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TAX LIEN
Once the property owner fails to pay his or her property taxes then the property becomes tax-deliquent. . Tax delinquent properties has unpaid real estate taxes and other unpaid debt such as water, sewer, etc. charges against the property.
Usually, if property has taxes that are backed for specific time period, then the county issues a tax-lien for overdue taxes, interest, penalty and costs. Certain states allow the tax lien to become a first lien on the property, which means it can be sold at auction as a tax lien certificate. The only lien senior to tax lien certificates is an IRS lien. Creditors and the IRS, however, can take priority over tax lien holders if the original owner of the property declares bankruptcy. Title and Bankruptcy research is recommended before bidding for the tax lien certificate.
By selling tax lien certificate, city collects unpaid taxes and relieves itself from taking title to numerous tax delinquent properties. It is also a way to enforce homeowners to pay obligated taxes against property. They are not selling the property, they are selling only the right to collect the delinquent taxes. The buyer has no legal claims other than collection of delinquent tax rights or no obligation during the redemption period.
The certificate will bear interest rate of 12% ~ 18 % per annum (1% ~ 1.5% monthly depending on the state) on the amount of all taxes, penalties, interest, and costs from the purchase date of tax lien certificate until it is redeemed by the property owner. Investor also can transfer or assign the certificate to third party.
Department of Finance and New York City Waterboard (for NYC) posts these tax delinquent properties to sell tax lien certificate. Some states may hold tax lien certificate auction annually and the lien certificate that were not sold at auction can be purchased at "over the counter"
Local Law 26 allows individual investors to purchase tax lien certificate by competitive bidding. Tax lien certificate is not to be sold in discount to individual unless it is bought in bulk by institution.
The minimum bid is overdue taxes, interest, penalty and costs. The winning goes to the highest bidder. In New York, 5% of bidding price is required at the time of bidding. The payment has to be cash or cash equivalent. In many states, the full payment has to be made by cash within pre-determined time.
After winning the bid, the certificate of tax lien is given for 4 month to 3 years depending on the state. After that period, investor is eligible to apply for a Treasurer's Deed on the property if the owner of the property fails to redeem. Tax lien certificate is secured with an assignment of the county's real property tax lien against that real property. The owner of the property who is tax delinquent has to pay interest and penalty charges to the tax lien certificate holder. The delinquent tax property owner can redeem the property by paying back all the unpaid taxes, interest and penalty within 3month to 3years depending on the State law. The interest and penalties on investment are paid as profit to investor and the investment is secured by the property. What an attractive investment!
Foreclosure on the tax lien properties rarely happens. If the situation arises, usually mortgage lien or homeowner pays the taxes not to lose their lien against property or their home. In New York, the municipality holds tax foreclosure auction annually. If the certificate holder forecloses the property, there is no one else bidding for the property. The certificate holder just can apply for Treasurer's Deed.
Foreclosure of tax properties can be extremely profitable but investors really have to check things out before purchasing. Some of these properties can be really undesirable or not profitable at all. It is advised that investors inspect the property before sale. Also, these properties are not insurable thru any title company without doing a quiet title suit. It is strongly advised that you consult with attorney with this area. Through the quiet title suit, all the lien holders against the property will be notified and you will get a clear title. But this can be costly so you need to figure out expenses to see if this property is profitable. Another caution, the government agency don't evict delinquent owner so if they are still living in a property, it is the investor's job to evict them out of the property.
Want To Learn More About Tax Lien Investing?
Read Books on Tax Lien.
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