When buying a house you expect to spend money beyond the sales price for some repairs or remodeling. Buyers don’t expect to have to pay to clear a lien against the property for unpaid taxes, and the prospect is intimidating. What is a tax lien? If you love a house that has one, should you automatically pass, or move forward?
What is a tax lien?
A tax lien is a legal device that a taxing authority files against a property whose owner has failed to pay either property or income taxes. The lien gives the authority the right to collect the taxes from the proceeds of the sale of the house. If the taxes go unpaid long enough, the tax lien gives the authority the legal right to order the house foreclosed upon and sold to pay the bill. Federal tax authorities can seize a home for unpaid income taxes.
Taxing authorities don’t want to hold properties, so they do everything they can to remedy the debt with the homeowner before resorting to such measures.
How do you know if a home has a tax lien against it? If the seller doesn’t disclose the information, it typically will come to light during the purchase process. When you buy a house, you purchase an owner’s title insurance policy. In preparing to issue that policy, the title company searches public records regarding the property and should find the tax lien, as well as liens for unpaid construction work or other indebtedness.
Buying a house with a tax lien
When a home with a tax lien is sold, the delinquent taxes will have to be paid, either from the proceeds of the sale or out of pocket by the seller or buyer. Before you make an offer on the house, find out the total amount of taxes owed and factor that amount into what you are willing to pay for the house. If the seller has sufficient equity that your purchase price allows her to pay off the mortgage and the taxes plus the costs to sell the house, everything ties up nicely.
If the sales price isn’t high enough to cover these items, the transaction becomes a “short sale,” which is a more difficult process in which the mortgage company, the government and the seller and buyer must come to terms. Normally the mortgage company has the right to seek repayment from the purchase price before any other party, but with a tax lien, the government comes first. Unless the government taxing authorities agree to allow the mortgage company to retain its priority, the tax debt prevails. The negotiations between parties in a short sale can take weeks or months. Many buyers simply don’t have time to wait it out. Complicating the process is that the seller often resists providing financial information, which drags out the process.
On the positive side, sometimes a short sale can offer a house for a great price if terms have been worked out agreeably with all parties.
Loans and title insurance
If you are paying all cash for the house, and can pay the tax, buying a home with a tax lien is simple. If you are getting a mortgage, you may have trouble getting approval without agreeing to pay off the taxes as part of the purchase. The mortgage company will take out its own title insurance policy to protect itself.
If the tax lien isn’t discovered until after closing, it is your responsibility to pay it because tax liens attach to the property, not the owner at the time the lien was incurred. Even though the previous owner was in arrears, now that you own the property, you owe. But your title policy will pay the taxes because this situation occurs when the title company failed to discover the tax lien.
Additional considerations
Be sure to have an inspection of a house with a tax lien. If the seller wasn’t paying taxes because he was in financial distress, he probably couldn’t afford to maintain the house appropriately.
When considering buying a home with a tax lien, it’s helpful to work with a real estate agent and an attorney or escrow agent experienced in short sales and in buying homes with tax liens. These professionals can help you skillfully navigate the purchase process.