What is a Tax Sale?
Property taxes are (usually) due every year. When a property owner fails to pay these taxes, the local government can hold an auction to cover the cost of the overdue taxes. The details vary state to state and county to county. This process can take years from the first delinquent payment until the actual tax sale.
There are two types of tax sales. One is a tax deed sale, where the property and its unpaid taxes are auctioned off to the highest bidder. Before a property is available for purchase at a tax sale, the owner will be given a redemption period where they can pay all the delinquent taxes and any accrued interest to maintain ownership of their property.
The second is a tax lien sale. These auctions allow bidders to purchase tax liens on properties.
Basically, if you were to purchase a tax lien, you are paying the property taxes on behalf of the property owner as a sort of loan. When the property owner decides to pay their taxes to come out of delinquency, they must pay the full amount owed as well as any interest accrued on the overdue taxes. The county will then issue you, the tax lien holder, a check for the amount paid. Interest rates vary from county to county, but some areas charge delinquent property owners up to 10% annual interest on overdue taxes. All interest accrued is then paid to the tax lien holder.
If the property owner does not choose to pay back the overdue taxes, you as a lien holder can continue paying the taxes on the property. Depending on the area, you can then acquire the title to the property after several years of paying the taxes through the tax lien program. The amount of time required varies from one location to the next.
Once they set amount of time has passed, you can apply for ownership of the property that you have been paying the taxes on. The county is required to give the property owner notice and allow them a chance to pay back the overdue taxes plus interest, this time is known as the redemption period. If the owner fails to make the required payments, you can be issued a deed on the property.
This can be a much cheaper way to acquire property if you are looking to invest. However, it could take years and the properties available will likely be neglected. This is also something to be cognizant of if you own property. Paying taxes on time is an important step in protecting your investment. If you have a loan on property, your lender will likely set up an escrow account to ensure these taxes are being paid. If you own the property outright, it becomes your responsibility to make sure these taxes are paid on time.
Still have questions? Drop them in the comments!
Not sure what an escrow account it? Click here to learn more.
Want to take the next step and purchase your first tax lien? Click here to learn how.
As always, I am but a work in progress.
Cheers.
