If you put less than 20 percent down when you purchased your home, and if your mortgage is government-insured, you may not have to worry about losing your home to a property tax lien sale. Under these circumstances, your mortgage company probably requires escrow of a portion of your payment each month to pay for property taxes. Otherwise, if you pay them separately from your mortgage, you run the risk of falling behind. The laws in all 50 states allow the government to recoup the taxes you owe if this happens.
State laws vary regarding how far you can fall behind with your property taxes before your government will take action. In some areas, you may have only a few months, while in others, you could have a year or more. If this time elapses, however, and if you don't catch up with your taxes, the end result is the same: the government will auction off a lien against your home. Your government automatically has a lien by law if you don't pay, and it sells ownership of the lien to someone else. It doesn't sell your home itself, just the right to foreclose on it. The auction process varies from jurisdiction to jurisdiction. In some cases, the bidder who is willing to accept the lowest interest rate on his investment wins. In others, the bidder who is willing to deposit the most money with the government wins.
Payment of Taxes
After the auction, the winning bidder is required to pay your delinquent property taxes for you. For example, if you owe $3,200 in property taxes and if he wins the bidding at $5,000, some jurisdictions will take $3,200 of the bid to satisfy your tax debt and hold the remaining $1,800 on deposit. If the basis of the auction was the interest rate, the high bidder will pay your taxes but would typically not put additional money down. In exchange, he receives a tax sale certificate or certificate of sale that states the terms of his bid. The certificate is official proof of his ownership of the lien against your property.
After the auction, you have a period of time in which you can take action to prevent foreclosure. You can redeem the certificate. Unfortunately, after a tax sale, you can't simply go to city hall and pay your past due property taxes to make the whole mess go away. You'd have to pay the taxes, plus interest, and the interest can vary by state law. In some states, it's a statutory amount, such as 10 percent. Therefore, if you owed $3,200 in taxes, you'd have to pay $3,520 to redeem your home. In jurisdictions where buyers bid on the interest rate, you must pay the tax debt plus the bidder's winning interest rate. In either case, the bidder or investor receives his money back when you redeem, plus your interest – his profit for the whole transaction. There may also be penalties payable to your government to cover their time and expense for holding the auction. After you've paid everything due, the winning bidder must give the certificate back and there's no longer a lien against your property – unless you fall behind with your taxes again.
If you can't come up with the money to redeem the certificate, the winning bidder can file a lawsuit against you to foreclose on your home. This can be tremendously complicated if you have a mortgage against it, so it's not uncommon for lenders to purchase the tax sale certificate themselves for this reason. In some states, such as Maryland, if the winning bidder does not exercise his right to foreclose within two years, his certificate becomes useless – he can't collect his interest from you and he can't take ownership of your home. The lien reverts to your government until they hold another auction.
- Bankrate.com: Buying a Home in a Tax Lien Sale
- National Consumer Law Center: The Other Foreclosure Crisis
- Montgomery County, Maryland: Tax Sale Information and Procedures
- Bankrate.com: Escrow Makes Payments – Even on Fixed-Rate Mortgages – Variable
- Gray Robinson: Tax Certificates, Tax Deeds and Tax Sales – Information for Lenders and Investors (PDF)
- What Is Going to Happen if I Owe Back Property Taxes?
- Can a Foreclosed House Be Bought Back After Being Sold?
- Penalties of Non-Payment of Property Tax
- What Happens if You Purchase a Home at a Tax Lien Sale & There Is a Mortgage Lien Owed?
- What Do You Have to Do to Pay off a Tax Certificate on a Home?
- Tax Consequences of Losing Money When Selling a House