If property taxes for the immediately preceding tax year are delinquent on a parcel, they are offered for sale to tax purchasers at the Annual Tax Sale. The sale might be held any time from the Fall of that year to the Spring of the following year.
At the Tax Sale, buyers can bid on and then pay the back taxes, fees and penalties for any property on which owners have not paid their property taxes.
By paying the taxes and any accumulated penalty charges, the buyer in essence purchases certain rights to the property, which can eventually lead to securing actual ownership. The process of claiming a property can take from 6 months to 2.5 years and there are many safe guards built into the system to allow the property owner to redeem his or her rights to the property.
Since the original property owner has up to 2.5 years (for residential properties) to repay its delinquent taxes before losing the deed on the property, it is essential to consider a longer-term horizon when analyzing returns from the Annual Tax Sale.
In the end a Tax Certificate holder receives what is called a "Tax Deed" which is granted by the court. A Tax Deed is, in most cases, a perfect title and extinguishes all other encumbrances on the title including mortgages, mechanics, liens, utility bills, leases, etc.
When considering the purchase of a tax certificate, the purchaser must take into account the following:
- The cost of the tax certificate.
- Any attorney fees as well as filing fees and costs.
- The cost of any subsequent taxes beyond the tax years on the tax certificate to be paid after redemption has expired, which is 6 months from the date of the pruchase of the certificate.