The National Tax Lien Association reported that tax delinquencies in the U.S. totaled in excess of $15 billion in 2010, with more than $5 billion of the lien homes sold at tax sales that year. Homeowners with delinquent taxes typically also have outstanding mortgage debt. Purchasers of homes with liens must deal with challenges from lenders holding the house as collateral.
Tax Lien Sales
Washington, D.C., Puerto Rico, U.S. Virgin Islands and 29 states sell homes to collect delinquent taxes. Each state has different laws for filing liens, specifying grace periods and terms for redeeming the property, in addition to rules for conducting the home sale or auction. Tax lien sales rules regulate the new owner's right to possession of the property. Twenty-one states, including Montana, New Jersey and Wyoming, issue the winning bidder a tax lien certificate allowing the former owner or the mortgage holder a period of time to redeem the property. Pennsylvania, North Dakota and Oklahoma don't have a redemption period. The typical redemption period ranges, as in Idaho, from the end of the sale, to the time the property deed is issued. This sometimes requires a waiting period of 18 months after the sale, as in West Virginia. Wyoming requires a waiting period of four years before the new owner can receive a new deed to the property. During the redemption period, mortgage holders can foreclose the home for failure to make mortgage payments.
Buying Tax Lien Properties
Mortgage lenders typically receive notification when property owners fail to pay property taxes. Some lenders make these payments to protect the borrower's interest in the mortgaged property. When lenders fail to receive notification or fail to act on the notice, the lender must win the house at the tax sale or auction. The lender then receives the proceeds from the sale after payment of the delinquent taxes. Connecticut, for example, requires the tax sale winner to pay 18 percent interest to the holder of the tax certificate during the six-month redemption period. Alabama collects 12 percent interest during the three-year period from the winning bidder at the tax lien sale. Texas has a variable redemption interest of 25 percent in the first year and 50 percent in the second year. Wyoming takes 3 percent of the property purchase price and an additional 15 percent annual interest for a minimum of four years until the new home deed is drawn.
Clearing Mortgage Liens
Some properties sold at tax lien sales also have second mortgage liens. This creates a problem for new owners, even when laws don't require a waiting period for issuing a new deed. California laws, for instance, allow a second mortgage holder the right to seek damages against the borrower to repay the mortgage owed when the senior loan failed to allow the junior lender a chance to foreclose on a home. This means possible legal delays for the new owner taking title to the home. Mortgage lenders in Tennessee, for example, have the right to challenge the state for proof of the cash distributed from the tax sale, and this offers more chances for ownership delays during the challenge and accounting process.
Paying for a title search provides an official report of mortgages, tax payments and any current and outstanding liens on the property. Purchasing title insurance protects against any unpaid mortgage liens failing to appear on the tax records. Other possible liens on your new property include unpaid water bills, special assessments for parks, sidewalks or sewers left unpaid. Unpaid fees for weed removal or window coverings done by the city or county also mean liens on a house sold at tax sale. Researching these liens requires contacting each agency directly to determine required steps to remove them. This may involve payment for city services provided to the original homeowner to clear the debt.
- Bankrate.com: Buying a Home in a Tax Lien Sale
- CNN Money: Investors Target Property Tax Deadbeats
- National Consumer Law Center: Foreclosure Report -- Survey of State Foreclosure Laws
- National Consumer Law Center: The Other Foreclosure Crisis -- Property Tax Lien Sales
- Real Estate Center Law Letter: Liens -- Priority of Mortgage and Tax Liens
- Cornell University Law School Legal Information Institute: Discharge of Liens; Nonjudicial Sales
- Photodisc/Photodisc/Getty Images
- Texas Sales Tax Exemption Certificate Instructions
- Steps in Fighting a Lien
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- Can I Work Out a Payment Plan for a Tax Lien?
- 1041 Tax Advice
- The Tax Law for a Personal House
- List of Things Eligible for Tax Free Weekend
- How to Buy a House That Is Not Considered Livable
- What Happens if You Purchase a Home at a Tax Lien Sale & There Is a Mortgage Lien Owed?
- Can a Person Refinance a House if a Lien Is on the Property?