Foreclosing
On A Tax Lien
In
the event of non-payment on a tax lien certificate it becomes
necessary to foreclose on the property. There are two main
methods that this will happen depending on the state, which
I’ll get intobelow. First there are some important notes
about your tax lien investment.
Remember
that the lien is in first position. So if for some reason
the bank forecloses on the house because it is in default,
the lien holder is paid first, then the bank, then any other
liens.
Now,
if the lien holder needs to foreclose on a house because the
redemption period is up, and there is still a mortgage on
the house, in most cases the bank will come in and pay off
the lien to protect their investment. This is because if YOU
foreclose on the house, they lose their mortgage and possibly
hundreds of thousands of dollars.
If
the redemption period is over 2-3 years, it's possible that
multiple liens were purchased on the house in successive years
after yours was purchased. If a bank forecloses on this property
lien 1 will get paid out first, then lien 2, then the bank,
etc...
If
the original lien holder forecloses on the property themselves,
then the bank mortgage is wiped out as usual, but they must
pay off lien holder 2 and 3, if they exist, before they can
do anything with the property. At that point lien holder 1
will acquire the property free and clear or the property will
be sold at a tax deed sale and lien holder 1 will be paid
off not only for their original investment and interest, but
also for the money they had to pay to any other lien holders.
These two methods work as follows:
Free
and Clear
The
lien holder waits for the redemption period to go by. If the
lien is not paid off they must notify the county of their
desire to foreclose. This may involve:
- paying
an administrative fee
- filling
out paperwork
- sending
a notice to the property owner
- publishing
a legal notice
- paying
off other liens on the property
This
method is used by most lien states.
Tax
Deed Sale
The lien
holder forces a tax deed sale to occur. The county handles
all notices and then sets up the sale. The property owner
can redeem up to any time before the deed sale. The Lien holder
will receive a credit for the lien, and the interest owed
and any other fees paid. If for some reason the bidding on
the deed does NOT exceed this credit, the lien holder receives
the property.
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