delinquent tax sales

[Autumn Alexander]

What do you think about delinquent tax sales? What sort of experiences have you had? 

I am a newbie looking at my options for getting started with investing. I have student loan debt that is making my credit not so stellar, so I'm weighing my options. I've been looking into delinquent tax sales in my area and the base rates range from $5 to 

$10,000. 

Is there any way to purchase them before they go to auction? 

Any advice on getting started or what to expect would be appreciated.

Thanks!

Autumn

[Ron Burmeister]

@Autumn Alexander

One thing to remember about tax liens is "Every State Is Different". Be careful when someone gives you advice and they are not speaking specifically about Kentucky.

Kentucky has very specific rules concerning third party purchases of tax liens.  You can read all about it here Kentucky Department of Revenue

Disclaimer: I am not an attorney or tax professional.  I am not offering legal or tax advice just my own opinion. Get a good attorney and CPA, you will need them.

Kentucky tax liens sales are not an auction they are a lottery. Liens are sold for the amount owned, period.  The sale is handled by the county clerk.  How a County Clerk runs the sale can very depending on the clerks interpretation of the law and their level of technology.

The tax lien sales begin in late July and run through September or so. Each county schedules a different day so that buyers can attend all the sales if they want.

I followed the Boone County sale this past year and here is how it went:

You register as a purchaser with the State and/or County Clerk depending on how many liens you are going to buy.  Prior to the sale you email the county clerk a list of liens you want to buy and in the order you want to purchase them.  Day of sale you sign in, tell them how many liens you want to buy and how much you want to spend, if limited.  They put your name in a hat and when everyone present has registered the clerk draws names from the hat and this is the order of the lottery.  The sale was over. 15 minutes, tops.

They then take the order the names were drawn and load this in their computer system along with the spread sheet you provided. The computer then determines which lien you get and they notify you later that day.  Once the clerk records the lien, you then own the lien not the property.

There were 29 bidders at this sale and there were about 150 liens.  They awarded 1 lien at a time i.e. the first bidder got their first choice, second bidder got their first or second etc.  Depending on the number of liens the county clerk can adjust the number of awards at a time.

You recoup your money by the homeowner paying you the taxes and fees due or you foreclose.

There are very specific rules on what you can do with the lien.  You cannot foreclose on the property for 1 year after the lien was delinquent (Which is January 1 of the following year). The lien is valid for 11 years from purchase. There are very specific recording and notification requirements that must be met. You can charge 12% interest on the balance of the lien only.  You can collect certain fees and legal expenses, however, you cannot charge interest on the fees and legal expenses. The legal expenses collected are actual fees and you may have to justify them. I have heard that on average, by floating the legal expenses your yield can be reduced to about 9%.

If you foreclose, the property will be sold by the master commissioner to the highest bidder and you are paid from the proceeds of the sale.  You can even bid on the property if you want.  The good thing about Kentucky tax liens is they take first position even ahead of a 1st mortgage.  I  have heard that the only thing that a tax lien is subordinate to is an IRS lien.

So whether the property has a mortgage or not is really negligible except for some strategies. One strategy is; If they are not paying their taxes they probably are not going to pay their mortgage. So, buy a property with a mortgage and sit back and wait for the bank to go through the expense of foreclosure. Just don't let your taxes and fees exceed some percentage of what the property may sell for at the master commissioner's sale.

Tax liens that are not sold during the lottery sale can be purchased from the county clerk the day after the sale.  All the rules of registration and how you handle the liens are still valid regardless of how you purchase them.

The tax lien you mentioned of $4800 on a $600,000 property is very do able. If it is currently delinquent you should be able to purchase it from the county clerk now. But remember, you will only own the lien not the property.

Hope this helps and good luck.