Buying a house at a tax lien sale

How does that work? If (as I gather from the 'net) you aren’t buying a house but a lien, what do you actually own?

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Ok, I stayed up late and saw a few minutes of this John Beck character showing flash cards of houses that would cost > 150,000$(CDN) here going “This house was purchased for 849.22, and would easily fetch 25,000 at public sale!!”

Firstly, why is his amazingly-big-profit final figure so low? Location?

Secondly, how does this actually work? This guy is apparently a scam, but the idea it’s based on exists. So… what is a tax lien? Why would the government sell it, and why for so little? If you bought one, what does that really get you? Is it a worthwhile way of buying a house, or are the hassles too great?

About the only thing I know about real estate or financial affairs is that my local bank branch has a bigger place than I’m likely to have for a while.

If someone is unable to make the tax payments on a piece of real property for a given period of time (which varies from jurisdiction to jurisdiction), title to it can be taken by the taxing authority (state, county, town, city, etc.). It is then generally sold at auction, with the taxing authority requiring a minimum bid of the amount of taxes owed. High bidder gets the property.

In general, title is passed to the taxing authority and then to the winning bidder. However, in some jurisdictions, the tax-debtor prior owner has a period of time (usually a year) to redeem the property by paying the back taxes plus interest.

In other jurisdictions, what is auctioned is a lien on the property, which functions to give title after a statutory period if the tax-debtor is unable to clear back taxes and regain clear title.

And there are no doubt other variants on the same scheme.

What if the house is mortgaged or something - wouldn’t the bank do something in that situation?

Your first case seems fairly clear, but in the second, what do you ‘have’ if the person does clear the taxes? I assume they would have to pay you? Wouldn’t that leave you in the undesirable situation of having to collect from a possibly unfriendly individual?

You, the buyer as the new owner, are still liable for all other liens.

Meaning that just because the city has a lien on the property doesn’t mean the bank has any less claim to it?
So if you do pay the 849.22 you would then own not only a house but also a mortgage already?

Would that be what they call ‘the catch’?

If you own a lien you don’t own the property, but a claim to interest in the property. Other lien holders could include banks, contractors, and others. When you buy a tax lien, the homeowner still owns the house. You’ve got to figure out how to get the money out of the owner, or you can file to foreclose. But there are other lien holders. If you’re able to foreclose, you’ve got to satisfy the other lien holders, either by selling the property and paying them off, or taking out a new mortgage to pay them off. I don’t know how foreclosure works, though – who “owns” the house? All of the lien holders, or just the person who foreclosed?

Part of a title search is to ensure that there aren’t any unknown lien holders.

Most banks require an escrow for payment of taxes if you have less than a certain amount of equity. If you start to not pay the mortgage company, they’re likely to foreclose before the government does. So if you buy a tax lien, the chances are better than good that you’ve got a house that’s either paid off, or has a lot of equity potential, or is just a piece of crap that’s not worth anything.

Anyone know this: government would have first claim above the mortgager, right? What happens when you buy the government’s lien? Do you go to the end of line, since you’re not the government? Or are you still first in line?

IANAREI (real estate investor) but I’m guessing a tax lien sale is just different wording for a Sheriff auction’s sale. In this situation, the house has been confinscated by the government, and the bank is out any balance on the mortgage. Of course they are out of that money if the sale of the house doesn’t cover the mortgage. So as a result, if a bank has a claim on a house that is being auctioned, there is almost always a rep. bidding the house up to a point where they can make money off of the sale. So while it’s possible to find a house where there is no other interested party, somebody else is always trying to get a slice of the profit, and will bid the price up.

It’s a common thing here for "investing groups "to pay up the taxes on delinquent properties and then send a letter to the owner informing them that they’ve paid the tax lein on the property and that the owner has xx days to reimburse them plus a “processing fee” of $250 or they will seize the property.

This does require that the year has passed and they actually can seize the property at any time. The $250 “processing fee” lets the original owner off the hook if they want to pay it.

Since I have purchased property from a tax sale I will tell you my experience and preface with this caveat…I live in Northeast Pennsylvania, your local laws and sales may be different.

We have 2 different kinds of tax lien sales here. After nonpayment of taxes for a set period, your property gets put up for auction at an “Upset Tax Sale”. Property bought at this sale comes with all liens still attached and the liens become your responsibility.

Any property not sold at the “Upset Sale” usually goes up for sale about 1 year later at a “Free and Clear Sale”. THis is the sale where you get the really good deals. Property purchased at this sale is “Free and Clear” of all liens. My wife and I purchased the lot next to our house ( about 1/2 acre with a trailer on it) for $680.00 dollars at the county Free and Clear sale.

The only catch to a free and clear sale is to make sure you have a search done at the courthouse to make sure that all of the lien holders on the property have been notified of the Free and Clear sale. Lien holders that have not been notified of the sale still have a rightful lien on the property. We hired a local title searcher to make sure the property we bought had all of the notifications mailed out.

There was a $21,000.oo mortgage on the property that is no “null and void” as a lien on the property.

Yes it cost a little extra to have a professional do the title search, but well worth it in the long run. :slight_smile:

Thanks for the replies - I think I’ll obtain my house the old-fashioned way. :wink:

As I understand it, having just participated in such a sale as an employee of a temp employment service , there are 2 ways to make money at such a sale.
Assuming you are the sucessful bidder, the occupant (owner) must pay you interest on your money.
Here in Iowa its 20%.
The other way is if they don’t pay you the delinquent taxes which as stated above has an additional 20% added by the state,the property becomes yours.Don’t know about other leins if it goes this far.
20% ain’t too bad a return on your money but it might take 3 years to get it.

The above is how it was explained to me at the sale.

It depends. 20% APY, or 20% flat? 20% APY for three years is an excellent return, seemingly without a ton of risk. But 20% of your principle over a three year period is not such a good return–I’d rather buy some stocks.

I bought 9 acres right next to me for $75 this way. My $75 bid was the winning bid at the tax auction. Then the owners had three years to pay me back my money @7% interest. I also had to pay taxes on the land each year.

At the end of three years, the owners hadn’t paid me and I was issued a regular deed. YEA!

There was a guy at the tax auction who won the bids on, maybe, 40 different places. After the auction was over I asked him what he was doing. He said he’d get the winning bids on 30 or 40 places a year, and if even one of them didn’t redeem after the three years, he’d make several thousand dollars.

There were no liens on the property I bought, so I don’t know how that would work.

In some jurisdictions, if a waterfront property is involved, the lien might extend to docking facilities, mortgaged ships and other water vessels. In these cases, pending multi-unit condominium contracts may be rendered null and void if said lien creates disputes over control of water access.

In other words, your condominium might dissolve if exposed to a vessel lien. Don’t say you weren’t warned.

…and the crowd goes mild…