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Foreclosing On A Tax Lien

In the event of non-payment on a tax lien certificate it becomes necessary to foreclose on the property. There are two main methods that this will happen depending on the state, which I’ll get intobelow. First there are some important notes about your tax lien investment.

Remember that the lien is in first position. So if for some reason the bank forecloses on the house because it is in default, the lien holder is paid first, then the bank, then any other liens.

Now, if the lien holder needs to foreclose on a house because the redemption period is up, and there is still a mortgage on the house, in most cases the bank will come in and pay off the lien to protect their investment. This is because if YOU foreclose on the house, they lose their mortgage and possibly hundreds of thousands of dollars.

If the redemption period is over 2-3 years, it's possible that multiple liens were purchased on the house in successive years after yours was purchased. If a bank forecloses on this property lien 1 will get paid out first, then lien 2, then the bank, etc...

If the original lien holder forecloses on the property themselves, then the bank mortgage is wiped out as usual, but they must pay off lien holder 2 and 3, if they exist, before they can do anything with the property. At that point lien holder 1 will acquire the property free and clear or the property will be sold at a tax deed sale and lien holder 1 will be paid off not only for their original investment and interest, but also for the money they had to pay to any other lien holders. These two methods work as follows:

Free and Clear

The lien holder waits for the redemption period to go by. If the lien is not paid off they must notify the county of their desire to foreclose. This may involve:

  • paying an administrative fee
  • filling out paperwork
  • sending a notice to the property owner
  • publishing a legal notice
  • paying off other liens on the property

This method is used by most lien states.

Tax Deed Sale

The lien holder forces a tax deed sale to occur. The county handles all notices and then sets up the sale. The property owner can redeem up to any time before the deed sale. The Lien holder will receive a credit for the lien, and the interest owed and any other fees paid. If for some reason the bidding on the deed does NOT exceed this credit, the lien holder receives the property.

 

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