When Owners Default on Tax Liens

19 Replies

What happens if a property owner does not pay, when it comes to tax liens/certificates?

From what I understand, in this situation, you're in a great place! I'm pretty sure that tax-liens are senior to all other liens or mortgages. Your owner defaults, and I'm pretty sure you've got the property free and clear!

That sounds almost too good to be true. Could be like a stock option play. Are there many different strategies that people emplow when it comes to the liens?

Free & clear? What if the property owner still owns on a mortgage?
Who will have to pay to the mortgage company?

Usually tax liens holds 1st position and they are senior over mortgages.

Correct, When you get a property from a Tax Lien or Tax Deed sale in most states it is free and clear. The mortgage is wiped out.

One strategy is to contact the mortgage company and offer them your position.

Another, once a lien has been sold on a property contact the owner and offer them some money to buy the property. Then, pay the lien and you have a property (make sure there is no mortgage on this one).

There are more these are the ones I have used.

Really, mortgage is wiped out? Why don't then the mortgage company/lenders have someone monitor these tax liens so they can bid when it is time of the auction?

Originally posted by Tyler H:
Really, mortgage is wiped out? Why don't then the mortgage company/lenders have someone monitor these tax liens so they can bid when it is time of the auction?

That's why mortgage companies usually escrow the tax payments and if they don't, can foreclose if you don't pay your property taxes. It gives them a year to repossess the property and resell it as an REO without losing it outright.

Wow, a 4 yr old thread brought back to life! LOL

Lots of things can happen during various phases of the process. One of them is another investor can swoop in and cut a deal with the owner to redeem (when it makes sense).

Just about any other option, as opposed to allowing the tax sale to be completed along with the redemption period, does not wipe out the mortgage.

This is an area to be careful of for sure. Know the laws of your state and county.

I understand that mortgages are suboordinate to liens and tha tliens take first place over almost anything - except IRS liens I believe. But take this scenario:

Property worth about $100,000
$50,000 mortgage
$10,000 lien that you purchased and accrued interest for a year, was not redeemed, and after the year waiting period (it's a year here in Kentucky) is up and you proceed with a foreclosure.

I have trouble understanding that in a situation like this with such equity and value in the house, that your $10,000 lien somehow wipes out the $50,000 mortgage. It seems there is enough there for both to be paid if the property sells at foreclosure auction for say - $75,000?

Maybe I am missing something but given a situation like this, how does the mortgage holder just get wiped out?

Originally posted by Jimmy Hamilton:
... how does the mortgage holder just get wiped out?

Because those are the rules!

In the state of PA, there are two types of tax sales; one where the junior liens AREN'T wiped out, and one where they are. And keep in mind that the lien goes away, not the debt - so the (former) owner in default still owes the junior debt amounts that they incurred while they owned.

So it is written law (differences per state i'm sure) that mandates all junior loans being wiped clean.

And as you said the lien is wiped from the property although the previous owner still owes the debt, which is no longer collateralized. If this is the case then I don't know why EVERY mortgage wouldn't hold taxes in escrow (as I know many do).

What does a bank or mortgage holding company do with such an uncollateralized mortgage, write it completely off?

Are the junior liens wiped clean as of the property tax lien holder forecloses, or when does it occur?

What sorts of liens, if any (I think IRS is senior), are senior to property tax liens? I know mortgages & mechanics liens and the like are junior. But what about IRS, child support, or federal court judgements?

A tax lien that goes thru a proper foreclosure will eliminate all mortgages, judgments (child support, deficiency, etc) and even certain tax liens and government liens. These being previous tax liens and IRS tax liens if the IRS was noticed property during the foreclosure.

What isn't eliminated are most other government liens -- municipal fines, environmental liens, taxes after your lien, etc.

Check with your state statutes--every state is different and some allow for more liens that could be on par with the tax lien (ie condo and hoa dues in some states).


Most investors are paying home owners property taxes and if the home owner fail to pay the investors will cloud the title.

The rules vary by state and sometimes by county or other local jurisdiction. My comments below come from my knowledge of Maryland law.

I almost all cases, certainly in Maryland, yes a very small lien can wipe out a very large mortgage.

However all the mortgages and other lien holders are notified in the foreclosure. They have the right to, and usually do, pay off the tax lien to protect their interest.

The other factor is tax liens, and deeds, are sold at auction. The amount of the bid over the taxes due, goes to the owner or mortgage holders. Some of the Maryland auctions are very competitive and bids can be more than the mortgage amount.

I just got an e-mail today from my attorney that one of my tax liens is on a property owned by a hard money lender. The lender has said he is going to walk away and not pay the taxes.

Sorry to revive the old thread, but had a question I couldn't find a 100% definite answer to.

My question is in relation to a home that has multiple tax liens against it that are held by multiple owners. If I were to buy all the associated tax liens against it from the owners, or even a large majority of them, I would be able to file for the foreclosure and ownership of property (assuming the owners right to reclaim grace period has passed) and the mortgage on the property would be completely wiped, correct?

I just can't figure out why one of the other holders haven't bought the liens out from the others and went for the property themselves. Is there something here that I'm overlooking?


The way is works in AZ Jonathan: if there are more than one lienholder on a property, the ones older than 5-years can foreclose (three years after the lien is sold, the lien is two years old when sold). If the subsequent lienholder is aware that you are about to get the property, he may pay off your lien and wait until he can foreclose.

When you foreclose, if you notify the mortgageholder (or anyone with an interest in the property) and they do not redeem the lien (pay the tax), you get Treasurer's deed free & clear.

What I don't get is someone I know in AZ doesn't foreclose the mortgage so I assume he wants to assume the mortgage.

Could also be the property is in bankruptcy.

Thanks for the response Raquel. Just to make sure I understood everything correctly - The house I'm currently interested in has multiple liens against it, with the oldest being 5 years old and the most recent being about a year old. Do they all have to be 5 years old, or just as long as one meets the specified time frame? If I were able to purchase all the liens then I would have the sole ability to foreclose unless the bank mortgage holder agreed to pay my net sum of all the liens plus interest, correct?

Also, in my current situation, the total sum of the liens are significantly smaller than the mortgage amount, so is there any way around notifying the mortgage holder? Looking at the cost of the liens compared to the mortgages, it would be absurd for the bank not to purchase the liens. I would really like to pick up the property if possible.

I'm thinking it might be worth my time to hire a local RE friendly attorney to sit down to weigh my options and to make sure I'm not overlooking something.

After staying up and reading the majority of the day away, I think I've gotten a better understanding of how the system works. Unfortunately, upon solving the issues listed above, I ran into a few more that I cannot find the answers to.

1. If I were to negotiate a short sale with the bank, what price should I be looking to pay - whats the normal discount amount? and what difference would an all cash offer make?

2. If I were to purchase the liens from the other holders after the short sale negotiation, what premium should I be expecting to pay? Don't want to get screwed on this step because I'm a rookie. From what I've read, the normal interest rate received on the liens they purchased (in Kentucky) is 12% - so what kind of additional premium on top of that should I expect to be added?

3. Am I required to own all the liens to file for ownership in court, or just have a large majority? If for example I have 9 of 10 liens against a property, would that be sufficient?

Sorry for all the trouble, I appreciate the help.


Updated almost 6 years ago

Still looking for answers ASAP. Need to get this all sorted out before this Wednesday. Thanks.

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