What it means
Local governments depend on property taxes to fund schools, roads and other services. When an owner does not pay, the government has strong legal powers to collect, and a tax sale is the step in which the property or the debt is sold to a third party.
A tax sale protects the public purse and treats paying neighbours fairly. There are two main types.
In a tax deed sale, the buyer receives the property itself, while in a tax lien sale the buyer receives a certificate that gives a right to be repaid with interest and, if the owner never repays, the right to claim the property. Which type is used in a given area is a matter of local law.
Sales are normally held at auction, either in person or online, with notices published in advance. Bidders may compete on price or, in some places, on the lowest interest rate they will accept.
Bidders are often required to register and show proof of funds in advance. Owners usually have chances to avoid the loss.
They can pay the arrears before the sale, and in many places they have a redemption period afterwards in which they can repay the buyer and recover the property. Many tax sale properties never actually sell because owners pay at the last minute.
For buyers, the attraction is the chance to buy below market value or earn an interest return. The risks are real, though, because the property may be damaged, occupied or burdened by other debts.
Successful buyers do careful research well before the auction date. The nuance is that the rules differ greatly from place to place.
Notice periods, bidding methods, redemption rights and what the buyer actually receives all vary, so local advice is essential. A lawyer who knows the local process can save a buyer from costly mistakes.
In practice
Real-world examples.
Example
A county announces an auction of 45 properties with unpaid taxes. A buyer attends and wins a small house for $38,000, which covers the taxes, interest and costs owed. After the redemption period passes without the owner repaying, the buyer becomes the full owner. The county applies the proceeds to the unpaid taxes and returns any surplus according to local law.
Example
A retail landlord discovers that a building he lets out is listed in a tax sale because his property manager missed the payments. He pays the arrears the day before the auction, and the property is removed. The incident prompts him to review his payment controls. He also sets up automatic payments for all future property taxes.
Example
An investment fund buys tax lien certificates in bulk, looking for interest income. Most owners repay within a year, and the fund collects its return. In rare cases the fund begins the process to take the property. The fund's returns depend on diversification across many small certificates.
Case study
Seen in the real world.
Riverbend Municipal Services is an illustrative, fictional local authority that was owed $2,400,000 in unpaid property taxes. Collection letters and payment plans had recovered about half, but a stubborn group of owners had not responded. The shortfall was starting to affect the authority's budget for the coming year.
The authority held a public sale of liens on the remaining properties. Investors paid the outstanding taxes, and the authority received the money within weeks, which helped it fund road repairs that had been delayed. Several investors competed for the liens, which kept the interest rates low for owners.
In this illustrative story, around 90% of the owners repaid within the redemption period, with interest. The authority also introduced reminder letters and a simpler payment plan so fewer owners reached the sale stage in future years.
Watch out
Common mistakes.
- Believing that a winning bid always gives immediate and unchallengeable ownership, when redemption rights and other claims may remain.
- Bidding without inspecting the property or searching the title, which can lead to expensive surprises.
- Owners ignoring notices, when paying before the sale usually stops it.
Questions
People also ask.
What is the difference between a tax sale and a foreclosure?
A tax sale is held to recover unpaid taxes, while a foreclosure is usually started by a lender over an unpaid mortgage, although tax liens can lead to foreclosure as well.
Do I get the property if I buy a tax lien?
Not at first, because you receive a right to be repaid with interest, and you gain the property only if the owner never repays and you complete the legal process.
Can the owner stop a tax sale?
Often yes, by paying the arrears, interest and costs before the sale, and in some places they can recover the property afterwards.
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