Tax Lien Basics: What is Unique About a Tax Lien?

What is a tax lien or tax foreclosure and how can you profit from them? There is a lot of "bad information" out there, so lets clear a few things about tax liens.
 
March 17, 2011 - PRLog -- In this blog and the upcoming posts, we are going to break down the basics of tax liens and what is unique about them specifically. This may seem very basic, and it is, but many folks don’t understand exactly what a tax lien is. We believe it is important to understand the basics, before we discuss different strategies, risk & reward, etc of tax liens. So lets get started.

English common law describes the unique thing about a tax lien is that it is ahead of all other liens. What exactly does this mean? It means that the tax lien is ahead of other liens. Specifically:

   * a mortgage (either first or second or third)
   *  it is ahead of a mechanic’s lien (a lien placed on property for work done on the property
   *  in most jurisdictions it is ahead of all other liens

The possible exceptions to this are some special assessment liens or Internal Revenue Service liens. It is extremely important to understand the rules in the jurisdiction that you are going to invest in as the rules do vary state to state and even within a state.

What is the Benefit of Being a Lien Buyer?

What is the benefit to you as a lien buyer of the tax lien being ahead of all other liens? It means that if the tax lien is not paid off, all the other liens are extinguished or in lay terms, they go away. That means that in most cases the lien buyer gets the property free and clear of all encumbrances.

What is the Buyer at the Tax Lien Sale Buying? First and foremost you are not buying the real estate!

The lien buyer is buying the taxing authorities rights, which means the lien buyer now has the right to receive the delinquent taxes and any interests and/or penalties that accrue on the lien.

The delinquent taxpayer has a period of time, usually called a redemption period, to pay the lien buyer. If the redemption period goes by and the delinquent taxpayer has not paid the lien buyer, THEN the lien buyer has the right to acquire the property. The lien buyer’s interest in the property is known as an inchoate interest. What does this mean? It is defined as:  

   * Inchoate:  an interest in real estate which is not a present interest, but which may ripen into a vested estate, if not barred, extinguished or divested.

   * Huh? What does that means:  It means you have a right to the real estate if certain things happen.

The certain things usually include:

  1. Not getting paid back, with interest, what you paid for the lien.
  2. Complying with the specific things the statute requires you to do, when the statute requires you to do them. These are usually providing notice to those who have an interest in the property and filing certain documents with the court.

Courts are very reluctant to take somebody’s real estate without good cause so they require tax lien buyers to strictly adhere to the requirements of the law before they will give the lien buyer the real estate. It is extremely important that you understand exactly what is required and that you follow the requirements perfectly. We recommend that a lien buyer retain knowledgeable legal counsel, at least for the first transactions in a jurisdiction so that no mistakes are made.

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