A tax sale is the forced sale of property (usually real estate) by a governmental entity for unpaid taxes by the property's owner.
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: sending a letter by certified or registered mail to any and all owners of record as shown on the entity's records (some jurisdictions require an attempt at personal service), as well as to any person shown as having a mortgage, lien, or "other interest" in the property, placing a public notice in a newspaper designated to publish legal notices, posting notice at the local courthouse or other public place designated for official notices, and/or posting notice on the property itself in such a place and manner that it is visible to the public (such as the outside of an exterior door, or a sign on the property if it is unimproved).
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.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. 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.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. 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 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.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. 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.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). 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.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. 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 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: Bid Down the Interest. Under this method, the stated rate of return offered by the government is the rate of return allowed. However, investors can accept lower rates of return, including zero percent in some cases. The investor accepting the 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 Floridahttp://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).) Premium. Under this method, the investor willing to pay the highest (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)