Death & Taxes, But Just Taxes Here
By: Chris Wathen
Tags: Indiana, Taxes, Real Estate, Property Tax, Liens

Photo by Travis Saylor from Pexels

If you think you own your home just try ignoring your property taxes and see just how long you do!

No, this isn’t a dare, but just a friendly reminder that each county’s annual tax sale in Indiana will likely be held each Fall to sell those tax liens to the highest bidder.

So, what happens if a person fails to pay their property taxes? And how do some people invest in the resulting tax liens?

Let’s discuss the process:

Properties that are at least three installments behind are eligible to be added to the tax sale list. The minimum bid for the auction is set at the amount of property taxes owed, plus any penalties, auction fees, and public notice or advertisement costs.

At the public auction, the bidding starts with this minimum bid and proceeds until there are no more bids. The highest bidder receives a tax lien certificate (not a deed!) on the property in return, which is essentially a first-priority lien and one that is superior to most everything, even previously-recorded mortgages, except certain federal and state tax liens. (As you know, Uncle Sam always gets his money first, but the Governor does too! This is an interesting phenomenon because in Indiana liens typically attach to a property in the order — or priority — that they were filed, so tax liens are unique in this respect. This also explains one of the reasons why lenders want to escrow for property taxes when you have a loan secured with real estate. This way they know that the taxes are paid, and they won’t have a higher-priority tax lien to resolve down the road.)

The purchaser of the tax lien must send a “notice of sale” letter to the owner and any other person(s) with a “substantial interest” in the property (e.g. the bank with a mortgage on the property) with all the information required under the Indiana Code at least three months before the redemption period expiration, which is 12 months from the date of sale. Of course, this requires a title search to be conducted to find out exactly who these “substantial” interest holders are. After these notices are sent, the tax lien holder asks the same court that issued the original judgment for delinquent taxes on the property to order the County Auditor to issue a tax deed if the property is not redeemed by the redemption period expiration date.

For the 12 months between the tax sale auction date and the expiration of the redemption period, the tax lien holder may pay the subsequent property taxes and special assessments. Immediately upon paying for any of these additional costs, including the title search mentioned above, it must be reported to the Auditor’s office on a special form with the receipts. If this is not done, those additional expenses will not be reimbursed if the tax lien is redeemed by the property owner, who will probably not send you a “thank you” card in the mail either.

So, what if the property owner pays within the twelve month redemption period?

He or she pays interest — and a lot of it!

For up to six months, the lien holder will receive a refund equal to 110% of the minimum sale price and 5% per year of the amount that the purchase price exceeds the minimum sale price. So, on an annualized basis, the return is much, much higher than 5% if redeemed within a short period after the sale. In fact, a few years back, it was 10%; given the low interest rate environment in the USA for several years now, it was reduced to 5%.

If redeemed after six months from the sale, the property owner must pay 115% of the minimum sale price, plus 5% per year of the amount that the purchase price exceeded the minimum sale price.

As a person can see, the returns to the investor are very high in comparison to other traditional investments, but there are several risks, including:

*The bidder must determine what it is that he or she is actually bidding on, as it could be a property with environmental contamination, a useless strip of ground only a few feet wide and hundreds of feet long, or a parcel with other major issues. There are no guarantees or warranties, so that can be a huge risk, too, if the bidder does not do his or her homework.

*The tax lien holder does not actually own the property during the twelve month redemption period, so the tax lien holder has no right to trespass on the property. Needless to say, the owners — or vandals in general — can damage the property during that time.

*If the winning bidder on the tax lien fails to have the cash or financing available to him or her to pay the County Treasurer the full amount of their winning bid by the deadline on the sale date, which is usually in the afternoon of the auction, the bid is not only canceled but the bidder is subject to a penalty equal to 25% of the total amount bid.

*If the tax lien holder fails to notify the owner and those with a substantial property interest, as discussed above, the court may say, “Sorry, you just lost everything that you bid on it because you didn’t follow the rules!” So, a total loss of investment is possible.

As a person can see, where there is money to be made, there is also risk. Greater returns typically involve greater risk.

If there are any morals to this story, they are: (1.) pay your property taxes on time, and (2.) if you want to invest, be sure to find a competent legal advisor with experience in this area of investing. Although this may have whetted your appetite for large investment returns, you simply cannot read just one article and prudently expect to invest without major problems.