Property Tax Lien Sales


Tricky Business

Property Tax Lien Sales are a great real estate investment. It is kind of a tricky business so we really want you to get an idea of the strategies involved before you invest or get overwhelmed with the process.

For a basic understanding, Property Tax Lien Sales are sales by a governmental agency for delinquent property taxes on real estate. In this kind of sale, the Property Tax Lien is offered to prospective investors at a public auction. Included in the Lien are delinquent taxes, accrued interest, and costs associated with the sale and are offered at a public auction. In our technological society, internet-based auctions have grown popular because they allow bidders from all over the world to participate in Property Tax Lien sales. However, the bidders need to abide by the rules of the particular state offering the property.

It is really important to know that the process of Property Tax Lien Sales varies from state to state. If more than one investor wants the same lien, depending on state law, the winner will be chosen by one of the following five methods:

  • Bid Down the Interest: With this method the stated rate of return offered by the government is the maximum rate of return allowed. This means that the investor accepting the lowest rate of return in the property tax lien sales is the winner.  For example, if the government entity is offering the maximum interest rate of 12% return, which is paid on your investment (your investment = paying the taxes owed on the property).  If it’s a premium property, competing investors will BID DOWN the percentage rate they are willing to receive on their investment.  I have heard of interest rates being bid down to 1%!!
  • Bid Down the Ownership: This approach leaves the buyer out of full ownership. With this method the investor willing to purchase the lien for the lowest percent of encumbrance on the property will be granted the lien. Depending on the state, a bidder may wish to take a lien on only 95% of the property. If the lien is not redeemed, the investor will only receive 95% ownership of the property. The original owner will own the remaining 5%.
  • Premium Selection: This approach allows the investor to make an offer and get what he wants if he is willing to pay the highest “premium.” The premium is the amount the investor is willing to pay ABOVE AND BEYOND the taxes owed on the property.  Also, the premium may or may not earn interest, and may or may not be paid back to the investor upon redemption of the lien.
  • Rotational Selection: With this approach the investor has virtually no control over which liens to obtain in the bidding except to take or refuse what lien is offered in the sale. With this method, the first lien offered for sale will be offered to the investor holding bidder number one. This investor has the right of first refusal. If bidder number one refuses the lien, bidder number two may bid. Bidder number one will not be offered another lien until his number comes up again in the rotation. The next tax lien sale will go to the next number in line.
  • Random Selection: Actually, this approach is like the lottery. With this method, a bidder is randomly selected from those offering a bid in the auction.

Redemption Process

It is necessary to understand that there is an option for the original owner of the property or others who may have an interest in the property (such as banks). What this means is that following the sale, the investor must wait a specified period of time called the “redemption period.” The redemption process is the property owner’s final chance to keep his property. The redemption period is the time during which the lien (plus interest and any other costs) may be repaid.

Usually the lien holder is not allowed during this period to demand payment, threaten foreclosure, contact the property owner or anyone else having an interest in the property. Unfortunately, if the holder of the Property Tax Lien does so, the certificate may be forfeited.  In some states you can file for a deed to obtain ownership, in others, after you obtain title to the property, you must go through the foreclosure process to evict the owners.  The laws vary from state to state so it’s important for you as an investor, be informed before you proceed.

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