Government Tax Foreclosure Sales

Susan Weber
Know the pros and cons of buying a home in foreclosure.
Know the pros and cons of buying a home in foreclosure.

Government tax foreclosure sales can be an excellent way to purchase a home or property for a price significantly below the market value.

Types of Tax Foreclosure Sales

Every home or property owner must pay taxes to the government. Cities have school taxes. Counties have property taxes. The state and federal governments have income taxes. Many homeowners set up an escrow account to collect and pay the property taxes owed on the property. If a homeowner fails to pay property taxes or any taxes, they are at risk for the government demanding back payment of the taxes and accrued interest and penalties. If these payments are not met, the government can implement tax foreclosure proceedings and eventually sell the property to generate the tax income which is owed, even if the homeowner is current with mortgage payments.

There are two types of tax foreclosures:

  • Tax lien foreclosure
  • Tax deed foreclosure

Tax Lien Foreclosure

When you purchase a tax lien foreclosure you are buying the right to tax the lien on the property. You are not purchasing the property. The money from the sale of the tax lien is given to the governmental entity to pay the outstanding taxes. You need to collect the amount you paid for the tax lien from the homeowner. You can charge the homeowner interest rates of 18 percent or more until they have repaid you for the money you paid for the tax bill. If the homeowner does not repay you in full (including interest), you can foreclose and take the property.

A tax lien foreclosure can be a very valuable property investment tool. By law, a tax lien foreclosure must be sold to the highest bidder even if the highest bid is for a very low amount. This can result in properties being purchased for 30 to 60 percent below market value. This below market value purchase price can make a tax lien foreclosure a better investment than purchasing a traditional lender foreclosure - which according to realtytrac.com, an informational website about foreclosures - may only sell for 20 to 40 percent off the market price.

Tax Deed Foreclosure

With a tax deed foreclosure the property is sold for the back taxes owed as well as any interest charges and court costs. The property is sold to the highest bidder. You are buying the rights to the entire property. The property is sold without any outstanding mortgage, liens or deeds of trust.

How the Process Works

If the homeowner does not pay their taxes, they will receive a series of notifications from the governmental entity. After several notices they will receive a notice that if the taxes, penalties and interest are not paid within a specified amount of time, the government will start foreclosure proceedings.

The home will be put up for sale to recoup the taxes, penalties and interest owed. The properties are sold "As Is." The governmental entity will issue a Notice of Public Auction or a Notice of Sealed Bid Auction. These documents have the instructions and requirements for the sale.

On the specified date of the auction, bidders present their bids for review. The highest bid wins. The winning bidder must pay for the property immediately with cash or a Certified Cashier's or Treasurer's check. The governmental entity does not provide any financing.

Most states provide a waiting period of up to 180 days from the point the governmental entity accepts the successful bid until the deed for the property is turned over to the successful bidder. If the prior homeowner pays the new homeowner the amount paid for the unpaid taxes, interest and penalties, the prior homeowner keeps their property. The new homeowner is allowed to charge interest from the point of the payment at the auction until the prior homeowner reimburses for all monies paid to the governmental entity. In the case of IRS foreclosures for nonpayment of income taxes, the new homeowner can charge as much as 20 percent annual interest.

If the prior homeowner does not reimburse the new homeowner within the waiting period, the new homeowner will receive the deed for the property.

Locating Government Tax Foreclosure Properties

Only a small amount of foreclosure properties are government tax foreclosure sale properties. They are well-advertised by the governmental body which is initiating the foreclosure. As with all foreclosure sales, you need to do your homework before making a purchase.

Finding the Property

Each governmental entity has its own listing of available foreclosure properties. The listing is available directly from the government, in newspaper announcements and online. The listing will include a basic description of the property, the amount owed and the date and time for the auction sale.

  • IRS tax foreclosures - The IRS sells their foreclosed homes through tax foreclosure auctions that are listed online.
  • State, county and city tax foreclosures - The County offices and the local newspaper are good sources for information about the available foreclosure properties. County tax foreclosure sales are also listed online. An Internet search will show current listings as well as the conditions and details of the sales.

Listings of government tax foreclosure sales are also available on websites such as:

Do Your Homework

  • Research the property. - A physical description of the property, list of lien holders and the value of the property are available from the County Clerk and the County Tax Assessor. A local real estate agent may also be able to provide information on the property or provide you with information on comparable values of similar properties in the area.
  • Inspect the property. - You may not be able to enter the home or property, but you can examine the exterior. Talking with the neighbors may also provide insight into the property's internal condition, features and rights-of-way.
  • Get an appraisal. - A local professional appraiser can give you an estimate of the property's current value and potential market value if improvements are made.
  • Do a title search. - A title company can research the title ownership and alert you to the legal title holders as well as any outstanding title disputes.

Potential Downsides to Government Tax Foreclosure Sales

Purchasing a property for a price far below market value is very appealing but there are some downsides:

  • You have to pay cash.
  • You cannot inspect the inside of the home.
  • The prior homeowner may attempt to reverse the purchase by coming up with some of the taxes owed, leaving the new homeowner with legal fees and time lost in moving into or reselling the property.
  • The prior homeowner may refuse to move out, leaving the new homeowner with the cost and aggravation of eviction proceedings.

Property purchased through a government tax foreclosure can be an excellent investment and can potentially provide you with a home at considerable savings.

Government Tax Foreclosure Sales