A real estate tax sale occurs when a government entity puts a piece of real estate up for sale to recover past-due property taxes the owner hasn’t paid. There are two main types of tax sales: tax lien sales and tax deed sales. There are both state and municipal laws that govern tax sales.
Written by Attorney Curtis Lee.
Updated October 11, 2021
If you own real estate, you already know that you have to pay property taxes on it. But if you fail to pay these taxes, your state, city, or county tax authority could put your property up for a tax sale. Depending on which state you own property in, the tax sale could take the form of a tax lien sale or a tax deed sale. Read on to learn about both types of tax sales and what they entail.
Real Estate Tax Sales
A real estate tax sale occurs when a government entity puts a piece of real estate up for sale to recover past-due property taxes the owner hasn’t paid. There are two main types of tax sales: tax lien sales and tax deed sales. There are both state and municipal laws that govern tax sales. States and counties may also have their own rules and requirements for the real estate tax sale process.
Another variable affecting tax sales is which government entity is holding the tax sale. Any government entity that assesses and collects property taxes or other government debt can hold a real estate tax sale. This can include tax collectors for:
Whatever requirements are in place, they must be closely followed. If they’re not, the property owner or purchaser of a property at a tax sale loses their right to the property.
Real estate tax sales are popular with real estate and other financial investors. They can be relatively low-risk investment opportunities and give investors the chance to buy real estate at prices well below fair market value. Another reason investors find tax sales so appealing is that any other financial rights to the property, such as other liens or mortgages, are often wiped out, so the investor gets the property free and clear.
General Requirements for All Tax Sales
Though the specific details of a tax sale will depend on where the property is located. The majority of tax sales require the following forms of notice, whether they’re tax deed or tax lien sales. These notices are meant to inform all interested parties and the general public about the tax sale. They also help protect the legal rights of all interested parties (including the property owner). Notices include:
A letter sent to all property owners and entities with any legal or financial interest in the property (like a mortgage holder). Most of these are found on the property’s public records. This letter could be personally delivered, but will usually be sent by certified or registered mail.
A public notice published in the appropriate local newspaper, as outlined by local or state law.
A notice posted at the local courthouse or other public location.
A posted notice on the property itself that can easily be seen by the general public.
Tax Deed Sale
When there’s a tax deed sale, the buyer is purchasing the property itself. This means they’re not just buying title to the property, but also any unpaid tax debts. Most tax deed sales will take place through an in-person or online auction.
The minimum bid amount can vary. It could be as low as the amount of the delinquent taxes plus any penalties, interest, and costs associated with the sale. But it can potentially be higher, equal to 80% of the forced sale value of the property, minus any liens. The buyer with the highest bid will receive title to the property.
After making the winning bid, the highest bidder will often have a short time to pay for the property. In many jurisdictions, it’s 48 to 72 hours, but it can be less in some places. If the buyer doesn’t make full payment before this deadline, they could lose the property, including any auction deposit.
Even though the tax sale will typically remove any other liens or creditor’s rights to the property, the buyer will often only get a quitclaim deed. This is a deed where the seller only transfers whatever interest they have in the property. With a quitclaim deed, the seller makes no promises about the status of the property’s title.
Quitclaim deeds are similar to someone selling a car in “as is” condition. In this type of sale, the seller doesn’t guarantee the vehicle or its condition or provide a warranty. The buyer doesn’t know what to expect from the car, in terms of repairs or needed maintenance.
After receiving the quitclaim deed, the buyer needs to do in-depth research into the property’s title. And if it turns out it’s subject to one or more claims, the buyer may need to take legal action to settle this dispute over the property’s ownership. This is known as a quiet title action.
Right of Redemption
In most jurisdictions, there will be a right-of-redemption period after the public auction or sale. During this period, the original property owner has the opportunity to get their property by reimbursing the buyer what they paid at the tax sale.
Tax deed purchasers shouldn’t make any major improvements to the property until after the right-of-redemption period is over. If the original owner redeems the property, they get it back along with any improvements the tax sale buyer made. The “attachment” of the improvement to the property is called appurtenance.
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Tax Lien Sale
In a tax lien sale, the buyer isn’t purchasing the delinquent property. Instead, they’re buying the legal right to collect the unpaid real estate tax debt from the property owner. After the sale is over, the buyer receives a tax lien certificate. The property owner must then pay the buyer any back taxes plus penalties and interest. If the property owner doesn’t pay, then the lienholder can start the foreclosure process to get the title to the property. But they must first wait for any applicable redemption period to expire. If the buyer gets the title, they’ll often receive a quitclaim deed.
Tax lien sales are only available in about 2,500 jurisdictions (cities, counties, townships, etc.) across 23 states. And each state has limits on the penalties and interest that the tax lien owner can charge and collect.
The lien amount will usually be for the total of the back taxes, accrued interest, penalties, and other costs connected to the property’s tax sale. In situations where there’s more than one bidder for the same tax lien, there are five methods to decide who the buyer will be.
Bid down the interest: The tax lien will go to the buyer who’s willing to accept the lowest interest rate.
Premium: The winning bidder is the person who offers the highest amount of money over the lien amount.
Random selection: The purchaser is chosen randomly among interested buyers.
Rotational selection: Each prospective buyer is given a number, starting with the number one. This person gets a chance to buy the first tax lien up for sale. They can either make the purchase or refuse. If they refuse, the person holding number two can decide if they want to buy the tax lien or not. This process continues until the tax lien is sold. After deciding to buy or pass on a tax lien, a bidder won’t get another opportunity to purchase a tax lien until their number comes up again after everyone else has had their first opportunity.
Bid down the ownership: The winner is the buyer who agrees to accept the lowest percentage ownership of the tax lien.
If a tax lien doesn’t get sold at the auction, it gets “struck off” (sold) to the jurisdiction holding the auction.
Right of Redemption
After either type of tax sale, the original property owner has a right-of-redemption period to pay off their entire tax debt. This includes unpaid taxes, penalties, sale costs, interest, and fees.
During the redemption period following a tax lien sale, there are limits on the type of contact the tax lien buyer can have with the original property owner or anyone else with an interest in the property, like a mortgage holder. These limits revolve around the tax lien buyer demanding payment or threatening foreclosure. If the tax lien buyer violates these rules, they could:
Lose the lien (and not get reimbursed);
Get banned from future tax lien sales; and/or
Face criminal charges.
A tax sale occurs when a piece of real estate gets sold by a government taxing authority to recover unpaid property taxes. In a tax deed sale, the entire property is transferred to a new owner. But if the sale is only for the right to collect the tax bill, then it’s a tax lien sale. Either type of sale requires the government entity holding the sale to send and post the required legal notices to the public and interested parties. After a tax sale, many states give the original owner the right to take back the property if they become current with their property taxes.