Tax Lien Foreclosures

Tax Lien Foreclosures


These are properties whose homeowners owe taxes to a local, state, or federal government. If the homeowners do not pay the tax lien, the property is repossessed and sold.

What Are Tax Lien Foreclosures?

Tax Lien Foreclosures

To understand tax lien foreclosures, you first have to know what a tax lien is. Almost everyone has to pay taxes on their property. These tax liens are imposed in order to have collateral for the payment of taxes. The lien may be because of past due taxes that are against personal or real estate property.

Across the United States, there are hundreds of different counties which hold millions of dollars in unpaid property taxes. When this happens, a tax lien is issued against the property so that local municipalities can secure payment when it changes hands to a new owner. Although tax lien foreclosures are one of the least understood methods for investing in real estate, they are certainly one of the safest.

Tax lien foreclosures are sold during special kinds of auctions due to the lien being held against the property. They are quite different from a regular bank foreclosure or preforeclosure because the default is not against the mortgage, but against the municipality or government where the taxes have been assessed.

Most of the time, tax lien foreclosures happen when an owner gets behind on income taxes, property taxes or any other kind of taxes in which a homeowner can use their property as collateral. In most jurisdictions, tax liens are issued once a homeowner has failed to pay their property taxes. In some states, this lien can actually be put into the first position. In these cases, an auction can be held to sell off the property at tax lien or tax deed sales.

It's important to note that every state has their own policies and procedures as it relates to tax lien sales. Some states require that you wait a specific period of time before you're allowed to do anything with the property as the homeowner can still come back and pay off the tax lien plus interest. These interest rates also vary from state to state. If the homeowner doesn't come back and make things right, then the person who purchased the tax lien can move forward with their plans for the property.

The reason why investors love tax liens is twofold. First of all, the state will require a particular interest rate but the delinquent taxpayer must pay in order to get the property back from the buyer. So, the investor is at least guaranteed a nice rate of return on their money. On the other hand, if the homeowner doesn't come back then the tax lien purchaser will get title to the property for the amount that they paid. Either way, It's a win - win situation for a real estate investor.

What Are Tax Lien Certificates?

The tax lien certificate is a document that an investor purchases at a tax lien foreclosure auction. It is the piece of paper that they must hold onto while they wait to see if the homeowner comes back to redeem the property. As stated before, the homeowner must pay back the tax lien plus the stipulated interest amount in order to cancel the tax sale and get their property back. If they don't, the investor can turn the tax lien certificate into a property title by working with the municipality where they purchased it.

What is the Difference Between Tax Lien Sales, Tax Lien Certificates and Tax Deed Sales?

Some people get confused by the different terminology involved in tax lien foreclosures. For that reason, let's take a look at the definitions for these three terms:

  • Tax lien sales: A tax lien sale is when the government sells the tax lien directly to a citizen. The person pays the government directly for the full amount of another person's tax lien. In exchange, they receive a tax lien certificate that entitles them to a generous amount of interest in the event that the homeowner comes back to redeem their property. These foreclosure tax liens may or may not end up in the investor getting the title in the end.
  • Tax lien certificates: A tax lien certificate is simply a piece of paper that guarantees the buyer to a specific rate of interest if the homeowner comes back for their property.
  • Tax deed sales: A tax deed sale allows the purchaser to buy the rights to the property (the deed) free and clear of any mortgages. You should note that tax deed properties will cost a lot more money because you were getting ownership of the property immediately. They also have to be paid in cash. However, these homes can be big bargains.

What Happens to a Tax Lien If the Property Goes to Foreclosure?

Liens are satisfied in a certain order of importance starting with IRS tax liens. Many liens will come before the deeds of trust when it comes to foreclosed properties. Because of this, the mortgage company has a big decision to make if the property is headed for foreclosure. If the property has a mortgage on it and is in danger of being foreclosed due to property taxes, the mortgage company has a choice as to whether to pay the lien or let the house go into foreclosure. You must do your research because sometimes tax liens can be included in bankruptcies which will cause your tax lien certificate to become subordinate to other things that were included in the bankruptcy.

How Do I get a Tax Lien Released?

Patience is definitely something you have to exercise when it comes to buying tax lien foreclosures. Because each state and municipality can vary in their way of dealing with these kinds of houses, you must familiarize yourself with the process. It makes sense to talk to a real estate attorney in the area so that you understand what you have to do in order to get the tax lien released.

If the owner doesn't pay for the property within the stipulated period of time, you will be able to get the property free and clear in many cases. To make sure that things are done properly, you should interact closely with the municipality and your real estate attorney who can walk you through the process step-by-step. Because there are potential pitfalls associated with this kind of investment if you don't do your research, having that legal assistance can save you a lot of time and money.

You can find homes with tax lien sales coming up by visiting

FAQ about Tax Lien Foreclosures

  • Taxes, in general, cannot be discharged in a bankruptcy. If you have an income tax lien, you will be responsible for it even after the bankruptcy. A property tax lien on your property, though, is usually taken care of when the home is sold to another owner. It follows the property, not you.

  • If the owner never pays the property taxes owed, you have the legal right to take possession of their property. This is because tax lien certificates are backed by real estate.

  • The negative equity will more than likely increase due to the costs incurred by the lender through the foreclosure process. Unless you agree to a deed in lieu of foreclosure from your lender, you could be sued for what you owe if you live in a recourse state.

  • The mortgage will follow the property and the owner. A tax lien certificate – which is what you get when you purchase a property's back taxes - is only a right to purchase in the event that the homeowner fails to pay the property tax for a certain period of time (determined by the jurisdiction). The mortgage is still under control of the lender, and if the owner declares bankruptcy, the mortgage owner takes precedence over the lien holder.

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