How States Vary in the Tax Lien Auctions and Tax Lien Foreclosures

The laws that define tax liens and tax deeds vary like flavors in an ice cream shop – some are similar but not one is alike. 

First, let’s talk about how states sell their delinquent taxes.  There is a split among states—some states sell tax deeds at auction direct to the public.  These are known as “tax deed states”.  They include:

  • Alaska
  • Arkansas
  • California
  • Delaware
  • Idaho
  • Kansas
  • Maine
  • Massachusetts
  • Michigan
  • Minnesota
  • Nevada
  • New Hampshire
  • New Mexico
  • Oregon
  • Utah
  • Virginia
  • Washington
  • Wyoming

Other states (the focus of my tax lien website) sell their tax liens “tax lien states”.  These states choose this method because they can recoup their lost tax revenue quicker and it’s a cheaper option for them because they do not have to send out delinquent tax notices and begin foreclosure—they simply pass the costs on to the investors.  Twenty-two states plus DC and Puerto Rico sell their taxes as liens to investors.

The method that they sell these liens varies widely.  Most tax lien states sell through some sort of public auction—either live or online.  If the liens are sold at this auction, there is usually a way to buy the liens directly “over-the-counter”. A few jurisdictions sell their entire pool of delinquent liens in bulk to one buyer—usually a bank or tax lien servicer that specializes in managing tax liens.

The public generally buys tax liens through the auction process.  But, even the process of buying liens is completely different in each state.  There are “bid down” auctions such as those held by counties in Florida where buyers compete by bidding the annual rate of return on their liens down—sometimes to zero percent!  In Florida, for example, the bidding starts at the statutory rate of 18% but the competition at auction (mostly online) can often bring down the interest rate to only .25%.  Thus, the investor only really earns the initial 5% initial penalty that all buyers receive in Florida.

Another way to bring in competition and allow for some compensation to the taxpayer (if they were to lose their property to a tax deed) is found in “overbid” auctions.  In this auction, the initial bid is based on the delinquent taxes owed, and then bidders raise the purchase amount until the highest bid is put forward.  Sometimes, this amount can be 40-60% of the value of the property.  Furthermore, the amount bid over the tax amount usually does not accrue interest.  The District of Columbia auction is a good example of this type of auction.  In DC, the overbid does not earn interest but, if you receive deed to the property, they will return this overbid to you minus any taxes that have accrued since the auction and minus any municipal fines and recording costs on the property.

Yet, another method of selling liens is by rotational bidding and bid down ownership.  These only happen in a few states and may fall out of favor in the near future.  We’ll discuss all of these bidding-types in detail later on.

Finally, the last major difference between states is how one goes thru the foreclosure process after the redemption period has expired.  Judicial foreclosure states such as New Jersey and Maryland require the investor to hire an attorney and foreclose on the property just like a mortgage foreclosure.  Other states set out a series of statutory steps for the investor to follow that will result in a deed being issued.  Indiana, for example, sets out specific deadlines and noticing requirement the investor must send out in order for a deed to be issued.

The easiest methods for tax lien investors are administrative processes where the county handles all of the noticing before issuing a deed.  South Carolina is a good example of this.

These last two methods—statutory noticing and administrative--are the least defensible methods meaning that the investor will normally have to go thru additional judicial procedures called quieting title in order to get a free and clear deed.  We’ll also discuss this in detail.