Property tax liens in Arizona provide a relatively low-risk, high-yield investment opportunity.
Introduction to Tax Lien Foreclosures
In Arizona, tax liens are sold at a public auction every February. The amount owed in taxes becomes the amount of the lien, but the interest rate is generally determined by the bidding process at the sale--investors bid down the interest rate (in whole numbers) starting at 16%. Once an investor obtains a tax lien, the lien has priority over all other liens (except those created by the State). Investors can compound their investments through "subsequenting" their lien by paying subsequent years of taxes (at the same interest rate as their prior liens). Once an investor owns 4 years of tax liens (3 years from the date that the first lien was offered for sale), it can foreclose on the property, taking free and clear of any other junior encumbrances. Because tax liens are a creature of statute, they require an attorney who has dealt with this specific type of matter before. An attorney who has never done a tax lien foreclosure can take much, MUCH longer to get the job done.
Investigating the Investment
Tax liens are sold without any mention of existing easements. Likewise, if you foreclose on tax liens in Arizona, you take the property subject to existing easements. This presents quiet a bit of risk to an investor because you may end up owning property that is virtually worthless. It is important to look at the property, but you do not have any right to enter onto the property--look from afar. Know the area. Take note of the drainage, encroachments, and existing CC&R's. Once you have satisfied yourself that the property is a good investment, you are ready to purchase the lien.
Purchasing Tax Liens at Auction
A tax lien is a negotiable instrument, meaning that it can be bought, sold, or gifted to others. Tax liens are created by operation of law at the tax lien sale. If an investor does not obtain the lien through the tax lien sale, he should ensure that it is purchased by one who obtained it during a tax lien sale, otherwise the investor risks being involved in a fraudulent scheme. Whether the sale is in person or electronic, the bidder will be given a bidder number after providing a TIN or SS# (tax liens are interest bearing and the interest will be reported for income tax purposes). Each sale is different, as determined by the County Treasurer. Make sure that you familiarize yourself with county-specific rules. Once you have successfully bid the property, you will be issued a Certificate of Purchase (CP) number.
Purchasing Tax Liens after the Auction
Tax liens that were not sold at auction are referred to as "struck to the state" at the starting bid of 16%. Anybody who wishes to obtain a lien that has been struck to the state may do so at nearly any time, but you would have to pay the principal amount of the lien PLUS accrued interest at 16%. Each county maintains a list of tax liens that have been struck to the state. Sometimes multiple years of back taxes can be purchased at the same time. The time for foreclosure starts with the date that the earliest lien (that you purchased) was OFFERED for sale. Thus, by purchasing four or more years of back tax liens, one can greatly reduce the hold time of the investment. However, generally the most desirable properties are sold each year during the auction and the less-desirable properties are struck to the state.
Notice of Intent to Foreclose
Arizona statute requires that a Notice of Intent be sent out at least 30 days (and no more than 180 days) before a Complaint is filed attempting to foreclose the tax liens. The notice is required to be sent to the the situs address of the property, each of the owners of record, and the county treasurer via Certified Mail. If the owner does not pay the taxes during the 30 day grace period, the lien is ripe for foreclosure.
Foreclosing on a Tax Lien
The foreclosure action commences when the investor files a civil Complaint and Summons in the Superior Court in the county where the property is located. Each entity that has a legal or equitable interest in the property should be named as a Defendant in order to foreclose out the interests and take the property free and clear. Tax lien foreclosures are prosecuted in the same manner as civil lawsuits. If the owner of the property pays the outstanding taxes and interest to the county treasurer during the pendency of the lawsuit, the investor may recover a judgment for all attorney's fees, court costs, title policy, and mailings. Upon obtaining a default judgment, the property is not ordered sold at a sheriff's sale (as with other types of foreclosure). Instead, the "sale" is said to have taken place at the time that the liens were offered at public auction. Consequently, once a judgment is obtained, the investor can obtain a Treasurer's Deed (for a small fee, payable to the Treasurer) that can be recorded.
Overview of the Foreclosure Process
In essence, a savvy investor can potentially obtain property for pennies on the dollar. Depending upon the amount and duration of back taxes, an investor can obtain property for less than 10% of its value. Best of all, the risk is relatively low so long as the property has value--if the liens get paid back, the investor gets all principal + interest + attorney's fees + costs (after commencement of a lawsuit). If the liens don't get paid off, the investor gets the property! However, because tax liens are a creature of statute, an investor should be careful to hire an attorney with substantial experience in this specific type of action. The attorneys at Holland Law Group have handled several hundred tax lien foreclosures all across Arizona. Give us a call today at 928-536-3001!
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