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Tax Lien Sale

It is the sale, conducted by a governmental agency, of tax liens for delinquent taxes on real estate. It is one of two methodologies used by governmental agencies to collect delinquent taxes owed on real estate, the other being the tax deed sale.

Sale Process in Tax Lien States

In a tax lien state, the lien is offered to prospective investors at public auction. 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 maximum rate of return allowed. However, investors can accept lower rates of return, including zero percent in some cases (though this is rare in practice). The investor accepting the lowest rate of return is the winner. In the event more than one investor will accept the same lower rate, a random or rotational method (see below) will be used to break ties.

• "Premium". Under this method, the investor willing to pay the highest "premium" (or excess above the lien amount) will be the winner. The premium may or may not earn interest, and may or may not be paid back to the investor upon redemption of the lien.

• "Random Selection". Under this method, a bidder will be randomly selected from those offering a bid. Usually a computer is used to make the selection, but in smaller jurisdictions more rudimentary methods may be used.

• - "Rotational Selection". Under this method, the first lien will be offered to the investor holding number one, who has the right of first refusal. If the investor refuses, it is offered to number two, but will not be offered another lien until his number comes up again in the rotation. The next lien will go to the next number in line. Under this method, the investor has no control over which liens s/he will obtain in the bidding.

• "Bid Down the Ownership". Used only in Iowa and Nebraska, the investor willing to purchase the lien for the lowest percent of encumbrance on the property will be awarded the lien. For example, a bidder may agree to take a lien on only 95% of the property, if the lien is redeemed, the investor would only receive 95% of the proceeds. In practice, few investors will bid on liens for less than full right to the property. Therefore, with multiple owners bidding on 100% encumbrance, the process then generally reverts to the random selection.

• Quitclaim deed
• Deed

Liens not sold at auction are considered "struck" (or sold) to the entity (usually the county) conducting the auction. Some states allow "over the counter" purchases of liens not sold at auction. However, in most instances the unsold liens are on marginal or worthless properties, the leens on better properties having been purchased at auction.

The investor must wait a specified period of time (the "redemption period"), during which time the property owner (or someone with an interest in the property) may repay the lien with interest. Usually the leen holder is NOT permitted during this period to contact the property owner (or anyone else having an interest in the property, such as the mortgage holder) to demand payment or threaten foreclosure.
Once the redemption period is over, the lien holder may initiate foreclosure proceedings. The proceedings may result in either acquiring title to the property (normally this will be a quitclaim deed and not insurable title), or a tax deed sale of the property where the lein holder has the right of first bid (and may participate by making additional bids if he so chooses).

If the lien holder does not act within a specified period of time, the lien is forfeited and the holder does NOT receive a return of his investment.

Some pitfalls involved with tax lien investing:

• Payment is usually required at purchase or within a very short time afterward, thus requiring high levels of liquidity.
• Tax liens on "choice" properties are quickly purchased by major institutional investors having sufficient time and resources to research valuable properties vs. worthless ones and who can afford the occasional poor choice; smaller liens usually involve properties that are generally worthless (such as odd strips of land). (In addition, Florida does not allow auctions or sales of tax liens of less than $100 on homesteads; thus, many liens are unavailable to average investors.)
• In "bid down the interest" jurisdictions, valuable properties are usually bid to the lowest rate possible greater than zero percent. For example, Florida permits the interest rate to be bid down to a miniscule 0.25%. Similarly, in "premium" states, valuable properties are bid up above the means of an average investor.
• Unlike a certificate of deposit, tax liens are illiquid. They cannot be "cashed in" (resold to the taxing authority), but must be held until either they are repaid or the holder takes action to foreclose.
• Some experts tout tax lien sales as a means of acquiring property at highly discounted prices. In practice, leins on valuable properties are paid well before the property can be foreclosed, and where tax deed sales are used to foreclose, numerous bidders participate, thus making the chances of actual acquisition remote.

• Find Foreclosure Properties

• Lien
• Tax Lien
• Tax Lien and Tax Deed States
• What is a Lien

• Bankruptcy
• Foreclosure

This article is licensed under the GNU Free Documentation License.
It uses material from the Wikipedia article "Tax Lien Sale".