreclosure by paying the amount owed plus interest, penalties, and/or other costs or fees. The amounts can end up being quite high if the process is well under way. [1] Even after foreclosure, in some jurisdictions the owner can still recover the property by paying the amounts owed (plus additional interest/penalties/costs) within a specified time. Alternatively, the owner can file suit to have the sale set aside on grounds that the requirements were not followed (such as proper notice not given).

Sales

Two main methods are used to capture delinquent real property tax: the tax deed sale and the tax lien sale.

Both methods operate using an auction method. The title not the property is up for auction at a tax lien or deed sale, the property may or may not be salable. Traditionally, the auctions have been live events held at the county courthouse or another designated official location. However, online auctions have increased in usage. [2] There are various auction bidding methods used to determine final sale, the method and the terms of sale vary by county for each county in every state. Each county will advertise that no tax sale is risk-free since all title and certificates on property are sold 'as is' with no warranties, and no expectation of clear title.

Tax deed sale

In a tax deed sale, the title to each property is sold.

At the sale, the minimum bid is generally the amount of back taxes owed plus interest, as well as costs associated with selling the property. Often the purchaser making the highest bid for the property takes title. However, the purchaser must follow each county's rules, which vary widely, and usually have a very short period (generally 48–72 hours, or much less) to pay the entire amount owed, or else the sale is invalidated and usually the auction deposit is lost.

Depending on the jurisdiction, any amount in excess of the minimum bid may or may not be returned to the original property title owner, or the owner may forfeit rights to such excess amount if not claimed within a specified period. Also, anyone having an interest in the property (such as a governmental entity having weed liens on the property) may, in some cases, claim the excess.

In the event the property is not purchased at auction, title generally reverts to the governmental entity that initiated the sale, which can then offer it for at or even below the original minimum bid (depending on property value and/or interest in the parcel).

Title is generally transferred in a tax deed sale through a form of limited warranty or quitclaim deed (sometimes styled as Tax Deed or Sheriff's Deed). In most jurisdictions, this type of deed is generally insufficient to acquire title insurance. [3] Therefore, a purchaser would most likely then need to initiate a quiet title action in order to resell the property later. However, title to the property can be sold from one purchaser to another using a limited warranty or another quitclaim deed, though usually at far less than its market value.

Some jurisdictions allow for a post-sale "redemption period", whereby the former owner has a specified amount of time to reclaim the property by repaying the amount bid at auction plus interest, penalties, and/or other costs. [4] As such, purchasers of properties at tax deed sales are cautioned not to make major improvements on the property until after the redemption period has expired, as such improvements would then become the property of the original owner.

A tax deed sale may also be used in conjunction with a tax lien sale process, whereby the lienholder (instead of a governmental agency) starts the process toward forcing a public sale of the property. [5] In those instances the lienholder's investment (the price of the lien plus any additional costs necessary to start the tax deed sale process, such as required fees and payment of any still-unpaid taxes or buyout of other certificate holders' interests) constitutes the minimum bid; if no other bids are received at the sale then the lienholder will take title to the property subject to redemption periods (if applicable) or any lawsuit to overturn the sale.

Pitfalls of tax deed investing

Although the possibility of obtaining property at rates far below market values is promising, there are several pitfalls which must be taken into account before investing:

  • Payment is usually required at purchase or within a very short time afterward (often no more than 24–72 hours), and certified funds are required (i.e. financing is not allowed). Failure to pay the full amount generally results in the sales of all properties purchased by the investor being cancelled; the investor may also be barred from future sales in that jurisdiction.
  • Though touted as a means of obtaining property at very low cost, in practice when a property is placed for auction at a tax deed sale, it is usually sold at a higher price than the original minimum bid of the back taxes, accrued interest, and costs of sale.
  • As stated above, in most jurisdictions properties sold in this manner are conveyed to the highest bidder via "tax deed" (or similarly-named deed), a form of quitclaim deed. Thus, the holder of the tax deed would then have to file a quiet title action, in order to clear any title defects or obtain a mortgage or title insurance.
  • Should a property be obtained, it may still be subject to other liens and assessments on the property which are not extinguished at sale. These liens and assessments (and their related interest) can, in some instances, exceed the value of the property itself, making it virtually worthless.
  • Some states allow a post-closing redemption period, during which time the original owner can redeem the property by paying the amount bid plus interest/penalty and costs. As such, if the purchaser makes improvements on the property and the original owner redeems it within the redemption period, the purchaser may lose those improvements if they are physically attached to the property and cannot be removed.

Tax lien sale

In a tax lien sale, instead of selling the actual property, the governmental entity sells a lien on the property. The lien is generally for the amount of delinquent taxes, accrued interest, and costs associated with the sale.

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:

  1. 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. The investor accepting the lowest rate of return is the winner. In the event that more than one investor will accept the same lower rate, the tie may be broken by 1) first bid received, 2) random selection, or 3) rotational method (see below for further discussion of the latter two methods). (States that use this method include Arizona and Florida [6] )
  2. Premium. Under this method, the investor willing to pay the highest premium (excess above the lien amount) will be the winner. The premium may earn interest at a different rate than the base lien value (or may not earn interest at all), and in some cases may not be paid back to the investor upon redemption of the lien. (States that include this method include Colorado; Colorado does not pay interest on the premium nor does it return it upon redemption)
  3. 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. (States that use this method include Nevada [7] )
  4. 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.
  5. Bid Down the Ownership. 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 a tiebreaker method such as random selection. (States that use this method include Iowa)

Liens not sold at auction are considered "struck" (sold) to the jurisdiction conducting the auction. Some jurisdictions allow "over the counter" purchases of liens not sold at auction, subject to some liens being exempt from sale. [8]

The investor must wait a specified period of time (commonly referred to as the "redemption period") before taking action to foreclose on the property. [9] During the redemption period, the lien (plus interest and any other fees) may be repaid by the owner or a legal designee of the owner. [10] 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 lienholder can face sanctions (such as: termination of the lien and loss of money spent, being banned from future sales, and/or criminal charges). [11]

In some jurisdictions, [12] 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" (redeem) the prior lienholder's interest. Other jurisdictions allow the lienholder first right to pay subsequent taxes, but if the lienholder chooses not to do so, a separate lien is offered for sale. Still other jurisdictions do not offer subsequent tax payment priority; each lien is sold separately (and can result in multiple liens on a property held by different lienholders). [13]

Once the redemption period is over, the lien holder may initiate foreclosure proceedings. Normally, the cost of the proceedings will include, in addition to statutorily-mandated costs (such as application fees and costs for public notices), buy-outs of other liens and payment of any other unpaid taxes plus accrued interest. 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.

The foreclosure proceedings, depending on the jurisdiction, may be either:

In both cases, as with tax deed sales, title to the property will normally be in the form of a quitclaim deed, thus requiring further action to quiet title.

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 cannot be extended unless the tax lien holder is officially in the process of foreclosing on the property or other legal action (such as bankruptcy) is pending. [14]

A lien issued in error of state law is repaid, but usually at a far lower interest rate than had the lien been valid. [15]

Popularity of tax lien sales

The popularity of tax lien sales is driven, in large part, by the maximum rate of returns offered, which can be far higher than other investments, as well as the guarantee that the governmental entity, if the lien is redeemed, will repay the investor. Examples of such high returns include:

  • Iowa, which offers a guaranteed 2% per month simple interest return (24% annual return)
  • Florida, which offers a maximum annual return rate of 18% [16] (with a guaranteed minimum 5% return on the original lien investment, regardless of time held and regardless of the original rate bid, except if the rate bid was 0%) [17]
  • Arizona, which offers a maximum annual return rate of 16% [18]

The market in tax liens has been so popular that a number of major banks and hedge funds have invested large amounts of capital in it. [19]

Pitfalls of tax lien investing

Although the rates of return are promising, there are several pitfalls which must be taken into account before investing:

  • Some jurisdictions require a large deposit at the outset of the sale, regardless of how many certificates are to be purchased or their value. [20]
  • 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, which require additional costs beyond the original investment (and the costs may or may not be repaid upon redemption). In addition, the actions must be performed within a certain period of time and in strict accordance with legal requirements; failure to comply exactly with such requirements may make the lien worthless and the investment lost.
  • In "bid down the interest" jurisdictions, valuable properties are usually bid to the lowest rate possible greater than zero percent. [21] Similarly, in "premium" states, valuable properties are bid up above the means of an average investor, and further, depending on the jurisdiction, the premium may not be repaid.
  • 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 to sell or assign one's interest in a tax lien to another party; such transfers usually require a fee to do so. However, the acquiring party may or may not wish to purchase the lien for the original amount.)
  • Though touted as a means of obtaining property at very low cost, in practice liens are nearly always paid off prior to the auction date, and in those cases where the property is placed for auction, it is usually sold at a higher price than the original minimum bid of the lien, accrued interest, and costs of sale.
  • As with tax deed sales, title to property is obtained via a form of quitclaim deed, thus requiring further action to quiet title.
  • As with tax deed sales, a property obtained via tax lien may still be subject to other liens and assessments on the property which are not extinguished at sale, which (along with any accrued interest) can, in some instances, exceed the value of the property itself, making it virtually worthless.

See also

Related Research Articles

A lien is a form of security interest granted over an item of property to secure the payment of a debt or performance of some other obligation. The owner of the property, who grants the lien, is referred to as the lienee and the person who has the benefit of the lien is referred to as the lienor or lien holder.

A mortgage is a legal instrument of the common law which is used to create a security interest in real property held by a lender as a security for a debt, usually a mortgage loan. Hypothec is the corresponding term in civil law jurisdictions, albeit with a wider sense, as it also covers non-possessory lien.

This aims to be a complete list of the articles on real estate.

<span class="mw-page-title-main">Foreclosure</span> Legal process where a lender recoups an unpaid loan by forcing the borrower to sell the collateral

Foreclosure is a legal process in which a lender attempts to recover the balance of a loan from a borrower who has stopped making payments to the lender by forcing the sale of the asset used as the collateral for the loan.

<span class="mw-page-title-main">Tax lien</span> Lien imposed on property by law to secure payment of taxes

A tax lien is a lien which is imposed upon a property by law in order to secure the payment of taxes. A tax lien may be imposed for the purpose of collecting delinquent taxes which are owed on real property or personal property, or it may be imposed as a result of a failure to pay income taxes or it may be imposed as a result of a failure to pay other taxes.

A mechanic's lien is a security interest in the title to property for the benefit of those who have supplied labor or materials that improve the property. The lien exists for both real property and personal property. In the realm of real property, it is called by various names, including, generically, construction lien. The term "lien" comes from a French root, with a meaning similar to link, which is itself ultimately descended from the Latin ligamen, meaning "bond" and ligare, meaning "to bind". Mechanic's liens on property in the United States date from the 18th century.

In property law, a concurrent estate or co-tenancy is any of various ways in which property is owned by more than one person at a time. If more than one person owns the same property, they are commonly referred to as co-owners. Legal terminology for co-owners of real estate is either co-tenants or joint tenants, with the latter phrase signifying a right of survivorship. Most common law jurisdictions recognize tenancies in common and joint tenancies.

A partition is a term used in the law of real property to describe an act, by a court order or otherwise, to divide up a concurrent estate into separate portions representing the proportionate interests of the owners of property. It is sometimes described as a forced sale. Under the common law, any owner of property who owns an undivided concurrent interest in land can seek such a division. In some cases, the parties agree to a specific division of the land; if they are unable to do so, the court will determine an appropriate division. A sole owner, or several owners, of a piece of land may partition their land by entering a deed poll.

The homestead exemption in Florida may refer to three different types of homestead exemptions under Florida law:

  1. exemption from forced sale before and at death per Art. X, Section 4(a)-(b) of the Florida Constitution;
  2. restrictions on devise and alienation, Art. X, Section 4(c) of the Florida Constitution;
  3. and exemption from taxation per Art. VII, Section 6 of the Florida Constitution.

Repossession, colloquially repo, is a "self-help" type of action in which the party having right of ownership of a property takes the property in question back from the party having right of possession without invoking court proceedings. The property may then be sold by either the financial institution or third party sellers.

An action to quiet title is a lawsuit brought in a court having jurisdiction over property disputes, in order to establish a party's title to real property, or personal property having a title, of against anyone and everyone, and thus "quiet" any challenges or claims to the title.

In finance, a security interest is a legal right granted by a debtor to a creditor over the debtor's property which enables the creditor to have recourse to the property if the debtor defaults in making payment or otherwise performing the secured obligations. One of the most common examples of a security interest is a mortgage: a person borrows money from the bank to buy a house, and they grant a mortgage over the house so that if they default in repaying the loan, the bank can sell the house and apply the proceeds to the outstanding loan.

A maritime lien, in English and US law and elsewhere, is a specific aspect of admiralty law concerning a claim against a ship for services rendered to it or injury caused by it.

<span class="mw-page-title-main">Mortgage</span> Loan secured using real estate

A mortgage loan or simply mortgage, in civil law jurisdictions known also as a hypothec loan, is a loan used either by purchasers of real property to raise funds to buy real estate, or by existing property owners to raise funds for any purpose while putting a lien on the property being mortgaged. The loan is "secured" on the borrower's property through a process known as mortgage origination. This means that a legal mechanism is put into place which allows the lender to take possession and sell the secured property to pay off the loan in the event the borrower defaults on the loan or otherwise fails to abide by its terms. The word mortgage is derived from a Law French term used in Britain in the Middle Ages meaning "death pledge" and refers to the pledge ending (dying) when either the obligation is fulfilled or the property is taken through foreclosure. A mortgage can also be described as "a borrower giving consideration in the form of a collateral for a benefit (loan)".

The Home Equity Theft Prevention Act is a New York State law passed on July 26, 2006, to provide homeowners of residential property with information and disclosures in order to make informed decisions when approached by persons seeking a sale or transfer of the homeowner's property, particularly when homeowners are in default on their mortgage payments or the property is in foreclosure.

The vast majority of states in the United States employ a system of recording legal instruments that affect the title of real estate as the exclusive means for publicly documenting land titles and interests. The record title system differs significantly from land registration systems, such as the Torrens system, that have been adopted in a few states. The principal difference is that the recording system does not determine who owns the title or interest involved, which is ultimately established through litigation in the courts. The system provides a framework for determining who the law will protect in relation to those titles and interests when a dispute arises.

<span class="mw-page-title-main">Property tax in the United States</span>

Most local governments in the United States impose a property tax, also known as a millage rate, as a principal source of revenue. This tax may be imposed on real estate or personal property. The tax is nearly always computed as the fair market value of the property, multiplied by an assessment ratio, multiplied by a tax rate, and is generally an obligation of the owner of the property. Values are determined by local officials, and may be disputed by property owners. For the taxing authority, one advantage of the property tax over the sales tax or income tax is that the revenue always equals the tax levy, unlike the other types of taxes. The property tax typically produces the required revenue for municipalities' tax levies. One disadvantage to the taxpayer is that the tax liability is fixed, while the taxpayer's income is not.

<span class="mw-page-title-main">Administrative divisions of Florida</span>

Local governments in Florida are established by the state government, and are given varying amounts of non-exclusive authority over their jurisdictions. The laws governing the creation of local governments are contained in the Florida Constitution and the Florida Statutes. Local governments are incorporated by special acts of the Florida Legislature. These include four types: counties, municipalities, school districts, and special districts.

Florida is one of several states where the courts are required to be involved in every step of the foreclosure process. By 2012, it took three years to complete the process. In nonjudicial states, it takes an average of 100 days. As a result of the United States housing bubble, there is a large backlog of housing that is in the foreclosure process but unavailable to the market. This overhang has had a detrimental effect on the housing market.

In the United States, the Trustee Sale Guarantee (TSG) is the title guarantee that is issued at the beginning of a foreclosure. TSG helps the foreclosing trustee and beneficiary through the delivery of the information required in ensuring compliance with the statutes of foreclosure stipulated by the state.

References

  1. NPR reported on a woman losing her home in Baltimore in May 2010 because she had missed a water payment of $360; over time her obligation multiplied to over $3,000 after penalties, interest, and other fees were added.
  2. Online auctions allow for more sales in less time, as well as allowing bidders from outside the area (such as out-of-state or foreign bidders) to participate. Florida counties, in particular, have embraced Internet auctions in interest.
  3. A notable exception is Illinois, where a "Tax Deed" delivers a clean title, as the issuing court removes all clouds on the title in its order directing the issuance of the deed.
  4. For example, Texas allows a two year redemption period for homestead or agricultural properties, and a 180-day period for all other properties. The amount to be paid is the amount paid at the sale (which could be more than the original bid), plus 25% of that amount paid at the sale (for homestead and agricultural properties redeemed after the first year, the penalty is 50% of the amount paid), plus deed recording costs. See http://www.statutes.legis.state.tx.us/Docs/TX/htm/TX.34.htm Texas Tax Code, Section 34.21(a) (for homestead/agricultural properties) and (e) (for all other properties).
  5. Florida uses tax lien sales at the initial tax delinquency, and the tax deed sale (upon a lienholder's request) to sell the property in order to redeem the lien.
  6. http://www.leg.state.fl.us/Statutes/index.cfm?App_mode=Display_Statute&Search_String=&URL=0100-0199/0197/Sections/0197.432.html Florida Statutes, Section 197.432(6).
  7. Technically per the statutes, Nevada is supposed to award the lien to the first buyer making an offer; however, in practice it is sometimes hard to determine who was the first person bidding especially at live auctions where multiple bidders are shouting interest and thus the random method is used.
  8. For example, Florida allows purchases of liens struck to the various counties; however, per statute certificates for liens of less than $250 on homestead properties cannot be sold, either at the initial auction or over the counter. See http://www.leg.state.fl.us/Statutes/index.cfm?App_mode=Display_Statute&Search_String=&URL=0100-0199/0197/Sections/0197.432.html Florida Statutes, Section 197.432(4).
  9. For example, in Florida the period is "two years after April 1 of the year of issuance of the tax certificate". http://www.leg.state.fl.us/Statutes/index.cfm?App_mode=Display_Statute&Search_String=&URL=0100-0199/0197/Sections/0197.432.html Florida Statutes, Section 197.432(13). Since Florida counties hold their sales after April 1 (by law, the start date for tax lien certificate sales must be no later than June 1), in Florida the redemption period is roughly 22 months after the date the certificate is sold.
  10. In many jurisdictions, technically per statute only the actual property owner or a legal designee are legally permitted to redeem the lien. In practice, though, jurisdictions usually do not strictly enforce the statute, desiring to have money in their accounts (and liens paid off to lienholders, thus creating future interest in lien sales) as well as not wanting to upset members of the public who desire to pay debts legally owed.
  11. For example, see http://www.leg.state.fl.us/Statutes/index.cfm?App_mode=Display_Statute&Search_String=&URL=0100-0199/0197/Sections/0197.432.html Florida Statutes, Sections 197.432(14).
  12. e.g., Arizona and Colorado
  13. Florida falls under this category.
  14. For example, in Florida a tax lien certificate must be redeemed within 7 years from the date of issuance (which is statutorily defined as the first day of the sale on which the certificate was purchased, even if the certificate was purchased after the first day), unless the lien holder has applied for a tax deed or a legal or administrative proceeding "has existed of record". http://www.leg.state.fl.us/Statutes/index.cfm?App_mode=Display_Statute&Search_String=&URL=0100-0199/0197/Sections/0197.482.html Florida Statutes, Section 197.482.
  15. For example, in Florida the interest rate on an errant lien is only 8% (unless a lower rate was bid), vs. the 18% maximum rate allowed. http://www.leg.state.fl.us/Statutes/index.cfm?App_mode=Display_Statute&Search_String=&URL=0100-0199/0197/Sections/0197.432.html Florida Statutes, Section 197.432(11),
  16. http://www.leg.state.fl.us/Statutes/index.cfm?App_mode=Display_Statute&Search_String=&URL=0100-0199/0197/Sections/0197.432.html Florida Statutes, Section 197.432(6).
  17. http://www.leg.state.fl.us/Statutes/index.cfm?App_mode=Display_Statute&Search_String=&URL=0100-0199/0197/Sections/0197.472.html Florida Statutes, Section 197.472(2). The 5% minimum applies to the redeemer of the certificate; however, except for the additional $6.25 certificate fee assessed at redemption per Section 197.472(3) which is paid to the county, the balance due is remitted to the lien holder.
  18. "42-18053. Interest on delinquent taxes; exceptions". Arizona State Legislature. Archived from the original on 2015-09-19. Retrieved 2015-08-22.
  19. "Sun Sentinel Investigation: Tax lien sharks use shell companies to squeeze out locals". Archived from the original on May 6, 2013.
  20. For example, Miami-Dade County requires a $5,000 deposit, even if a buyer wants to purchase only one certificate for far less. https://www.bidmiamidade.com/main?unique_id=vEfCeDAD5hGrBWl0dGFpSA&use_this=view_faqs
  21. For example, Florida permits the interest rate to be bid down in 0.25% increments to as low as a minuscule 0.25% annual rate of return though it guarantees a minimum 5% return on investment while Arizona allows the bid to be bid down in 1% increments to as low as 1% annual rate of return.