Chapter One
What Is a Tax Lien Certificate?
When property owners fail to pay the required property tax assessed on real property, the property may be auctioned and sold at a real property tax sale, though real property is not always sold at tax sales. Some states engage in the sale of deeds to real property to recoup losses from delinquent property taxes. Other states engage in the sale of liens against real property to recoup the losses.
The purchase of a tax deed is significantly different from the purchase of a tax lien. States that engage in the sale of tax deeds are considered tax deed states. The winning bidder bids for immediate possession of deed and title to a property. A tax deed is issued or assigned in return for the payment of unpaid real property taxes as well as associated penalties, interest, and costs of the tax sale. States that engage in the sale of tax liens are considered tax lien states. The tax sale initiates a process or system by which an investor pays the delinquent tax on behalf of the property owner. The property owner is then given an opportunity to repay the investor or be forced to relinquish title and deed to the property in the future. A certificate that indicates payment of the tax lien is issued or assigned in return for the payment of unpaid real property taxes as well as associated penalties, interest, and costs of the tax sale.
Tax deed states
In tax deed states, the winning bidder at a tax sale purchases ownership to a property, as specified by a tax deed. The bidder becomes the property owner upon payment of the delinquent tax amount and any other costs and fees assessed against the property. In some tax deed states, the previous property owner is given an opportunity to redeem the property from the newly established owner. The redemption period varies among the states, but generally ranges from six months to two years. These states are considered hybrid tax deed states. Hybrid tax deed states include ten states and the territory of Guam, as follows: (Ref. 5)
Connecticut Delaware Georgia Guam Hawaii Louisiana Massachusetts Pennsylvania Rhode Island Tennessee Texas
Other tax deed states do not provide the previous property owner with an opportunity to redeem a property and regain ownership. Because property owners are not allowed an opportunity to redeem their properties, there is no redemption period or interest rates and penalties applied to redemption amounts. These states are considered to be "pure" tax deed states and are listed below. (Ref. 5)
Alaska Arkansas California Idaho Kansas Maine Michigan Minnesota Nevada New Hampshire New Mexico New York North Carolina Ohio Oregon Virginia Washington Wisconsin
California is relatively new to tax sales and has never sold a tax lien certificate, even though state legislation includes statutes authorizing each of its 58 counties to do so. New Hampshire statutes are rarely exercised. New York statutes have been exercised only in certain cities and counties. Ohio statutes allow for the sale of tax liens in municipalities with populations greater than 200,000. Alaska offers tax deeds for sale only to the municipality in which the property is located. If the property owner fails to redeem the property from the municipality within one year, the municipality offers the property for sale, usually at the fair market value. Arkansas allows property owners to redeem their properties within 30 days of the tax sale. Michigan and Wisconsin offer properties for sale after they have been foreclosed by judgment. Nevada uses tax lien certificates to foreclose special assessments or improvements, such as repairs to sidewalks, curbs, gutters, and the like.
Tax lien states
In tax lien states, no deed or title transfers are executed as a direct result of a tax sale. The winning bidder purchases a tax lien certificate, and a parcel of property is used to secure the lien. The delinquent property owner retains ownership of the property and is allowed an opportunity to redeem the tax lien held against the property. Some states consistently rely upon the sale of tax lien certificates to recoup losses due to delinquent property taxes. These states are considered to be "pure" tax lien states. Twenty-two states are pure tax lien states as well as the District of Columbia and the commonwealth of Puerto Rico, as follows: (Ref. 8)
Alabama Arizona Colorado District of Columbia Florida Illinois Indiana Iowa Kentucky Maryland Michigan Mississippi Missouri Montana Nebraska New Jersey North Dakota Oklahoma Puerto Rico South Carolina South Dakota Vermont West Virginia Wyoming
Different tax lien states have differing systems for recouping delinquent real estate tax. Florida is a tax lien state, but the established tax sale system does not allow a tax lien holder to foreclose the property owner's right of redemption. The sale of tax lien certificates is strictly an offer to investors to collect interest on the cost of a tax lien certificate in return for paying the delinquent property tax. If the property owner fails to redeem a tax lien certificate during the redemption period, the deed to the property is offered for sale at a second auction. During this phase of the Florida tax sale system, Florida converts to a tax deed state.
Tax Lien Certificates
A tax lien certificate is a real estate document that serves as evidence of indebtedness against a parcel of real estate. When tax lien certificates are sold, the parcel of real estate serves as collateral to secure the purchase of the tax lien certificate. Tax lien certificates are sold by tax lien states and in specific jurisdictions of some tax deed states. Different states refer to the document by various names that include the following:
Tax Lien Certificate Tax Sale Certificate Tax Sale Receipt Tax Lien Tax Claim Tax Certificate Certificate of Purchase Certificate of Purchase Certificate of Sale Certificate of Delinquency Receipt Showing the Amount Paid Receipt for the Purchase Money
Form 1 (see page 22) shows a sample of a tax lien certificate purchased in Iowa during a 2001 tax sale. In Iowa, a tax lien certificate is issued as a certificate of purchase.
When an individual purchases a tax lien certificate, that individual is, in effect, making a loan to the property owner for the payment of delinquent property taxes. The tax lien certificate indicates the particular individual making the loan and assigns the specified property as security against the loan. The particular parcel of property may serve as collateral in part or as a whole. The property owner must repay the loan in an amount equal to the delinquent tax and associated penalties, interest, and costs of the sale to maintain ownership of the property. As long as a tax lien is outstanding, the property owner may not borrow against the property; nor may the property owner trade, sell, or otherwise dispose of the property. If the property owner fails to repay the loan within a predetermined period of time, the tax lien certificate holder is entitled to foreclose the property owner's right to redeem the property or the property owner's right to redeem the portion of the property held and assigned as collateral. Foreclosure permits the transfer of title to the deed from the property owner to either the tax lien certificate holder or both the lien holder and property owner. When a tax lien certificate is secured by less than 100 percent of the real property, foreclosure transfers the title of the property to both the lien certificate holder and property owner as tenants-in-common.
The sale of tax lien certificates benefits the taxing municipality, the property owner, and the purchaser. The taxing municipality benefits from the sale process by collecting the delinquent tax amount needed to fund government services. The timeliness of payments from investors not only allows the government to fund services, but also allows the government to provide uninterrupted services to the taxpaying community. The property owner who is delinquent in paying taxes benefits from the tax sale process because he or she is given an extended opportunity to pay delinquent property taxes. However, the inclusion of penalties, interest, and costs increases the amount that must be repaid to the lien certificate holder. The investor benefits by receiving, in most cases, either a high return on investment dollars used to acquire the tax lien certificate or ownership of the property if the loan is not repaid. The return on investment dollars is realized from the interest, penalty, or both that is required for redemption of the tax lien certificate.
Ownership is realized once the investor engages in specific procedures to foreclose the right of redemption and obtain the deed and right of possession to the property.
Different states have different methods of enforcing the laws pertaining to delinquent real estate taxes and tax lien certificates. State laws dictate the particular processes for conducting the annual tax sale. State laws, for example, may allow for the tax sale to take place at any given time, on a specific date, or within some specified period of time. The particular city or county treasurer is responsible for determining where and when the tax sale is held, though the treasurer may allow an outside entity to host the sale on his or her behalf.
Tax Lien Certificate Costs
Most states are governed by statute that dictates the process for delinquent property tax sales, the assignment of tax lien certificates, the redemption of tax lien certificates, and the foreclosure process. In states that do not have statutes governing the annual tax sale, a reputable governing body is responsible for defining the process and entities responsible for the sale. The treasurer of each municipality usually makes a determination of the cost to be applied to tax lien certificates. The cost may include any of the following:
Delinquent property tax amount Other delinquent fees assessed against the securing real property Penalties Interest Administrative fees Cost of the tax sale Cost of issuing the tax certificate
The delinquent property tax amount is always included in the cost of a tax lien certificate. Other delinquent fees may include unpaid costs assessed for water and services provided by the governing body. Either state statute or a governing body of the particular jurisdiction establishes penalties, interest, administrative fees, and the cost of auctioning tax lien certificates at the tax sale. Each municipality's determination of the combination of costs is the advertised opening bid amount offered when tax lien certificates are auctioned at the delinquent property tax sale. The opening bid amount usually represents the minimum amount that must be bid.
Right of Redemption
The sale of a tax lien certificate does not indicate a transfer of ownership to the tax lien certificate holder; nor does it allow the certificate holder any right of possession to the property that secures the tax lien certificate. States allow property owners to hold title to their property during the redemption period. This is inclusive of the property owner, mortgage lenders, and other lenders that may hold a deed of trust against the property. The delinquent property owner owns the property and has all rights of possession to the property until the lien certificate holder is able to foreclose the property owner's right of redemption. Even then, the owner may still hold partial ownership if the tax lien certificate was purchased by competitively bidding down ownership in the property.
Anyone can pay the redemption amount on behalf of the property owner, but only the bidder at the tax sale or the over-the-counter purchaser is able to purchase a tax lien certificate. The tax lien certificate holder, however, may assign his or her interest in the tax lien certificate to another party by entering into a contractual agreement with the other party or assignee. Contractual assignments are common among institutional investors that send hired representatives to tax sales. A representative bids on behalf of the company, using his or her own identity and transfers interest in any lien certificates acquired to his or her employer. The assignment is recorded with the taxing authority, and upon redemption, the last recorded assignee is paid the redemption amount.
The treasurer or tax collector is responsible for handling the redemption of tax lien certificates. He or she collects the redemption amounts and notifies the last assigned and recorded certificate holder of the redemption. Upon receipt of such notice, the tax lien certificate holder is required to return the tax lien certificate to the treasurer or tax collector. The treasurer or tax collector is then responsible for paying the redemption proceeds to the party to which the certificate is assigned.
Redemption Period
The delinquent property owner has a responsibility to redeem the tax lien certificate from the tax lien certificate holder by paying the delinquent tax assessed against the property plus interest, penalties, fees, and costs of the sale within a specified period of time. This period of time is known as the redemption period, and it may range from 60 days to 4 years, depending upon the particular state's statutes. The start of the redemption period is usually established as the day of the tax sale and may be applicable to tax lien certificates sold over-the-counter or auctioned at a later date.
Interest and penalties may be applied to the redemption amount. Annual interest rates generally range between 6 percent and 24 percent of the tax lien plus associated costs, as established by state statute or a governing body. Penalty amounts are also established by state statute or a governing body and are usually set at a fixed percentage of the tax lien amount. Estimates indicate that property owners will redeem between 95 percent and 98 percent of all tax lien certificates offered for sale during the redemption period.
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Excerpted from THE COMPLETE GUIDE TO INVESTING IN REAL ESTATE TAX LIENS & DEEDSby Jamaine Burrell Copyright © 2006 by Atlantic Publishing Group, Inc.. Excerpted by permission.
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