Purchasing Tax Lien on property that is in foreclosure

[Greg D.]

I have come across a number of tax liens on properties that are in foreclosure. What happens to your lien when the property is foreclosed on?

Would you avoid these properties? Anything special to watch out for on these liens?

[Jerry K.]

@Greg D. The tax liens are still valid - the property owner still owes the taxes. Once the property deed changes hands from the old owner to the bank (or the entity doing the foreclosure), then the new entity owes the taxes from that day forward.

Foreclosure really just delays the time the lien will be paid off. But like all lien investing, you have to make sure the property is worth more than the lien total.

I actually look at foreclosed homes that already are in the bank name yet still have property tax liens. The bank has to pay off those liens when they finally sell the property. It's short term holdings, but at a high rate of interest, it's a nice quick hit for some idle cash.

In reality, banks usually pay the back taxes even before they try to sell the property, but sometimes they wait until they actually sell the property.

What you have to watch out for is the risk of the owner filing bankruptcy to stop the foreclosure. Bankruptcy can drag on for months or years and tie up your investment. In extreme (but rare) cases, the bankruptcy judge can vacate the interest paid on the lien - meaning you only get back your principal. More likely, your money is tied up for a long time.