In the previous video, we outlined the foundation of tax lien investing. We discussed what property taxes are, what they’re used for, how they’re assessed by the county, and what happens when a property owner fails to pay property taxes at the time that they’re due. We also outlined the basics of how an individual can purchase a tax lien certificate, essentially bailing out both the county and the property owner.
But the question arises, what happens if the property owner never pays the property taxes plus the accruing penalty?
This “worst-case scenario” actually can become your best-case scenario. Let’s discuss how that works.
TAX LIEN PRIORITY, REDEMPTION PERIODS, AND EXPIRATION PERIODS
In our previous video, we discussed the priority of a tax lien issued by the county and how it becomes priority no matter when it was issued in relation to other liens against the property. The tax lien automatically jumps ahead of mortgages, mechanics’ liens, and others. The only liens that remain equal to or similar, meaning that they may need to be negotiated or removed, are other government liens or encumbrances.
Those other government liens or encumbrances can be found through county records or through a quick title search.
Due to the power of the government-issued tax lien, and since the county has assigned its interest in the tax lien to the investor through the tax lien certificate, if the property owner fails to pay their property taxes during a designated time period, then tax lien certificate holder has the option to take ownership of the property through foreclosure.
Here are a couple examples of state statutes that describe this ability:
ARIZONA STATE STATUTE 42-18201: …at any time beginning three years after the sale of a tax lien but not later than ten years after the last day of the month in which the lien was acquired pursuant to section 42-18114, if the lien is not redeemed, the purchaser or the purchaser’s heirs or assigns, or the state if it is the assignee, may bring an action to foreclose the right to redeem.
FLORIDA STATE STATUTE 197.502: The holder of a tax certificate at any time after 2 years have elapsed since April 1 of the year of issuance of the tax certificate and before the cancellation of the certificate, may file the certificate and an application for a tax deed with the tax collector of the county where the property described in the certificate is located.
There are a few dates and time periods that are important to remember for this, though. The first is primarily referred to as the “redemption period” and is the time that the property owner is protected from foreclosure. Remember that the county works for the people and isn’t in a hurry to make things worse for the property owner. They also need to remain viable and need to provide incentives to individuals to provide the money that they need to remain viable. It’s a delicate balance.
The county sells the tax lien certificate to remain viable, they pass the interest penalty to the certificate holder, but the collateral for the deal is that the tax lien certificate holder can take ownership of the property if needed to recoup their investment.
In Florida, for example, the time that the property owner is protected from foreclosure is 2 years. During this time, the interest penalty is accruing but the property owner is left alone. They are not allowed to be contacted or harassed for payment. They receive periodic reminders and notices from the county, but no notices from the certificate holder are allowed.
If the redemption period expires, and the property owner still has not paid their delinquent property taxes plus interest, then the tax lien certificate holder has the option to foreclose, through the power of the government-issued tax lien, to take ownership of the property.
In most cases, if it gets to this point, the property owner does not live in the property. It is very rare when a foreclosure takes place on a tax lien certificate and the property owner still lives in the property; it happens, but it’s rare.
We will discuss the foreclosure process in more detail in a later video.