What is a tax certificate? A tax certificate is an interest bearing first lien representing unpaid delinquent property taxes which are offered for sale by the county in which the property is located. All unpaid county real estate taxes become delinquent on April 1 each year with a penalty of 3% added to the unpaid taxes. Once taxes have become delinquent, the county in which the property is located can and may hold a tax certificate sale to auction off tax sale certificates. A tax certificate becomes an enforceable first lien against the property and is valid for no longer than 7 years (this period may be extended if the property files bankruptcy).
A tax certificate does NOT convey title to the property, it is merely an interest in the property. Tax certificates are kept as an electronic file within each counties Tax Collector’s office. Interest on tax certificates accrues simple interest on a monthly basis. When a tax certificate is “redeemed,” the tax certificate holder receives their investment back (the amount paid for the tax certificate) plus accrued interest up to the date of redemption. If the unpaid taxes and accrued interest are not paid within a prescribed period of time, the county, or holder of the certificate may sell the tax certificate at a county tax sale. If no action is taken by the tax certificate holder within 7 years of the issuance of the tax certificate, the tax certificate is cancelled and the certificate holder will lose his or her investment.
What is a tax lien sale? A tax lien gives the government (generally the county in which the subject property is located) the authority to sell the property to collect the delinquent taxes and transfer the property to the purchaser who submits the highest bid at the tax lien sale. Such sales are called “tax deed sales” and are usually held as auctions (depending on the county the sales are either in person or are held online) where the minimum bid is the amount of back taxes and fees owed.
What is a tax deed? A tax deed is a legal document that grants ownership of a property to a government body or investor / corporation when the property owner does not pay the taxes due on the property. A tax deed gives the government the authority to sell the property to collect the delinquent taxes and transfer the property to the purchaser. Such sales are called “tax deed sales” and are usually held as auctions where the minimum bid is the amount of back taxes and fees owed.
What is the Redemption Period of a tax certificate? The property owner can redeem a certificate at any time until the property is sold at a tax deed sale OR until the certificate has expired (seven years after the date of issuance).
What are the risks involved with purchasing at a tax deed sale? There are many but here a few of the most common-
(1) the purchase generally does not have the right or ability to perform a home/property inspection (other than viewing the property from the outside),
(2) no marketable title- properties sold at tax deed sale for nonpayment of taxes do not come with marketable title,
(3) redemption- the property owner has up until the date of the advertised tax certificate sale to pay the unpaid taxes and accrued interest which will nullify the certificate and cause the sale to be canceled,
(4) superior liens may survive the tax deed sale and remain as a cloud on title which must be dealt with by the property owner,
(5) the property may be worthless- such as submerged land, a vacant lot with zoning or building restrictions, or an easement where no structure can be built and may become a maintenance nightmare. Properties may be also be small or “landlocked” rendering them unuseable.
(6) bankruptcy- the current property owner can file bankruptcy and this may put the entire tax certificate-lien-deed process on hold for years.
Tax Certificate Purchaser and Purchasers of Tax Deeds are cautioned to do their homework as this area of real estate investing is a “buyer beware” practice. Investors are cautioned to thoroughly evaluate each property on a case-by-case basis. There are no warranties made by the clerk of the county selling property. The ay be issues such as zoning, access to the property (such as using a private road that crosses over another owner’s property). Purchase must factor in the costs associated with filing a Quiet Title action in order to receive clear and marketable title. These matters as well as many others are issues that the high bidder accepts responsibility for and the obligation to resolve and are not considered or the duty of the Clerk to resolve, investigate, or determine.
Bakalar & Associates, PA is able to assist investors with their pre-purchase due diligence as well as with post sale needs such as Quiet Title Actions. Please speak with a member of the firm as to how we can assist you with your real property needs!