For those looking to purchase a home or other investment properties, using a tax lien auction can be a great way to purchase a property by paying the unpaid property taxes. However, there are some risks that also come with making these types of purchases. Most tax authorities use tax liens to force property owners to pay past due or delinquent property taxes. During the housing crisis that occurred throughout the recession, many homes come up for these types of liens due to the homeowners’ inability to keep up with the taxes and the mortgage payments. If you are considering these types of investments, consult with your tax professional or accountant, such as BTL & Company, P C, Tax & Accounting in Beaverton, OR. Here are just a few things to remember when purchasing a property through a tax lien auction.
What Is the Auction Process?
The process may vary from state to state, but essentially, the tax collectors wait for the specific time period as prescribed by state law. Then they will put those unpaid property taxes up for auction. The person who pays the most cash for the tax lien will win the auction. Then the tax collector takes the payment for taxes and the purchaser now has a lien on the property. Their investment will be rewarded in one of two ways.
Interest on Bid Amount – If you bid on a property, you are making an investment with your funds.
Depending on the state’s procedure, the current property owner will have a set period of time in which to pay off the back taxes. If they do so, then you will receive your investment capital back along with a set amount of interest based on your state’s limits. That interest rate is often referred to as the statutory interest rate. Essentially you will receive interest on your entire bid, even if it is over the amount of the actual property taxes due by the owner. The owner will have to pay the back taxes and the added interest to redeem their property.
Ownership of the Property – While a vast majority of owners are able to redeem their property within just a year or less, there are some property owners that are unable to do so. As a result, after a specific period of time determined by the laws of that state, you will have to file a lawsuit to get the title of the property and take control of it. This can be a complicated and time-consuming process, but once it is completed, you will take ownership of the property. Now you can use the property as you see fit.
Potential Pitfalls to Avoid
Here are a few pitfalls to be aware of when investing in these types of properties. First, make sure that the house or building is still on the property before you bid. The house, for example, could burn down and the land could be worth significantly less than your bid. Thus, it could end up costing you money. Secondly, you will need to be sure that the tax collector or tax authority followed the proper statutory procedures for placing the lien. You also need to be sure that the tax notice actually went out and confirm there are no unapplied tax payments from the owner.
Third, you will need to monitor the investment. If your state allows for a longer redemption period, keep the taxes current and the lien as well. This will allow you to avoid someone else placing a lien on the taxes that you might owe on the property. Finally, it is important to be patient. After all, you are going to have to work through the redemption process and then the lawsuit for title to the property. This will take time. If the current owner is involved in a bankruptcy, you may be given your investment capital back, but at a lower interest than the state law indicates.
As we can see, the benefits of investing in property tax liens can be substantial. However, it also requires a lot of patience and willingness to wait to enjoy complete ownership of the property. Additionally, it is important to note that above all, to benefit your investment, you need to make sure that you pay for your property taxes on a timely basis.
BTL & Company, P C, Tax & Accounting