Hey there, it’s Casey Denman here with TaxSaleAcademy.com. Thanks so much for joining me today for our weekly question segment.
This week’s question comes to us from Carolina.
Carolina says, “I’m just learning about this tax sale business. Can you explain the process? It doesn’t seem that fair to the owners to just lose their house if they forget to pay.”
So Carolina, first of thank you for your question. And this is a concern that many people come up with that, as you’ll see, isn’t really a factor.
Now before I discuss the process, I do like to remind people that real estate taxes are a necessary evil. Noone like taxes, right? But real estate taxes provide the funds required for many, many amenities including a number you might use every single day without even realizing it. We’re talking about roads, sidewalks, area drainage, schools, law enforcement, fire departments, bridge, libraries, parks and many many other things. The budgets for these services and amenities are set by the local governments with the expectation that people will pay their property taxes. When enough people fail to pay their taxes on time, the government can’t provide these necessary services. So, there is a system, the delinquent tax system that handles these issues.
There are three primary ways to handle the late taxes. We have a tax lien system, a tax deed system and a hybrid system. Now, I’m not going to go into all of the specifics on each one since I have videos for that, but I am going to touch on them to tie everything together.
So obviously, a tax bill gets sent out yearly, or twice a year in some states. The owners know the amount well ahead of time and they know the date it’s due. If the taxes are not paid by that date, they are considered delinquent. And this happens to many people for a variety of reasons. But even the most successful people can overlook these taxes.
So they’ll usually get a notice that basically says, hey, your taxes are late. It’s time to pay. And by the way you also owe us a few extra bucks as a late fee.
From there a lien is eventually attached to the property. This could be done after a month or two or it might take longer. At that point, you’ll start getting some additional processing fees tacked on to the amount you previously owed. In a tax lien state, this lien is sold to a third party investor. In a tax deed state, this lien is held by the county. So now your property has a lien tied to it and can’t be sold with a clear title.
At this point, you’ll have to redeem the lien to prevent the eventual loss of your property. To redeem this lien, you’ll need to pay all of the back due taxes, the processing fees and NOW you’ll also have to pay interest on top of that. This interest could be very nominal or it could be upwards of 15 or 20%, so every day you’re late, the higher the tax amount owed will climb.
At some point, depending on the state, the lien will be moved to foreclosure. So, just like that mortgage lien can be foreclosed if you stop paying your mortgage, the tax lien can also be foreclosed. Again, the time varies, but that tax lien, whether it’s held by a third party investor like someone watching this video, or if it’s held by the county in a tax deed state, it will be foreclosed. Prior to this point the property owner will likely have received many, many notices. In some states, upwards of 15 notices will have been mailed first class mail and certified mail, PLUS postings at the property and legal ads in the local newspapers. So it’s not like the owner doesn’t know what’s happening. Additionally, they’ll have had years to come up with the redemption amount by saving, borrowing or even selling the property and paying of the taxes at closing.
Now, the specifics can start to vary here depending on the state and the system used, but at this point you can lose ownership of your property. It can be claimed by the tax lien investor who forecloses their tax lien, or the county will sell the property outright at a tax deed sale. It should be noted that a few states have one final window when the delinquent taxes can be paid and the property redeemed, but the fees have risen substantially by this point.
So Carolina, as you can see, this is a very lengthy process before someone loses their property and they are well aware of it prior to it happening. Not to mention the fact that many properties are intentionally here, including those that are in substantial disrepair. This process is extremely necessary for the county and city in order to provide the services for the safety and betterment of the community. We as tax sale investors contribute by investing into this process and ultimately into the community through our tax sale investments.
So hopefully this answered your question. If you have a followup question or anyone else watching has a question feel free to leave it below this video or any of our other videos here on YouTube and we’ll definitely respond and I might just shoot a video response like this one.
As always, don’t forget to head on over to TaxSaleAcademy.com if you’re looking to learn more about investing in tax defaulted real estate. At that site you can grab a copy of my book, Tax Sale Playbook, for free if you just cover the nominal shipping cost or you can join the academy for the most advanced step by step training we offer, including all of my training programs.
Take care and make it a successful day. See ya!