Last week a friend of mine was telling me about a conversation he had with one of his clients about tax sales. I thought it was interesting enough to share with you his answer to her questions…
If there is a mortgage on a property (without escrow-ed taxes), the current lender will wait until the last second before they pay the tax bill for the owner, just prior the tax sale (waiting for the owner to pay their own property taxes). A mortgage company does not want to pay the taxes themselves unless it’s in the mortgage documents for the taxes to be escrow-ed on behalf of the owner. If the taxes are in fact escrow-ed, the property will never end up on the tax sale list. The bank automatically pays the taxes annually anyway, as per the mortgage escrow contract.
Escrow-ed taxes are typical with FHA and Rural Development mortgages. Normally a down payment of 20% is required for the taxes not to be escrow-ed, which means conventional financing, land contracts or perhaps a property without any financing at all, such as a cash purchase or a home that has been paid off at the conclusion of the amortization of their payments.A bank will not jeopardize their interest in a property by allowing a property to be sold in a tax sale. If it were lost due to a tax sale, the bank would be out their entire investment in the property. Just like home or property insurance; if an owner defaults on their home owners insurance, the bank will step up and pay for liability insurance to protect their interests. The fee paid by the bank will then be added to the value of the mortgage, as would the tax bill. This results in a growth of the mortgage value, costing the owner (borrower) more in interest as well as principle by the end of their loan payoff.
Tax bills, just like insurance defaults are reported to the mortgage or lien holders of properties. The banks are aware of the tax shortage liability of their investment holdings.
That leads us to the question of; which properties do get sold on tax sales and for how much?
I personally have purchased many properties on tax sales, all in northern Michigan. The amount paid for such properties depends on if the sale is at the County or State level and how long past due the taxes are. A property must be at least 3 years behind in taxes prior a tax sale. Once the taxes are in default by 3 years, it’s up to the County to collect. After that time frame, if the County fails to collect it is then sent to the State to collect, typically in the forth year. The process of collection starts with the County seeking payment from the property owner, then any lien holders that may be in line for collection and then it’s off to the tax sales.Once a property finds it’s way to the tax sales, it is “POSSIBLE” that all prior liens have been dissolved, resolved or released. Let me say the word “POSSIBLE” once again. It is also possible, depending on the specific process the governing body took in the tax foreclosure process, a buyer of a tax sale property could still be subject to a prior financial lien. I have personally found myself in that specific condition on a property but I did get it resolved fairly easily. I won’t get too deep into that now.
If the sale is an auction instead of simply a tax sale, the price could go much higher due to other bidders raising the price. If this happens, the final sale price will normally reach “about” 50% to 80% of the current (real) properties value; it’s still a deal but not as much as simply a tax sale.
references: wes brooks, associate broker
The amount paid for a tax sale property starts with the amount of taxes due along with any governing body expenses endured during the collection process along with any expenses endured during the tax sale process. I once purchase 18 properties in Ogemaw County (all in one day) for a total of $1,980.00. Each of these were sight unseen. Some of them were nice and some … well … not so much. These were all at the County level. Each carried a 6 month redemption period granted to the past owners. If they lost their property to me (via the tax sale) by not paying their taxes, I then had to advertise or seek the past owners to grant them the 6 month period of redemption. If they did pay their taxes during the 6 month period, I received a full refund plus a 50% profit on my investment. That’s not a bad profit for a 6 month investment.
If the final redemption period concluded with me still holding my tax sale purchase, it was my land to do what I wanted with. Let me remind you that it was from a County tax sale. The State land tax sales are final at the moment of the sale. Once the buyer of a State land tax sale walks out of the building, the property is 100% the buyers property; at that moment. Payments are made in cash at the time of the tax sale. The cost will be a minimum (typically) of four years worth of taxes plus a recording fee. The property is sold in an “As Is” condition with no option for refund.
The “Annual Tax Bill” can be found in public records, calculated to the number of years of the delinquency and then you can estimate the amount that the property will sell for by adding about 10% to the total value of the tax bill liability. If a property has a tax bill of $1,300 per year multiplied by 4 years, would equal $5,200 plus 10% for processing and recording fees; the final payment for the land “COULD BE” … $5,720.00. “CASH”.
If the sale is an auction instead of simply a tax sale, the price could go much higher due to other bidders raising the price. If this happens, the final sale price will normally reach “about” 50% to 80% of the current (real) properties value; it’s still a deal but not as much as simply a tax sale.references: wes brooks, associate broker