Here’s my answer to a question from Mike about subsequent tax payments and lien priority:
Question: From what I have read, it says that if you don’t pay the subsequent taxes on the lien you bought you lose priority. Can you explain this further because if you bought the 2011 certificate and someone else buys the 2012 certificate your foreclosure period starts in 2013 and they start in 2014. So wouldn’t you be able to foreclose first so how are you losing priority?
Answer: Yes in most states the first lien has lien priority. There are 2 points I would like to make clear though. The first is that even though you have lien priority, if you don’t foreclose at the end of the redemption period and after the following year the subsequent lien holder forecloses, you will be foreclosed out of your lien. You can lose your investment and your right to foreclose on the property in this case. However, the subsequent lien holder must notify you when they begin foreclosure and when they do that you may redeem their lien, thus protecting your interest in the property. In fact you can redeem their lien at any time and they my not redeem your lien – thus you have priority.
The other point that I would like to make is that in some counties in Arizona if you do not pay the subsequent taxes they will sell your lien along with the current lien at the next tax sale. Some counties will only allow one tax lien certificate to exist on a property and this is how they control that.
Thanks for your question Mike,
Joanne
By Farley February 2, 2011 - 7:51 am
Regarding the original comments by Joanne. Your comments reflect what I understood, however, from a terminology perspective, I was under the impression that the subsequent tax lien holder was a higher priority. The reason the subsequent lien holder is considered higher priority is that he must be paid off before you can take possession of the property.
By Joanne February 2, 2011 - 3:22 pm
Hi Farley,
this is not true in all states that the subsequent tax lien has to be paid off in order to foreclose, but if you foreclose with a subsequent tax lien on the property, the subsequent lien will still stand, so that the subsequent lien holder may foreclose when the redemption period is over. Of course as the the prior lien holder or new owner of the property you may redeem the lien at any time.
If the prior lien holder does not foreclose and then the redemption period passes for the subsquent lien holder, and the subsequent lien holder forecloses, they will foreclose out the prior lien holder, and the prior lien holder can lose his or her investment if they do not redeem the lien.
By RichB January 31, 2011 - 11:23 pm
Interesting thread. Can counties have different policies when it comes to multiple lien-holders? I am from Illinois, and was wondering if their can be variations like this within counties, or is this practice of 1 or multiple holders controlled by the State Legislature?
By Joanne February 5, 2011 - 2:27 pm
Rich, there were so many comments, one right after another that I missed your questions about if variations of 1 or multiple lien holders vary by county or are controlled by the state. They would all have to adhere to the state statutes, so read the state statutes that pertain to tax sales in your state carefully. But as you can see with comments about AZ even the same states certain procedures can vary. For instance some counties in AZ allow more than one certificate to be sold on the same property, but some do not. In most states multiple tax liens are allowed, so the moral of the story here is PAY YOUR SUBSEQUENT TAXES in the states that allow you to pay them in order to protect your interest in the property.
By Christian January 31, 2011 - 5:20 pm
P.S. To previous comment: Fortunately in my state if the property owner is already in bankruptcy, the treasurer will not even sell the lein so a records search devoted to this issue is superfluous.
By Christian January 31, 2011 - 5:17 pm
Greg…Wow! You are cloning my thought process! Typically I tend to simply do a drive by to verify the existence of the property, condition, neighborhood, rentability, etc and a bit of online parcel, GIS mapping, and assessment data to verify property classification, access, taxable value, and anything else that might pop out as a red flag during those processes. Recently I have also begun to stress…under that category of “what else can go wrong”…about any other leins or claims that might survive the tax deed issue. In my state delinquent personal property taxes can attach to the real property and I have yet to determine the implications and priority that they carry. Fortunately bankruptcy seems to merely delay the inevitable and while you may not end up with the deed, the tax lien, being secured by the property, takes a first position ahead of other creditors looking to proceeds from the seizure and sale of the property and continues to earn interest for the duration of the proceedings. Bottom line is that you eventually get your principal plus interest, etc, but the wait can be a lot longer than otherwise expected.
By Greg January 31, 2011 - 4:53 pm
Christan: I agree but…
I’m still trying to get a sense of whether some due diligence makes sense from a cost/benefit point of view – specifically due diligence related to title searching (eg. for liens that would survive a tax lien foreclosure) and checking if an owner is in bankruptcy.
By Christian January 31, 2011 - 3:22 pm
Greg…and your observation should serve to emphasize the dictums: 1) DO YOUR DUE DILIGENCE! 2) NEVER buy a lien on a property that you would not want even if it were given to you!!
By Greg January 31, 2011 - 3:06 pm
Joe: Varies by state. It’s important to read the state code and county rules for every sale. In AZ the 2009 delinquent taxes are sold in 2011 and foreclosure can begin 3 years after that sale. If not redeemed no foreclosure action is take for 10yrs then the interest expires and becomes worthless (but I think there is an exception related to bankruptcy towards the end of that 10yr period.)
Christian: Yes. The risk I described is mitigatable by controlling the property via paying the subsequent taxes. In AZ I believe that this can be done in some counties and the rate is the same as the original lien was bid. The flip side of this is that if you want to be redeemed and not get the property (eg. if it looks like it is unlikely that the owner would redeem but the property is not attractive to you (eg. perhaps because you bungled your due diligence)) then it could be desirable to let other lien holder exist in the hope that one of them will choose to foreclose and redeem your lien in the pursuit of their foreclosure.
By Christian January 31, 2011 - 2:38 pm
The obvious strategy should be to always pay every subsequent year’s taxes in order to consolidate control and eliminate these “what ifs”.
Also, while I invest in a different lein certificate state, for what it is worth, in that state the amount of the redemption of year #2 would have been incorporated into your year #1 lein (either as a cost or add-on) such that it would have been included in the required redemption amount so when the owner redeemed, you would have received full payment. Always purchasing every subsequent year taxes retains control and avoids any other “interested party” becoming involved and simply increases the amount of funds that you have invested and receiving the interest anyway…which is the primary reason for investing…rather than the much, much, much less likely event that you end up with the property. Contrary to the late night info-mercials you are not “buying your dream home for pennies on the dollar” but rather investing your money in a potentially well secured venue with a good rate of return.
By Joe Jackson January 31, 2011 - 2:36 pm
Does the foreclosure date of a tax lien begin the date you puchase the lien? On a 3 year holding period, if purchased in December ’08, will the foreclosure period begin in December ’11?
By Greg January 31, 2011 - 12:27 pm
#3 should be “time passes”
By Greg January 31, 2011 - 12:16 pm
A specific blog post discussing this risk:
“Tax Lien Foreclosure: The Danger of Competing Lien Holders” by Michael Fleishman (a lawyer in Tuscan):
http://www.tucsonlanduselaw.com/2010/05/articles/tax-lien-foreclosure/tax-lien-foreclosure-the-danger-of-competing-lien-holders/
By Greg January 31, 2011 - 12:14 pm
So one gotcha that I read about in AZ is the following scenario:
1. You get a year 1 lien on a property for $1000
2. You don’t exercise your right to go for the year 2 lien (say, for $800) on the property and someone else gets it. (and you are in a county like Maricopa where the can be multiple years of liens owned by different owners)
3. line passes
4. you begin foreclosure proceedings
5. you pay off the year 2 lien as part of the foreclosure proceedings
6. THEN the owner redeems your year 1 lien
=> you paid to redeem the year 2 lien but never got compensated for it => YOU LOSE MONEY