We had great comments and questions in response to the last blog post on the priority of tax liens and subsequent tax payments. And some of them where answered by subscribers – Great Job! I wanted to respond to some of the issues and questions that were raised and put in my own 2 cents.

It all started when Greg posted this comment:

“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. time 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”

So lets go over this scenario and analyze it.

You’re foreclosing a tax lien so you have to notify all lien holders on the property and you have 2 choices, you can redeem the subsequent tax lien or not. If you don’t redeem the subsequent tax lien, then that lien holder can foreclose on you when their redemption period is over – in another year. So you redeem the lien. When you redeem the lien, it gets added to your lien and in order for the property owner to redeem sometime during the foreclosure process they would have to pay the entire amount owed which includes all that you’ve paid for your original tax lien and interest, plus what you’ve paid to redeem the subsequent lien and any outstanding taxes plus interest on those payments. So you do not loose money.

Now if you are actually able to foreclose on the property you don’t get your money back or the interest, but you do own the property.

Christian did a great job of responding to this comment

Then Joe asked a question about when the redemption starts and Greg did a great job of answering that question.

But then Greg responded to Christian’s comment with this

“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.”

I do have a comment to make about this suggestion Greg,

If you are the prior lien holder, a subsequent lien holder cannot redeem your lien, and they do not have to pay you in order to foreclose. If you let your lien go in the hope that they will foreclose you can lose your right to the property. So the advice that Joe gave about paying your sub taxes should be followed. Although there are counties in AZ that will sell your lien the following year if you don’t pay your subs, not all counties do this.(For more about this see my comment in reply to Farley, it should be the last comment on the previous post, as I have closed the comments for that post.)

I have one more comment about Christian’s last comment on carried away with due diligence for tax liens.

I do not check for IRS liens or bankruptcy when doing due diligence for liens. Frankly I think that would take too much of my time and for the amount of times that I would actually have to worry about it, I don’t think it would be worth it. An IRS lien can follow the property 120 days after you foreclose, they have the option of buying your out and when you go to foreclose they also have the option of redeeming your lien.

I don’t know of any state where a property in bankruptcy can knowingly be sold at a tax sale. But any property can enter into bankruptcy once you own the lien and there is no way of your knowing this or being able to prevent it. But as a lien holder you would have to be notified of the bankruptcy. As Christian says in his comment, “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.” I’d like to add to that you may have to also accept less interest than you bid while the property is in bankruptcy.

Thanks for all the really great input and comments. While I have closed the comments to that post, if you have further comments or insights on this topic you can submit them below.

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