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How do tax sales work

how do tax sales work

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When a homeowner falls behind on property tax payments, the local government that assessed the tax can place a lien on the property. Rather than go through the expensive process of foreclosing on a lien, however, the agency can sell the lien to a third party, who gains the right to collect the overdue tax. In a shaky economy, when many homeowners are falling behind on their mortgages and on the costs of owning a home, tax lien sales have become a popular niche business for individuals willing to do some basic research and preparation.

Tax Lien Sales

Your local assessor's office will have available a list of delinquent taxes and associated tax liens that are available to buyers. You can bid on these tax liens at auction. If you are successful, you make the property tax payment to the collecting agency and earn the right to a lien on the property. The

owner now owes you the overdue taxes as well as interest, which represents your investment return. In addition, if no tax payments are made within three years (in Arizona), you can foreclose on the property and take ownership.

Interest Rate Bids

A tax lien sale is not like a conventional auction. Instead of bidding the highest price you're willing to pay for purchase, you bid the lowest interest rate you'll accept on the overdue taxes. The delinquent tax amount is fixed -- if you win the auction, you must pay the full amount. The winning bidder is the individual who has bid the lowest rate of interest that he will charge to the owner/taxpayer. The tax lien auction does allow for a "reserve" interest rate, which is the lowest the bidder will accept. If other bids have not approached this figure, then the winning rate may be higher than the reserve rate.

Research and Registration

Category: Taxes

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