What is a Tax Auction?

Dale Marshall

A tax auction, sometimes referred to as a tax sale, is one of the most misunderstood concepts in American real estate. A tax auction is the sale at auction of a right to property to satisfy unpaid taxes, subject to redemption in full by the property owner. The successful bidder must pay the taxes due together with any other lawful charges and fees, and is given a right to the property evidenced by a tax deed or a tax lien certificate. However, the successful bidder does not take outright ownership of the property and may not evict the property owner for a significant period of time, often as much as two years or more.

A tax auction may be announced in the local newspaper.
A tax auction may be announced in the local newspaper.

Tax auctions on real estate are generally conducted by a local taxing authority to collect property taxes due and unpaid. Generally, property owners are not permitted to accumulate significant tax arrearages because the revenue has been budgeted and accounted for by the taxing authority. The nature of the transaction, in essence, is that the taxing authority collects the taxes due from the successful bidder, and then the successful bidder and the property owner work things out between them. In most cases, the property owner will repay any amounts paid by the successful bidder, with interest, during the redemption period. If the redemption period expires and the property owner has not satisfied the debt, then the successful bidder will take full ownership of the property and may take possession.

Failure to pay property taxes could result in the real estate being sold at a tax auction.
Failure to pay property taxes could result in the real estate being sold at a tax auction.

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A tax auction must generally be announced publicly, with the general public given sufficient time to inspect the property and prepare bids, although private sales sometimes take place if permitted by statute. Notice will include the total amount of taxes due and any additional charges and fees. When there's a lien on a property, such as a mortgage, both the property owner and the lien holder are notified of the shortage before public notification or auction takes place.

In most cases, a tax auction is conducted by sealed bid. The nature of the bidding varies by jurisdiction; in some cases, the bid is the interest rate the property owner must pay the successful bidder on the taxes and fees paid, and the lowest such bid wins the tax auction. In other cases, bids will be for dollar amounts, and may exceed the total taxes and other charges and fees due. In these cases, the tax auction is won by the highest bidder, and the property owner, to redeem the property, must reimburse the amount bid plus a statutory rate of interest.

There are individuals and companies that devote a great deal of time and money to purchasing properties at tax auctions. The properties they purchase are usually redeemed, and those that aren't are quickly repossessed and sold on the open market, usually at a substantial profit. However, the ratio of redemptions to repossessions is usually very high, and those seeking to earn a living from buying tax deeds or tax lien certificates at tax auctions should have both a great deal of patience and a great deal of capital.

There will be cases when a state government, or the national government, may seize property and sell it at auction to satisfy unpaid income or other tax liabilities. The rules and standards for these tax auctions are sometimes different from those conducted by counties or municipalities to recover unpaid real estate taxes.

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