A tax lien fourclosure is a lien or encumbrance placed on real property for failure to pay taxes. A tax lien is a powerful lien that, in most jurisdictions, takes precedence over mortgage liens and mechanic's liens. In essence, a tax lien becomes first priority and, if the property is foreclosed, will eliminate a mortgage lien. Generally, Internal Revenue Service (IRS) liens and local government assessments will still remain and could become the investors responsibility.

Here is an example of how a tax lien certificate works

Jerry Late pay gets in some financial trouble and cannot pay his property tax bill. After a few warning letters from the county, he is delinquent. To make Jerry aware of the serious nature of property tax delinquency and start the legal ball rolling, the county places a tax lien on Jerry's property for the amount of the taxes owed. The tax lien becomes a debt on the property and must be paid off before the property can be sold or legally cleared. In most counties, Jerry Late pay is considered in default the day after his property taxes are not paid. This shows Jerry Late pay how serious the county is when it comes to not paying property taxes.

Once a year the county has a tax lien auction. If Jerry Late pay has not paid his property taxes by the time of the auction, the county includes Jerry's property in the tax lien auction. To make the tax lien enticing to investors, a state-mandated interest rate, which varies from state to state but is usually in the range of 10 to 24 percent per year, is added to the tax lien. Some states call this a penalty, while other states just refer to it as the interest rate; however, each state has its own procedures. The state then creates what is called a tax lien certificate (also called a certificate of purchase) to offer to investors at the auction. The tax lien certificate is the physical piece of paper that gives the investor a legal claim to the investment. In most states, the interest rate on the tax lien is what the bidding will start at when investors bid on the tax lien certificate created by Jerry's delinquent tax bill.

At the auction, an investor buys the tax lien certificate issued for Jerry's property. The value of the tax lien certificate is equal to the delinquent taxes owed on the property plus any penalties. When the investor buys the tax lien certificate issued for Jerry's property, he/she is essentially paying off the delinquent property taxes owed to the county. Jerry now owes the tax lien investor all the back taxes owed plus the amount of interest due on the tax lien certificate. Although the rules vary from state to state, in most states interest starts to accrue the day the tax lien certificate is sold. Thus, the longer Jerry waits to pay off the tax lien certificate, the more money the investor earns. In some states, if Jerry waits more than a year to pay, the interest rate increases and the investor makes even more money. After a tax lien certificate is issued, there are two possible outcomes.

In about 95 percent of the cases, comes up with the money. This is because Jerry does not want to lose his home or property. Now you can see why tax lien certificates are an ultra safe investment. When Jerry comes up with the money, he pays the county, the county contacts the tax lien certificate investor, and the investor turns in the tax lien certificate issued at the auction. In exchange for redeeming the tax lien certificate, the investor receives all the money he/she invested in the tax lien certificate plus the accrued interest. This process is called redeeming the tax lien certificate. The county where the tax lien certificate was issued handles the entire process.

In less than 5 percent of the cases, Jerry cannot come up with the money to pay the delinquent taxes. In most states this means Jerry will forfeit the entire property to the investor. After following the legal process required by the state and county, the investor forecloses on Jerry's legal ownership of the property and, in return for paying all remaining liens, taxes and penalties due, the investor receives the entire property, often for a fraction of what it is worth. The period of time that Jerry has to pay back the delinquent taxes is called the redemption period, which can range from as short as six months to as long as five years depending on the state.

Talk about a win/win situation. If Jerry Latepay pays off the tax lien, the investor receives his/her original investment plus a high interest rate. If Jerry does not pay off the tax lien, the investor receives the entire property for nothing more than the property taxes due on the property when Jerry forfeits the property. Are you beginning to see why tax liens are a great, unknown investment?

The Durham City/County Tax Office, at the direction of the Durham County Commissioners and the Durham City Council, is aggressively pursuing the collection of delinquent real and personal property taxes. One of the collection tools used by the Tax Office is the employment of private attorneys to commence formal foreclosure proceedings under North Carolina General Statutes 105-374 against real property on which there are delinquent unpaid property taxes. The text of the foreclosure statute appears below.

Reinhardt Milam Law Group, PLLC is one of four firms employed by the Tax Office to carry out these foreclosure proceedings. Attorney Chip Reinhardt is the primary attorney handling tax foreclosures for Reinhardt Milam Law Group. He is assisted in this work by attorney Brendan Turner, legal assistant Jennifer Mengel. Our office has been doing this work since the spring of 2002, and our efforts, along with those of the other attorneys, has caused a noticeable increase in the successful tax collection rate of the Durham Tax Office.

What follows below is some information, in the format of Frequently Asked Questions (FAQ), about the tax foreclosure process in Durham and in North Carolina:

What are delinquent real property taxes subject to foreclosure?

Everyone who owns real property in Durham County is required to list this property as of the first day of January of each year. Most times, this listing is automatic, but if there have been improvements or changes in the property, these must be reported by state law to the Tax Office with the listing forms in January. By July 1 of each year, a tax rate will be set by both the Durham County Commissioners and (if the property is within the Durham City limits) by the Durham City Council. For each parcel of taxable real state, these tax rates will be multiplied by each parcel's listed and assessed valuation as of January 1, and the product of this multiplication is that year's tax bill on the parcel. Usually in August, but no later than September, a tax bill will be mailed out to the last known address of the taxpayer as of January 1 for that year. The taxpayer has until the first Tuesday of the following year to pay the tax bill without penalty. After that time, if the bill remains unpaid, it becomes delinquent, and subject to penalties and interest as set forth by state law. Once the property tax is delinquent, it is subject to foreclosure prosecution.

What if the taxpayer sells the real property after January 1, and what if a bill is not received by the new owner?

Under state law, the listing taxpayer is the responsible party for the taxes owned by the listing taxpayer as of January 1 of each year, even if the taxpayer sold the property after January 1. The Tax Office makes efforts to notify new owners of the existence of tax bills, but state law only requires that the tax bill be sent to the taxpayer as of January 1 of that year, and to the last known address of the taxpayer. It is the duty of each owner of property to keep the Tax Office notified of address changes and to know that taxes are payable each year, regardless of whether a billing was received.

What does Durham County do with delinquent tax bills?

When a tax bill becomes delinquent, the Tax Office tries various methods to notify the taxpayer and potential owners about the delinquent bill to see if the bill can be collected without the extreme remedy of foreclosure. Sometimes the Tax Office will set up a payment plan with a taxpayer, but the Tax Office is not required to do so, and can terminate payment plans at any time. The final step in the collection procedure is a pre-foreclosure letter sent by the Tax Office to the last known address of an owner and/or taxpayer. If these pre-foreclosure methods still fail, the Tax Office may assign parcels to private attorneys to commence foreclosure proceedings.

What happens when the Tax Office assigns property to attorneys to foreclose?

Once the Durham Tax Office assigns properties to attorneys to foreclose, the Tax Office marks its computer records with the assignment, and will no longer accept direct payments or payment plans from taxpayers. All tax payments from the point of assignment must pay the taxes, interest, fees and costs in full, and must be made through the attorney. Persons interested in paying off properties in foreclosure must contact the attorney directly to whom that property was assigned to secure a payoff quote. At some point after the assignment, the attorney will start a title search of the property to determine as a matter of public record all of the owners, mortgage holders, judgment and lien holders, and other interested parties required by state law. The attorney will then prepare a complaint listing the City and County of Durham as the Plaintiffs (complaining parties). The Defendants will be all of those parties found by the record title search to be interested parties in the real estate (owners, mortgage holders, etc.) The complaint will be filed in either Durham District or Durham Superior Court (depending on the amount of taxes owed). The summons and complaint will be delivered to each defendant by the sheriff, or by other approved means of service of process in civil lawsuits (FEDEX, certified mail, process server, etc.). Each party that is served is clearly informed by the summons that written answer, if any, must be filed with the Court within 30 days from the date the papers were served on the party.

What is the legal effect of a tax foreclosure filing?

There is no real defense to a property tax foreclosure complaint and lawsuit. The main purpose of the foreclosure process is to notify all interested parties that any legal interest they may have in the property will be terminated and extinguished if a tax foreclosure sale of the property is completed. This is because property tax liens are ahead of and superior to all other liens, except (in a limited extent) to filed income tax liens held by the North Carolina Department of Revenue. When a superior lien is foreclosed, it cuts off all junior liens and ownership rights.

What happens after the filing of the tax foreclosure complaint?

As noted above, each defendant has 30 days to file a written answer to the complaint if they wish. Depending upon service on the parties and any answers filed, the attorney conducting the foreclosure will eventually move for a judgment of sale. Once a judgment of sale is entered, the property is scheduled for sale at the Durham County Judicial Building. The sale is conducted by a Commissioner appointed by the Court, usually Mr. R. Douglas Davis. At the sale, the highest successful bidder puts up a 10% cash/certified check deposit with the attorney, and the sale is reported to the Clerk of Court. After that, the sale stands open for 10 days for possible increased upset bids. Upset bids are calculated and received by the Clerk of Court for each property. If no upset bids are received, the attorney notifies the high bidder at the sale that the bidder has won, and that bidder has to come up with the balance of the purchase price. The process is the same when upset bids are received, except that the final high bidder after upset bids are completed is notified to bring in the purchase price of the final high upset bid. When the purchase price is paid under either sale process, the sale is confirmed and a Commissioner's deed is delivered to the new owner.

How do people find out about upcoming tax foreclosure sales?

Tax Foreclosure sales usually occur once a month. Notices of sale are published in the newspaper once a week for two weeks and posted at the Courthouse for at least 20 days. In addition, our office also mails out notices with the minimum bid amounts (see explanation below) to the defendants in the case as well as the owners of property adjacent to the property being sold. Up until January, 2004, notices of sale with the minimum bid amount were also mailed to people who enrolled their names and addresses for a mailing list maintained by the Tax Office. Starting with sales in February, 2004, the mailing list will be discontinued, and the Tax Office will publish the notices of sale with the minimum bids on their website. As soon as that website address becomes available and is up and running, it will be posted here. The Tax Office is also looking into the possibility of setting up an opt-in e-mailing list to send out notices of sale with the minimum bids. If such an opt-in e-mail option becomes available, information about it will also be posted here.

Can the tax foreclosure sale be stopped or redeemed from sale?

State law provides that any owner, mortgage holder or defendant in a filed tax foreclosure proceeding can stop the foreclosure process at any time by redeeming the property. The redemption price is equal to the taxes, interest, fees and costs of the foreclosure proceeding to the date of the redemption. Parties wishing to redeem property from tax foreclosure and stop the foreclosure process must contact the assigned attorney for a redemption payoff figure. Redemption can even occur after a sale, as long as the sale has not been confirmed by the Court. However, once the foreclosure property sale has been completed with a confirmation order and delivery of deed, all rights of redemption are terminated.

Bankruptcy proceedings filed by the property owner under federal law can also stop tax foreclosures, but all of the taxes, interest, fees and costs of the action to the date of the bankruptcy filing must be paid as a priority claim in the bankruptcy proceeding.

What is the status of title delivered by a tax foreclosure deed? Are there any warranties on the property?

The Commissioner will make it clear to all bidders present at the public sale that no representation or warranty of any kind is being made about the property or the status of title being delivered. Under state law, it is up to each bidder to carefully check out the title and status of the property being sold before placing either a public sale bid or an upset bid.

What if the successful bidder at the public sale or at upset bid doesn't bring in the purchase price?

Any bidder at either public sale or upset bid who doesn't bring in the purchase price upon demand by the attorney will be subject to immediate loss of all deposits, as well as civil and/or contempt prosecution for failure to make the bid. All bidders who bid at tax foreclosure sales, either public or upset bid, are required by law to be aware of the penalties for failure to honor their bid

What happens if no one bids on the property at the foreclosure sale?

The County of Durham will enter a minimum starting bid at each sale, which is equal to all the taxes, interest, fees and costs of the judgment of sale, as well as the additional costs and fees of the sale itself. If no one bids, then the County's minimum bid will be the successful bid. If no upset bids are received (see above), then the sale will be confirmed to the County of Durham, and a deed will be issued to the County of Durham.

What happens to property which is deeded to the County of Durham?

After its deed is recorded, the County of Durham will evaluate the property to see if it wants to keep the property or dispose of it. Anyone interested in acquiring property from the County of Durham should contact the County Real Estate Administrator.