How Does Real Estate Tax Lien Work?
- Almost everyone who owns property pays property taxes to the county in which the property is located. Each state differs in the way it collects the taxes. Most commonly, taxes are paid annually or quarterly. If there is a mortgage on the property, the lender may escrow to pay the taxes for you. This is done by taking the annual tax bill, dividing it by 12 and adding that amount to the monthly mortgage payment.
In some states a property tax lien is put on the property the first of every year, even if the taxes are not due until a later date. The lien in this case is removed when the taxes are paid. Other states wait until the taxes are delinquent to put a lien on the property.
If there is a mortgage and the taxes are not paid in it, the mortgage company will be notified if the taxes become delinquent. This way the mortgage company can pay the taxes, if it chooses, to protect its investment. It will then add the taxes to the mortgage payment to get paid back. - There are two things that happen when taxes are delinquent. A tax lien sale is the first. If taxes are not paid when they are due, the county can sell a certificate to the highest bidder. The certificate isn't a deed to the property. The bidders actually bid on an interest rate to charge the property owner for paying the taxes. In this case, the lowest bid wins. If the property owner does not pay the owner of the certificate back within a certain amount of time, the certificate owner can foreclose on the property owner just like a lender. The time the property owner has to pay back the loan varies in different locations.
This is usually a good investment. The interest rates charged to the property owners are normally higher than savings accounts. Sometimes they can be as high as you would achieve in a mutual fund. And in most cases, the property owner does eventually pay the certificate holder. - The second method the county has for collecting delinquent taxes is a tax deed sale. This sale is usually a public auction held by the county where the property is located. The highest bidder gets possession of the deed to the property. Anyone who had a lien against the property is notified of the sale and has the opportunity to bid on the property. If they don't, then they forfeit their rights to their claims. The highest bidder then owns the property free of any other claim.
Anyone who bids on these types of property should do research first. Care should be taken to see the property and know its history. Most counties now have a geographical survey of all properties online. These surveys are a good place to check for such things as wetlands and encroachments. Also, contact should be made with the county before the auction to find out how and when the county expects payment. Many counties want cash the day of the auction.
