Let me start by stating that this is not legal advice. This blog does not offer legal advice. If you need legal advice, consult with an attorney. Orleans Parish just held its annual tax sale. This kicked off a lot of chatter concerning tax sales and these discussions often sound disconcerting. A sweet little grandmother loses her house for $78 in taxes or someone starts to believe you can acquire a house or investment property for under $100. I hope to generally educate about the process and to provide some understanding. If you have specific questions or plan to begin investing in tax sales – consult with an attorney.
What are tax sales? In Louisiana, it is a process or method for a taxing authority to recover delinquent taxes.
A tax sale is the sale of properties that have delinquent ad valorem (real or personal taxes) taxes due. These properties are sold to the public for the amount of delinquent taxes due, plus any accrued interest, costs and other statutory impositions. If a property is sold at tax sale, the property owner has three years to redeem the property from the purchaser by paying the purchaser the purchase price plus a five percent (5%) penalty and one percent (1%) interest per month from the date of the tax sale until the date it is redeemed.
What is the purpose of a tax sale? Governments utilize tax sales to collect unpaid property taxes. Does this mean that you can lose your house the day of the tax sale auction? Nope. When a house is sold at auction, the property owner has 3 years to “redeem” the tax bill. This redemption is paid directly to the taxing authority. (Usually the Sheriff but in New Orleans it is the City’s Department of Revenue.)
This should dispel the notion of acquiring real estate via tax sale. A tax sale is not an option if you intend to either live in or rent out the tax sale property. There is a redemptive period and it can take up to 3 years before you as a tax sale purchaser move on to the next step.
I often get contacted about using tax sales to acquire property. So here comes the “Debbie Downer” moment:
This is not a good way to buy your first house. TAX SALES are for investors.
First, we should realize what they are selling you at this auction. It is a tax sale deed. You do not have the right to enter the property or take possession without the 3 year redemptive period running and taking further legal steps, i.e. Lawsuit to Quiet the Title.
I routinely get calls from investors asking if they are going to be able to buy a house for $324.62. No – it does not really work like that. Is it too good to be true? Maybe – Probably – Yes!!
How does this tax sale process work? In Louisiana, our tax sales are handled by auction. In a normal auction, you are allowed to continue to bid until a person is the highest bidder. In Louisiana, we like to confuse people. We are a Civil Code state. If you have watched Streetcar Named Desire, you know this already.
“Now we got here in the state of Louisiana what’s known as the Napoleonic code.” – Stanley (Streetcar Named Desire).
Our state constitution does not allow you to pay more money for a particular tax bill, it allows you to bid down to acquire less property. This is the part where many tax sale buyers get a little confused. The winning bidder is the person who is willing to pay the tax bill while acquiring the least amount of ownership. At a tax sale auction, your first option is 100%. The bidder can then offer 99% and then 98% all the way down to 1%.
Let’s go back to my original example – there is a tax bill being auctioned for $324.62. The winning bidder is paying $324.62. The bidding or auctioning process is based on how much of an ownership percentage the bidder is eventually willing to acquire.
Why would someone do this? Is there anything positive? Tax Sale purchasers buy at the auction because the tax sale purchaser receives a high rate of return. In the first year, you can earn up to 17% on the tax bill amount. Each subsequent year, you can get up to 12% annually or 1% per month. You are not getting that return in a savings account or CD. The vast majority of investors in tax sale properties are doing so for the high interest rate return. Is this a good way for a first time home buyer to purchase a home? NO Do tax sales have many uses? Yes It’s a great way to earn some interest. It can also be one of the many tools in the blight remediation tool box.
Special Rule – blighted property owners have only 18 months to redeem a property. The Civil Code allows you to begin remediation prior to quieting the title if the property is blighted. The dollars you can spend are limited but it is the first step in cleaning up something blighted and ensuring that the property is now up to code.
WHAT HAPPENS IF THERE IS NO REDEMPTION – HOW DO YOU CLAIM THE TITLE? If there has been no redemption in the 3 year period, you have to file suit to quiet the title. This means hiring an attorney and beginning a potentially arduous legal proceeding where you bring a lawsuit against all interested parties in the property.
If you are successful with your suit to quiet title, you then have to deal with the next hurdle. It can be very difficult if not nearly impossible to get title insurance on a tax sale title. Most title companies are reluctant to insure tax titles. If there is no title insurance available, it is unlikely that you will be able to find a lender to loan money on the tax sale property.
CONCLUSION These tax sale titles are not a great idea for a first time home buyer. Tax sale properties can be a way to earn a really nice interest rate. They can definitely be used in targeted blight remediation efforts.
“Nothing in this blog constitutes legal advice. This is free. Legal advice you have to pay for.” – Scott Greenfield