Do you have questions about purchasing a tax certificate? Here are some answers.
If you've ever wondered what a tax certificate is,
you're not alone. In some states they're also known as certificates of purchase. When a homeowner becomes delinquent in his or her property taxes, the property may be seized by the authorities and a tax certificate is put up for sale on the auction block. Investors who purchase these certificates often resell the house, condominium or townhouse eventually, at a profit. Here are some frequently asked questions about this process:
- When are property taxes due? The taxes are usually due annually or bi-annually (once in the spring and once in the fall). If the home is mortgaged, the homeowners' monthly payment will include principal, insurance and taxes. The mortgage holder will hold the taxes and homeowners insurance in an escrow account and make payments as they become due. If a piece of real estate is owned free and clear, the owner will be responsible for making the payments.
- Is the homeowner notified that his tax payments are delinquent? Yes; the individual would receive a notification from the county treasurer. He or she would also be informed that the property will be in a tax deed or tax certificate auction unless the delinquent taxes and late fees were paid by a certain date.
- What is the face amount of this certificate? In order to purchase real estate in this manner, an investor would have to come up with the face amount. This amount includes delinquent real estate taxes, penalties, interest, advertising fees, and various governmental fees.
- Are these similar to liens? These are actually the liens with the highest priority, meaning they would be paid off first before other lien holders, including the Internal Revenue Service. Typical liens against a piece of real property may include contractors, creditors, homeowners associations and more.
- How is an auction held? Auctions to sell these documents are often held after the first of the next year such as the month of February. This allows time to post properties for buyers so that they can perform due diligence. This posting is done by the county treasurer or tax assessor's office and it must appear in a newspaper two or three weeks before the auction.
- Does this document mean that investors now own the property? No, not yet. It means that the investor has taken over the tax obligation on this property. If the owner fails to redeem his property by paying the investor the cost of the tax certificate plus any additional costs as well as a legally specified amount of interest, within a specified time period, then the investor may foreclose.
- Do investors receive interest on these certificates? Yes; the rates vary from a very low percentage such as 1% to higher amounts of 15 or 16%. The states with a high amount of interest attract many investors.
- Are these paper documents? Not usually. Instead they are computerized or electronic files.
- Any words of warning? Investors should investigate the property before buying the certificate. Due diligence is always the responsibility of the buyer.
Since many homeowners are underwater on their mortgages, many more of these properties are either being foreclosed upon or being auctioned off because of delinquent property taxes than ever before. If an investor was interested in purchasing either a tax certificate or a foreclosed home, he or she should consult with an attorney or a realty company who specializes in distressed real estate.
