I came across the terms "tax lien" and "tax sale" and wasn't sure if they are the same.
Q. I came across the terms "tax lien" and "tax sale" and wasn't sure if they are the same. How does a tax sale work? If the government put a lien against a house, what will happen to the existing loan from the lender?
A. Let's look at what a tax lien and tax sale are, how they work and what happens to the property and any outstanding loans or mortgage attached to them when they are imposed.
This, however, is only a general overview. The laws and regulations governing their use vary from state to state and, quite often, within the different counties, cities, municipalities, taxing authorities or even property owners' associations in each state. So talk to an attorney familiar with the rules being used where the property is located.
In real estate terms, a tax lien is a claim or judgment against the property. The property owner owes property taxes on a specific piece of property to a specific taxing authority. The court places a lien on the property and rules that once that property is sold, the person with the lien gets paid, plus interest. The money will go directly to the lien holder. The escrow company or escrow attorney handling the transaction hands out the money, and the person selling the property has no say-so in the matter, since paying off the lien is a court-mandated condition of sale.
In some cases, a taxing authority will sell the lien instead of the property. This is sometimes called a tax certificate sale. Let's say the owner owes the city $1,000. A third party pays the city that $1,000 and then puts a personal lien on the property plus interest. These are sometimes sold at auction. So, when the property is sold, the third party gets the $1,000 plus interest. It's worth noting that the property owner has no say at all in the amount of interest being charged. That is set either by the taxing authority or, when the lien is sold, by the person buying the lien.
In terms of a tax sale, the taxing authority -- or the person who bought the lien -- forecloses on the property and then sells or auctions it to recover the money it is owed. As we'll see, however, this can lead to court battles.
When this happens -- and it does happen -- the property can be separated from the mortgage and from any other claims against it. The value of the property is not the issue, just the back taxes.
Bill Slocumb, a Bakersfield, Calif., attorney and real estate expert, explains that in a case like this, "the person who buys the house usually gets it free and clear of all liens. So the mortgage holder gets wiped out. This really happens." If the person who owned (past tense) the property still owes money on it, the person still owes the money. "A mortgage is a promissory note -- call it an IOU -- secured by the property. The property is what gets sold. The IOU, however, is still valid. You still owe the mortgage company the money and they can still come after you for it. And they will."
Slocumb points out that "you can take real estate courses that claim to teach you how to buy tax liens and tax sales and become a millionaire."
The courses talk about buying million-dollar homes for only a few thousand dollars. But the courses don't really go into the details, all the different rules and regulations that have to be followed in different locations, how many people and companies you will be competing against, the types of properties that normally fall into this category, or about how hard it is to actually make any money at it. Nor do they point out that these sales can be challenged, and that court challenges can be expensive. In April, UPI reported that the U.S. Supreme Court ruled in favor of a Little Rock, Ark., man who claimed that the state failed to take reasonable steps to warn him that his house would be sold for back taxes.
The time between missing a tax payment and the lien or the property being sold depends on the state and the agency collecting the taxes. In any case, the taxing agency is required to attempt to let the property owner know that the property is in danger.
Slocumb says that if you are thinking about buying or bidding on a tax lien, certificate or sale, "first talk to a lawyer who specializes in them in that area."
If you would like to avoid getting caught up in a tax lien or tax sale, arrange your home loan so that your mortgage company makes your regular property tax payments automatically for you.
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