FORECLOSURES OR TAX DEEDS?
Do You Have to Pay Back Property Taxes on a Foreclosure? Learn the priority of liens and how it affects your profit margin. Which is a better deal? Buying tax defaulted property or foreclosures? Well, one is a much, much better deal! Which one do you think it is?
Watch the video above or read the summary below:
Do you have to pay back property taxes on a foreclosure? I’ve been involved in the tax lien and tax deed business for over 25 years, and I get this question often.
You’re going to find this very interesting because people confuse property taxes, regular taxes, foreclosures, and tax auctions. I’ll try to clean some of that up for you, so you understand it.
I’ll answer that question “Do you have to pay back property taxes on a foreclosure?” for you here in just a minute.
First, I’ll give you some more information about tax lien certificates and tax deeds.
I’ll also explain the foreclosure process to you. Then when I finish, I’ll tell you about big mistakes people make at the tax auction that you want to avoid. So don’t miss that.
ABOUT TAX LIENS AND TAX DEEDS
Tax liens and tax deeds have been around for 200 years in 3,000 different counties. Half of the counties will sell tax lien certificates. The other half will sell tax defaulted properties.
It’s the same thing with the 1,400 municipalities. So there’s going to be plenty of everything.
Thousands of people default on taxes each year, and multiple thousands of people default on their mortgages.
This creates a whole controversy. People are totally confused, and they really don’t know which is first and which is second.
I’ll tell you right upfront that you need to be thinking about a tax auction as being the first priority lien, and I’ll get into this more in detail.
The average person doesn’t give much thought to the fact that the county has bills to pay. Property taxes were invented so that the property owners could pay the county’s bills.
What do I mean by county bills? The police department, the fire department, the schools, the school teachers, fixing the roads, making the roads, etc.
All those things are county bills, and where are they going to get the money to do that?
They get that from property taxes. So the very first tax on any property, the day it becomes a subdivision is the day they make a tax number. That’s the very first tax, and that tax will always be there for the life of the property.
It doesn’t matter whether it was subdivided in 1621 or 2021. It doesn’t matter. That property tax number will be on that property.
It was given to the property when they made the first subdivision or said that they were going to have property, and it was going to be taxable.
DO YOU HAVE TO PAY BACK PROPERTY TAXES ON A FORECLOSURE? THE RULES
The state legislature makes the rules. Who do they make the rules for? For everybody in the state, including the county.
So the state legislature tells the County treasurer:
- You have to levy taxes.
- You have to collect the taxes.
- If you can’t collect the taxes, you must confiscate the property. In other words, seize the property and sell it to pay the back taxes.
So of all of the rules that everybody’s following, the first rule always is that the tax certificate is the number one, the priority lien on the property.
We all live in this Republic, and that means we can all buy property. We can resell property. We can subdivide the property. We can farm the property. We can do all kinds of things.
DO YOU HAVE TO PAY BACK PROPERTY TAXES ON A FORECLOSURE? THE BASICS
The question is do you have to pay back property taxes on a foreclosure? So let me get through that and make sure you understand. Let’s start out with the basics.
Living in a Republic allows us ownership of property. So that’s quite a privilege. We can do a lot if we own property, and we could make it more valuable by building on it.
All of that property is always going to be taxable. That simply means everyone that has a property is required to pay taxes. If you don’t pay taxes, they’re going to take the property back.
The county has a treasurer who will levy a tax. You need to pay it. The treasurer will finally seize the property if you don’t pay it, and then they will sell it.
So that first tax was on the property, and it’s always there.
THE PRIORITY OF LIENS
Usually what happens after someone buys a property is they decide they want to head over to the bank, borrow some money to build a nice house, or they want to have a ranch or a farm. They want to raise crops on it.
So they borrow money from the bank, and that would be a subsequent, a second loan. That would be a junior lien to the tax lien. The tax lien is the senior lien.
DO YOU HAVE TO PAY BACK PROPERTY TAXES ON A FORECLOSURE? YES
So the question that we’re answering today is do you have to pay back property taxes on a foreclosure? Most foreclosures are on the mortgages of unpaid mortgages, and a mortgage has covenants.
What do I mean by covenants? A mortgage has promises. It’s nothing more than a promissory note that says you’ll pay the installments. You’ll pay the taxes, and you’ll pay your insurance. That’s all a mortgage is.
It’s a very simple document, except the attorneys make it about 30 pages thick. It says in there that you’ll pay all those things, but there was a lien before any mortgage came, and that was the tax lien.
If you don’t pay your mortgage, the bank will be given an opportunity to pay for you. If they don’t pay it, then the tax collector will have a tax defaulted auction, and they will clean the mortgage off the property.
Does that mean that the mortgage doesn’t have to be paid? No, whoever had that mortgage, signed on the mortgage. They have to pay it.
However, when it came to the property, the bank said, ‘Wait a minute. We don’t want to lose our position on this property.’ So the bank will pay it.
The point is the taxes always get paid. Let’s go back and review.
THE FIRST LIEN ON A PROPERTY IS THE TAX LIEN
The first lien on every property is always the tax lien. That’s on the subdivision the day they made it a subdivision. It doesn’t go away. It will always be there.
So you need to think about this. Will the mortgage be foreclosed? Will it have to be paid? Yes. The mortgage will have to be paid.
If the mortgage isn’t paid, and the taxes aren’t paid, they will take the property, and they will sell it. That’s how they will collect their money.
So the tax collector and the treasurer will be working together. They will come and seize the property.
WHEN THE COUNTY SEIZES A PROPERTY, THEY WIPE OUT THE MORTGAGE
When they seize the property, they’ll wipe out the mortgage, then they will sell the property. When they sell it, they will collect the back taxes. So the taxes always will be paid.
Can they come back after you to get that money? Yes, of course they can, but the taxes always get paid.
The question is, do you have to pay back property taxes on a foreclosure?
Well, you might not do it because you might skip out of town, but I can tell you right now, those taxes will be paid. They will be paid on that property because the government will sell it and get that money back. The taxes are always paid.
No way you’re going to walk away from property taxes, and no property gets to walk away from that.
WHY IS A TAX DEED A BETTER DEAL THAN A FORECLOSURE?
When a bank forecloses on a property, and you want to buy it, you have to pay them whatever the foreclosure amount is. Say they foreclose on a loan, and the loan is $50,000, your first bid has to be $50,000.
At a tax deed auction, the first bid is going to be the back taxes. The back tax is going to be 1% or 2%. Whereas, a loan could be 50%, 75%, even 80% or 90%.
If you want to buy a foreclosure, that’s on a mortgage. If you want to buy at a tax defaulted property auction, you’re paying back taxes. There’s a world of difference.
Back taxes could be 10% or 20% of the value. A mortgage could be 90% of the value. Do you want to pay 90% for a property, or do you want to pay 20% for a property?
Can you buy before or after an auction? If you’re going to a foreclosure auction, you might be able to do something with the bank.
If you’re going to a tax auction, it has to be open to the public, and everybody gets a chance to bid.
If you want to buy it before, it’s not going to happen. They’re not going to sell it before. Why would they give you preference? All properties go to the tax auction.
If you want to buy the property before that, you’ll have to go make a deal with the owner. When you finish making the deal with the owner, then you’ll have to pay the taxes. All they care about is the taxes being paid.
So do you have to pay back property taxes on a foreclosure? Yes. Do you have to pay the previous owner’s defaulted mortgage when you buy a property for back taxes? No.
MISTAKES TO AVOID
Let me go on to the last two things I promised. Big problems that happened at auctions that I want you to learn to avoid. They’re very simple, but people make these mistakes all the time.
It doesn’t matter whether they’re brand new investors or they’re all pros. They just don’t think about it. They get all excited at the auction to make great deals, and I completely understand it.
Here’s mistake number 1: They bid on properties that they haven’t seen.
You will go to the auction. You’ll have someone in the row where you’re waiting and doing your bidding, and when they get a property, they will say, “Okay, Gladys, let’s go look and see what we bought.”
That’s the worst thing that they could do because what if there was a hurricane the day before? What if the property burned? What if there was a windstorm?
I don’t know what could have happened. But if something happened to the property and it’s been destroyed, they already invested their money.
I don’t know that there’s any rule that says the government has to give you back any money.
So you don’t want to bid on a property that you haven’t seen, or you haven’t had your boots on the ground, or you haven’t had someone you know look at the property, and we have people buy without going themselves.
They go and have someone look at the property and photograph it. You need to make sure you know what you’re buying. A lot of people don’t, and they lose their assets. That’s for sure.
Now the other big mistake is a similar one. They’re excited at the auction, so they want to get a property. Then they start bidding on properties that they haven’t planned an exit strategy for.
If you don’t know your exit strategy, you don’t want to buy anything. You want to know your exit strategy before you make the bid.
The successful people know what they’re going to sell for before they buy, or they don’t buy.
So those are two big mistakes that people make.
In a nutshell, do you have to pay back property taxes on a foreclosure? Yes. The property taxes hold a first lien position and always must be paid.
Do you have to pay the mortgage held by the previous owner if you buy a property for back taxes? No. The mortgage is wiped out when you purchase a tax defaulted property.
Conversely, at a foreclosure auction, you would also have to pay the defaulted mortgage.
So which is the better deal with the higher margin for profit? Buying the foreclosure property that requires paying both the loan and the back taxes? Or the tax sale property that only requires you to pay the back taxes?
Purchasing tax defaulted property is definitely the better deal!
If you’d like to learn more, I have a gift for you.
It’s the Safe Haven home study system, and you can learn about tax liens and a whole bunch of other information. It normally sells for $197, but I’ll give it to you for FREE.
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