Each state has different laws for tax sales. Generally, the taxing authority, usually the county, doesn’t have to go to court before holding a tax sale. Instead, the process is often started when the taxing authority files a list of delinquent taxes, which includes information about the taxpayer, the property, and the amount due, with the recorder’s office and publishes a copy in the newspaper. Also, the homeowner typically is entitled to some form of notice of the pending tax sale. Then, in some places, the county holds a public auction. Commonly, bidding begins at the amount that covers the delinquent taxes, interest, and related penalties that are owed to the taxing authority. The winning bidder at the sale normally receives either a:
• tax deed, or
• tax lien certificate.
In some jurisdictions, though, a sale isn’t held. The taxing authority simply executes its lien by taking title to the home. In other places, the taxing authority must foreclose the property, usually by filing a lawsuit in court, before holding a tax sale.
Tax Deed Sales
In tax deed sales, the taxing authority sells the title to the home. A tax lien certificate sale, on the other hand, doesn’t convey ownership of the property. Rather, the taxing authority sells its lien and the purchaser usually receives a tax lien certificate. This certificate entitles the purchaser to basically take over the position of the taxing authority and collect full payment of the past-due taxes, plus interest, from the delinquent taxpayer. If the delinquent taxes aren’t paid by a certain date, the purchaser of the lien generally has a right to foreclose the lien, or take specific steps to convert the certificate to a deed, and get title to the home.
Redeeming The Property
Most jurisdictions that sell tax deeds offer a right of redemption after the sale, which allows you to get your home back. To redeem, you must reimburse the purchaser the amount paid at the sale, or pay the taxes owed, plus interest within a specific time frame called a “redemption period,” which is generally between one to three years. Sometimes, the redemption period takes place before the sale. If you pay the delinquent taxes before the start of the sale, the sale will not take place.
Setting Aside The Sale
If you can’t redeem the home, you might be able to set aside (invalidate) the tax sale after it has occurred by showing, for example:
• defects in the tax lien or tax sale process
• the taxes were paid or are not owed, or
• a good reason why you neglected to pay the past-due amounts. (To learn more about redeeming the home and setting the sale aside, read Options After a Tax Sale on Your Home.)
Saving Your Home After a Tax Lien Sale
After a tax lien sale, you still own the home because the purchaser only buys a lien against your property. If you pay off the amount of the lien or the purchase price (depending on the situation), plus allowed costs, like interest, within a specified time period you get to keep the home. This, too, is referred to as “redeeming” the home. If you’re facing an imminent tax sale, or one has already occurred, consider talking to an experienced attorney in your state as soon as possible. A qualified foreclosure lawyer, tax lawyer, or real estate lawyer can answer your questions about how the process works where you live and the specific steps you need to take to save your home from a tax sale.
If you fail to pay your property taxes or other municipal charges, like a sewer or water bill, the past-due amount becomes a lien on the home. This type of lien almost always has priority over other liens, including mortgages. If the taxes remain unpaid, in most cases, the taxing authority will eventually:
• sell the lien (and if you don’t pay the past-due amount to the purchaser of the lien, that party can foreclose), or
• sell the property itself in a tax deed sale.
In some places, however, a sale isn’t held. Instead, the taxing authority executes its lien by taking title to the home. State law then generally provides a procedure for the taxing authority to dispose of the property, usually by selling it. In other jurisdictions, the taxing authority uses a foreclosure process before holding a sale. In many states, the home can be sold for the amount of the past-due taxes. So, a $300,000 home could be sold for $1,500 of unpaid taxes. This situation is very different from a home mortgage foreclosure where the purchaser at the sale usually pays an amount close to the property’s fair market value. Ultimately, in a tax sale, the purchaser can potentially obtain title to the home for a fraction of its actual value. Generally, people who lose their home to a tax sale have two options to get the property back: redeeming it or setting aside (overturning) the sale.
In most states, delinquent taxpayers get some time during which they can repurchase (“redeem”) the home after a tax sale by paying the buyer the amount paid at the sale or paying the taxes owed, plus interest, penalties, and costs. In some states, the redemption period occurs before the sale. But if you don’t redeem, the purchaser can get title to the home free and clear of any liens that existed before the sale. Usually, the homeowner gets the right to live in the home during the redemption period. Exactly how long the redemption period lasts varies from state to state; one year to three years is typical. In some states, though, the redemption period is much shorter. Check your state laws or consult with an attorney to find out the tax sale redemption period where you live. If you can, you should redeem as soon as possible to prevent additional interest and penalties from accruing. Sometimes, homeowners aren’t aware that a tax sale has been scheduled until after it’s already happened.
Defects In the Tax Lien or Tax Sale Process
Defects in the tax lien, such as omitting one of the property owners’ names, or defects in the tax sale process, like failing to give proper notice, might provide grounds to set aside a tax sale. Minor mistakes probably aren’t enough to invalidate a sale, but a defect that prejudices the homeowner’s rights probably will.
For example, let’s say a property owner provides the county (the taxing authority) with a new address for mailings. But the county doesn’t send any notices about the delinquent taxes to the property owner at the new address. So, the property owner doesn’t receive notice of a tax sale. In this situation, the sale could probably be set aside for lack of proper notice. Whether a particular defect is significant enough to invalidate the sale depends on a state’s statutes and case law.
The Taxes Were Paid or Aren’t Owed
If the homeowner already paid the taxes, the sale is invalid and could be set aside. Likewise, if the property is exempt from taxation, a tax sale would be void.
A legitimate excuse for failing to respond to, say, a tax sale foreclosure action might justify setting aside the sale. For example, if a 74-year-old widow with a psychiatric disorder fails to do anything about the delinquent taxes until eviction proceedings start, a court would likely set aside the sale and let her keep the home if she pays the full amount of the taxes due.
If a borrower or homeowner fails to pay their mortgage or property taxes, the local tax collector or lender has the right to pursue legal action against the borrower to reclaim the money owed to them. With delinquent property taxes, this is done through a tax lien foreclosure or tax deed sale. For a delinquent mortgage, it’s done through a mortgage foreclosure. The foreclosure process varies slightly for each but will eventually result in the property being either sold at a public auction or taken back by the lender or tax lien holder through foreclosure. In both events, the real property transfers to a new owner. However, in some states, there is a redemption period after the foreclosure sheriff’s sale, which offers a right of redemption to the property owner or third party with vested interest in the property. This redemption period is the specific period of time in which the foreclosed owner or other third party with vested interest, like a mortgage holder or junior lien holder, can redeem the foreclosure sale by paying the delinquent amount plus penalties and interest.
Not every state offers a redemption period. Statutory redemption, or the allowable grace period to repay the debt with interest and fees, is most commonly used in judicial foreclosure states, but the redemption grace period and whether it’s provided will depend on the type of foreclosure sale. If the home is going through foreclosure, it’s unlikely the property owner has the money to pay the debt or they would have paid it prior to the foreclosure sale. However, there are some instances when the foreclosed owner is able to pay the outstanding debt after the sale because they gained access to a new source of money. But in reality, the most common type of redemption is by third parties who carry an interest in the home.
For example, a mortgagor who still has an outstanding mortgage surely doesn’t want to lose the home through a tax sale. In the event the property does go to tax sale or tax lien foreclosure, they may have the ability to repay the outstanding tax amount with interest and fees. This allows them to regain title to continue with foreclosure proceedings if need be or recoup the debt paid for taxes in some other fashion.
It’s also fairly common for a junior lienor, or a mortgage lender who is in second position behind the first mortgage holder, to execute their right of redemption, but this is typically done before the sale.
For example, if the borrower is delinquent on their first mortgage and the lien holder is foreclosing, the junior lien holder can pay the outstanding amount in order to keep their security position in the property. This is usually only executed when the home has equity, because the redeeming junior lienor now has room to recoup their investment in the property through a sale after redemption and completing their foreclosure.
As you can see, redemption periods play a big role in distressed real estate sales. As a property owner or real estate investor, it’s important to understand how a redemption period can impact you or the potential outcome of your investment. It’s a good idea to speak with an attorney in the area who specializes in real estate foreclosure for further guidance on your local or state laws for right of redemption.
The term “tax deed” refers to a legal document granting ownership of a property to a government body when the owner fails to pay any associated property taxes. A tax deed gives the government agency the authority to sell the property to collect the delinquent taxes. Once sold, the property is then transferred to the purchaser. These transactions are called “tax deed sales” and are usually held at auctions. A property tax is any tax paid on a piece of property.
Taxes are paid by the owners of real estate individuals or corporate entities and are assessed by the municipal government in which the property is located. The taxes collected are used to fund various municipal programs, such as water and sewer improvements, law enforcement and fire service, education, road and highway construction, public servants, and other services. Property tax rates vary by jurisdiction. When property taxes are left unpaid, the taxing authority may sell the property’s deed or title and therefore, the property to recover the outstanding taxes.
The taxing authority usually a county government must go through a series of legal steps in order to acquire a tax deed. These include notifying the property owner, applying for the tax deed, posting a notice at the property, and posting a public notice of sale. The exact steps that must be taken generally vary in accordance with local and municipal laws.
In a tax deed sale, the property itself is sold. The sale takes place through an auction, with a minimum bid of the amount of back taxes owed plus interest, as well as costs associated with selling the property. The highest bidder wins the property. The tax deed legally transfers ownership to the purchaser on one condition: The new owner must pay the entire amount owed within 48 to 72 hours, or the sale is canceled. Any amount bid by the winning bidder in excess of the minimum bid may or may not be remitted to the delinquent owner. This depends on the jurisdiction. The original owner may forfeit this excess amount if they do not claim it within a specified period of time.
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