The Basics of Tax Liens

By Jim Hogan

As you look to kick-off 2023 on the right foot with good investments, one consideration comes early in the year for Arizonans. 

This opportunity presents itself as a result of unpaid property taxes when the county treasurer sells the delinquent lien at public auction. Tax liens are generally purchased for two reasons: first, to obtain ownership of a property through foreclosing the lien; or second, to obtain a high rate of interest on the amount invested.

Obtaining Ownership

Statistically speaking, the majority of tax liens are redeemed by the owner. It’s only around 1% – 2% of tax liens sold that result in the bidder acquiring the property. However, by investing in many liens, some properties will be eventually acquired.

Advantages of an Investment in Tax Liens

The main reason to buy tax liens is to obtain a relatively high interest rate of interest compared to an investment in a certificate of deposit. 

While many people think that IRS liens have a higher priority, by law, Arizona property taxes have the highest lien priority. This makes tax lien investing very safe. IRS liens have no special priority. Their priority is based on the order recorded. 

The interest rate paid to the county on delinquent taxes is 16%. When a lien is auctioned, it is possible for the bidder to achieve that rate too. However, since the early 1990’s CD interest rates have been low, and rates achieved by tax lien investors have been in the 3%-8% range.

The Tax Lien Auction

Each county treasurer handles the tax lien auction a little differently. Things have changed post-2020, so it’s especially important to check the Treasurer’s website for the latest information regarding auctions. In years prior, counties such as Maricopa County, Pinal County and Yavapai County held their auctions online, while counties such as Pima County and Cochise County held live auctions. In 2022 Pima and Yuma counties went to online auctions too. Regardless of bidding location, bidders are required to register with the Treasurer to obtain a bid number or open an account and provide a Social Security Number (or other form of tax ID for Internal Revenue Service reporting purposes). A deposit may be required. Whether online or live, the basics of the auction procedure are the same. The winning bidder is the person who accepts the lowest interest rate on the investment should the owner redeem the certificate.

The Redemption Process

According to Arizona law, the property owner has a minimum of three years after the tax lien auction to redeem the property and prevent foreclosure. The CP (certificate of purchase) holder need not begin the foreclosure immediately after the three years but must begin the foreclosure action within 10 years from the date of the auction on the lien becomes invalid.

Foreclosure

Three years after the date of the tax lien sale, but within a period of 10 years after the sale, the CP holder may begin a judicial foreclosure action to obtain ownership of the property.

Prior to initiating the court action, the CP holder is required to give the property owner a minimum of thirty days’ notice by certified mail of the impending foreclosure. If the owner fails to redeem within that thirty-day period, the CP holder may begin the foreclosure action in Superior Court. 

In most cases the CP holder will hire an attorney to conduct the lawsuit, but all the legal details will not be discussed here. Basically, once the papers are filed in court, the property owner, and any other persons, such as a mortgage holder, having an interest in the property, must be given service of process. Once served, the CP holder has a certain amount of time within which to respond to the action.

In the end, either the property owner or subordinate lien holder redeems, or the judge orders in favor of the CP holder and directs the Treasurer to issue a Treasurer’s Deed to the CP holder. 

If redemption occurs, the property owner is liable to the CP holder for foreclosure costs and attorney’s fees. Sometimes the redeeming owner will pay the attorney’s fees and costs at the same time redemption occurs.

But, if the owner redeems directly with the Treasurer, the Treasurer is not going to collect the attorney’s fees and costs. In this circumstance, the lawsuit would be amended to obtain a judgment against the owner for the unpaid fees and costs.

In conclusion, investing in tax liens can be a safe and high return investment if you’re patient and do your research. There are other many other questions and considerations that are not discussed in this article.  So, if you decide to get involved, make sure you time to learn as much as you can before taking the leap with your hard-earned money.