Tax Liens.  Everyone loves them (for good reason, they can be very lucrative).  Real Estate gurus make big money selling “how-to” convincing people to invest in them.  The pitch is simple:  A County in Georgia is owed property taxes that go unpaid.  The County files a lien, and then auctions it off.  You win at the auction, and purchase it (a portion of your purchase price goes to pay the taxes that were in arrears).  Now, you wait a year.  During that year, the property owner or other interested party can “redeem” the tax lien from you by paying enough to cover your full purchase price plus an additional 20%!!!  That’s crazy.  even if they redeem in 30 days, you still get the full 20%.  Investors’ mouths start to water.  What if they don’t redeem?  Even better!  Then you foreclose on the property and own it free and clear for the drastically reduced purchase price you paid at the tax lien auction*.  You wipe out old debts, liens, mortgages, and everything else* and own the property free and clear!!  How can you lose?!?!

Well, those are the basics, and they’re largely correct, but those asterisks cover a lot of ground.  How do you foreclose?  Is that all you have to do?  Is there anything that a tax lien does not wipe out?  As with any too-good-to-be-true investment, the devil is in the details.  We’re not going to do a whole treatise in one online post, but here are some things to keep in mind.

1.  Tax lien foreclosure doesn’t wipe out everything

Year’s support (a probate issue for surviving family members) can cause problems.  So can tax liens from a higher authority (State or Federal taxes).  Additionally, though bankruptcy will likely not trump your investment, it will drastically slow it down, and increase your cost to free and clear ownership.  these are matters that are difficult to predict when “pre-screening” liens on which you want to bid, especially given the high volume of auctions.  If you have specific questions about types of debt or obligations not eliminated by a tax lien, contact us online, at 770-538-5160, or at info@kimandbagwell.com.

2.  NOTHING is automatic, and NOTHING is free.

Foreclosing on the right to redeem the lien is an involved process.  It normally involves a title search of the property, locating prior owners, prior lien holders, tenants, and anyone else with a legal or equitable interest in the property.  They have to be served with notice of the foreclosure, and the foreclosure has to be advertised in the paper as well.  BUT WAIT, THERE’S MORE!!  After you have foreclosed on the right to redeem, you are not done.  Though you do now own the property, you will have difficulty selling it or taking out a loan against it, because the tax lien itself created a cloud (defect) on the title to the property.  In order to get rid of this cloud, you have to file a quiet title action.  This is basically a lawsuit asking a Superior Court Judge to decree that you own the property free and clear.  Again, all former interest holders must be personally served with a copy of the lawsuit and given a chance to reply.  Further complicating matters is that you will have a choice of whether to file to simply remove the title cloud, or to file “Against all the world.”  A quite title against all the world not only clears the title to the property, but also eliminates any disputes over things like boundary lines, easements, etc…  If you simply file to remove the cloud, you would still be left with those other issues, if there are any.

Given these procedural requirements, most investors find themselves speaking with an attorney when it comes time to deal with a redemption or a quiet title action.  Accordingly, make sure you budget for legal and regulatory expenses when deciding how much to bid on a particular lien.

3.  There are no guarantees.

What if you buy the lien, foreclose on the title, and start a quiet title action, only to discover that the sheriff’s office made a typo when selling or advertising the original lien?  Well,  typical lawyer answer, it depends.  Sometimes small defects can be corrected.  Sometimes, you have to go back and start all over.  Sometimes the lien you bought turns out to be invalid, and then you have to decide whether it’s worth fighting with the County to try to get a refund.  All investments have risks, tax liens included.

Don’t let these warnings scare you off, though.  When handled properly, carefully, and systematically, tax lien investing can often yield great returns.  If you have purchased a tax lien, and have questions about your next steps to secure your property, or handle a redemption, please call our office at 770-538-5160, contact us through this online form, or email us at info@kimandbagwell.com.

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