How Do Tax Sale Properties Work

Q: I am a little confused about how tax sales work. If a property is secured by a debt instrument (e.g. bank mortgage) and the property is sold for the amount of the back taxes only, who pays the mortgage?

A: That’s a great question. In most states, if a homeowner has failed to pay real estate taxes that may be due on his or her property, the local jurisdiction that collects the taxes has the right to sell off the property for the amount of unpaid taxes. Generally, there is a time period by which the homeowner can come up with the money to pay the tax bill even after the property has been “sold” for unpaid taxes.

To simplify the process, tax bills are due by a certain date. If taxes are not paid by that date, the homeowner would owe a penalty on the amount until paid. After a certain date, however, those taxes are considered unpaid and are listed in the rolls of unpaid taxes.

After another period of time, these properties with delinquent real estate taxes are set for a tax sale. At that tax sale, prospective buyers can bid the amount owed on the taxes to receive “title” to the property. In some cases, some tax buyers may bid more than the amount owed on the taxes just to get the property and in other cases the properties may not even get sold.

Once the properties are sold and the tax buyer has the title to the property, the homeowner has a certain time period to redeem the unpaid taxes, plus fees and penalties.

If the homeowner or the lender on that property redeem the taxes, the tax buyer loses out and does not get to own the property but if nobody comes forward to redeem the tax bill, the tax buyer ends up owning the property and the ownership interest of the former owner of the property and lender’s is wiped out.

So to answer your question, nobody pays the mortgage. The mortgage gets wiped off the property and the lender loses its interest in the property. The homeowner also loses the property, but will still owe the lender the money owed on the original loan. To avoid losing the properties, lenders usually require that the borrower set up a tax escrow. The tax escrow is funded by the homeowner’s money and when the real estate tax bills come out, the lender has money to pay the bills.

The real estate tax sale process differs from place to place so a tax buyer has to become quite familiar with the mechanics and timing to buy a property at a tax sale. Dates will differ from county to county and state to state. Frequently, prospective tax buyers will spend some time at the tax sales and will spend countless hours looking over real estate tax records to become familiar with the process before actually bidding on properties.

For a homeowner, the best advice is to make sure that the real estate tax bills get paid on time. Even if the lender has a real estate tax escrow in place, the homeowner should monitor that the real estate tax bills have been paid.

After all, it’s your property on the line.

Published: Mar 27, 2008


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