Arizona Tax Lien Foreclosure – Doing Your Due Diligence August 15, 2008

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Once an investor has owned a tax lien certificate of purchase for at least three years since it was first offered for sale by the given county, the investor may seek to foreclose the right of the property owner to redeem the tax lien. Arizona’s statutes (A.R.S. Section 42-18201, et seq.) govern the foreclosure process.

Specifically, Arizona Revised Statute Section 42-18201 requires that at least thirty days before filing an action to foreclose the right to redeem, the tax lien holder must send a notice of intent to file a foreclosure to the property owner. Section 42-18201 specifies exactly how that is to be done.

The recent Arizona Court of Appeals case of Roberts v. Robert, 158 P.3d 899 (App. 2007), has added to the due diligence necessary to successfully foreclose the right of a property owner to redeem a tax lien. In Roberts, the Roberts purchased two tax liens for property located in Mohave County, Arizona. The Roberts later sued the owner of record, Phyllis V. Johnson, the Mohave County Treasurer, various fictitious parties, and the “unknown heirs of any of” them “if they be deceased” to foreclose their right to redeem the tax liens.

After attempting personal service on Johnson, the Roberts discovered that Johnson had died. A son of Johnson, was served on Johnson’s behalf and subsequently entered into an arrangement with the Roberts whereby they would obtain a default judgment without any subsequent assessment of fees or costs against Johnson or the son. The Roberts later obtained a default judgment barring Johnson or any person claiming title “under” her from asserting any right, title, or interest in an tot he property subject to the tax lien.

A year later, Tim Roberts appeared, claimed to be the son of and heir of Johnson, and argued that as an heir, he had a right to redeem the tax liens. He then moved for a new trial and asked the trial court to set aside the default judgment, arguing that the default judgment was void because he had not been personally served or served by publication.

The issue presented to the Court of Appeals was whether Johnson’s heir had a right to redeem a tax lien. The Court of Appeals ruled that because Tim Roberts was Johnson’s rightful heir, he a right to redeem. The Court also ruled that only those parties who are joined in a foreclosure action may have their rights to redeem foreclosed. Thus, ruled the Court, the Roberts need to join Tim Roberts as a defendant in their foreclosure action and obtain a judgment against him to foreclose his right to redeem.

The Court also set the standard for what level of due diligence and due process will be required in a tax lien foreclosure action in Arizona. Depending on the circumstances, the Court ruled that a tax lien holder may need to examine public records, or may need to ask relatives, friends, or the neighbors of the deceased property owner about the existence of heirs. In the end, the Court stated that whether service by publication is constitutionally sufficient will turn on the facts of the particular case, and it would not attempt to set forth a rule that will fit each circumstance.

This case clearly sets a due diligence and due process standard, but leaves it up to the circumstances of each case to dictate what efforts will justify service by publication. Indeed, the Court rejected the Roberts’ contention that they did serve Tim Roberts as an “unknown heir.” The Court stated that the record contained no evidence of what steps, if any, the Roberts took to identify and locate Johnson’s heirs before attempting service by publication.

The message is clear – if the property owner has died, some efforts must be made to locate the heirs of the deceased property owner before service by publication will be deemed appropriate under the circumstances. This decision clearly will place a heightened burden on tax lien investors and will undoubtedly increase the cost of successfully foreclosing the right to redeem. It will be interesting to see if future court decisions spell out in greater detail what level of due diligence and due process will be required. Until then, investors beware – do your due diligence.

(tax lien foreclosure Arizona Tucson attorney lawyer “tax liens” “tax lien”)

Tax Lien Foreclosures and Bankruptcy August 7, 2008

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Due diligence – do it and do it well. For unsuspecting tax lien investors who have not done their research, they might be surprised to learn that while property tax liens have very high priority, in certain circumstances, a bankruptcy can wreak havoc on their investment.

It should be noted that bankruptcy courts often respect property tax liens and give them high priority in the administration of a bankruptcy estate. However, under certain rare circumstances – Chapter 7 – the bankruptcy trustee may subordinate the tax lien to the administration of the estate, effectively extinguishing the tax lien. In effect, a tax lien investor could end up an unsecured creditor – a far cry from the 16% return or title to the property that investors believed they would receive.

This is a pretty rare situation, but one tax lien investors should be aware of.  In all instances, as part of a tax lien investors’ due diligence, they need to determine if the subject property is subject to an automatic stay by a bankruptcy court.  By consulting a title company, the county recorder, and the bankruptcy court, an investor can easily avoid such a scenario.

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What happens to a tax lien in a foreclosure? June 30, 2008

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(Fleishman Law, PLC)

A common question in the tax lien investing arena is what happens to a tax lien if a property is foreclosed on?

In a tax lien state like Arizona, counties do not sell property; rather they sell a tax lien in the form of a certificate of purchase for unpaid property taxes. This tax lien is an encumbrance or enforcement right held by the county. While the lien does not grant full ownership rights to the property, it does provide the investor with two commanding rights: 1) The right to receive interest penalty charges (up to 16%) if the lien is paid off by the delinquent property owner, and 2) The right to foreclose the tax lien and take title to the property if the lien is not paid.

What makes tax lien investing so potentially powerful is that property tax lien is a high priority lien, which is superior to judgment liens, mortgage liens, trust deeds, and other private liens. However, property tax liens do share priority with other liens. For example, in a Chapter 7 bankruptcy, the bankruptcy trustee may be permitted to pay the expenses of administering the bankrupt estate before paying the tax lien. Another example is when a bank fails due to insolvency. In that case, any loans owed to the bank are administered by the Federal Deposit Insurance Corporation (“FDIC”). This is a rare instance, but one any investor must be aware of.

The long and the short of tax liens in the foreclosure process is that the tax lien will be paid even if the property goes to a trustee’s sale because of its superior priority.

Fleishman Law’s Tax Lien Foreclosure Primer June 23, 2008

Fleishman Law’s Tax Lien Foreclosure Primer

If you own a home and dutifully pay your mortgage each month, chances are, you do not worry much about whether your property taxes are being paid. Hopefully, if your mortgage servicer is doing its job correctly, you have an impound or escrow account set up from which your servicer pays your property taxes and insurance. However, some property owners do not have impound accounts; therefore, they are responsible for the payment of their property taxes.

So what happens when a property owner stops paying their property taxes? In Arizona, like many states, once a property owner is delinquent in the payment of their property taxes, county treasurers sell tax liens to investors in the form of certificates of purchase.

Each year, county treasurers hold tax lien sales. In Arizona, the tax lien sale is held each February. There, investors bid on an interest rate that they are willing to accept for the tax lien. In Arizona, the highest rate that an investor can receive is 16.00% for a tax lien. Often, if the tax lien has great interest, investors bid down the rate, which may reach as low as 5-6%. The investor is not bidding on the property, but the right to own a tax lien against that property. The tax lien process ensures that counties continue to receive property tax payments to support the services they provide, and it also provides investors a solid rate of return or the opportunity to foreclose on a property in time.

In the absence of any future payments by the property owner, a tax lien affords the investor the opportunity to make property tax payments in the place of the property owner. The tax lien holder also continues to receive the same interest rate originally bid until such time as the tax lien is redeemed by the property owner or a foreclosure action is instituted.

To begin a judicial tax lien foreclosure, an investor must hold a tax lien certificate of purchase for a minimum of three years from the date of the original offering of the tax lien. By the time an investor begins a judicial foreclosure in Arizona, for example, five years of back taxes will have accrued.

The judicial foreclosure process is controlled by state statutes and is very specific in its provisions. Given that a property owner may be stripped of his ownership rights to a property, notice is always an important part of the tax lien foreclosure process. In order to ensure that proper notice is given, purchasing a litigation guarantee from a title company is important to get the most up to date information on the property owners.

Arizona requires that a statutory notice letter be sent to the owner of record according to the records on file with the county recorder. Once notice is provided and no redemption has occurred, the investor can file an action in superior court seeking to foreclose the right of the property owner to redeem the tax lien. A property owner can redeem any tax lien up to moment before a judgment is signed. The typical tax lien foreclosure can take close to a year to complete.

Once a successful tax lien foreclosure is complete and a court enters judgment foreclosing the right of the owner to redeem the tax lien, the county treasurer will issue a treasurer’s deed, which is recorded and gives the investor title to the property.

It is interesting to note land ownership in this country is conditional. While ownership of property is a concept firmly enshrined by our founding fathers, governments at all levels still have tremendous power to take that property from owners. While eminent domain is the most commonly known power given to governments to take property, the tax lien process ensures that if you choose not to pay your property taxes, you invariably will lose your property to someone willing to step in and pay your back taxes for you.