Pitfalls and Challenges in Obtaining a Tax Deed

Most properties sold at the annual tax sale result in redemption. “Redemption” is the formal name for the repayment of the unpaid taxes by the owner or interested party. Depending on your investment strategy, you may be looking for properties which are likely to redeem or properties which may not redeem. In either case, the process for obtaining the tax deed is the same but it does come with different risks. Like all investments, the amount of risk you are willing to take will dictate the potential return.

The Property Tax Code provides the rules for obtaining a tax deed. The courts require strict compliance with the provisions of the code which outline the procedure for obtaining a tax deed. Because a failure to follow those provisions may result in an inability to obtain a tax deed, individuals should consult with an attorney once they purchased a tax lien. Statutory requirements begin shortly after the tax lien sale so do not wait to understand your obligations under the code.

The redemption period is a statutorily defined period of time in which an interested party can submit the unpaid taxes and penalties to the county clerk thereby redeeming the tax lien. The tax buyer cannot obtain the tax deed until that time period is over. The length of time depends on several different factors including property zoning and improvement status. Once a tax lien is purchased, you must know the redemption period to begin the process for obtaining a tax deed. Waiting to identify the appropriate redemption period can be fatal to obtaining a tax deed.

The redemption date is the last date in which an owner can pay unpaid taxes and redeem the property. That date sets a strict timeline that the tax buyer must follow to obtain a tax deed. The process for obtaining a tax deed begins with a written notification delivered by the county clerk shortly after the tax lien sale and concludes with the application for tax deed hearing in which the circuit court orders the county clerk to issue a tax deed to the tax buyer.  In between are a variety of steps which include an extensive search of the property records to identify all interested parties and a variety of notification methods to inform those interested parties in the potential tax deed.

As discussed earlier, once that tax deed is issued to the tax buyer, an interested party losses their rights to the property. This includes mortgage lien holders, mechanics lien holders, potential property heirs, family members with an expectancy interest and others. The law provides protections for interested parties, but you must act to enforce those protections.

For you, as a tax lien buyer, to avoid disputes over the tax deed, you must strictly conform with the law. “Strictly conform” means the actions you take must not merely address the spirit of the law, or accomplish the same goal as the law, the action must be done exactly as the law proscribes.  That burden is difficult to assess for things such as your “reasonable efforts” to identify all interested parties.  When the statutory language provides clear guidelines, strict compliance is relatively easy. But when the statutes language requires your actions be “reasonable”, you must look to case law to identify what ‘reasonable efforts” mean. You simply can not use your own judgment as to what a “reasonable effort” entails in order to plan what actions you are going to take. Without the guidance of an attorney, you risk making mistakes which may make your investment worthless.

Tax buyers looking to pursue obtaining a tax deed should contact our office to discuss the process and how we can ensure you receive the tax deed. The earlier in the process we get involved the better the result.

Buying a Tax Lien – Understanding the process and obligations.

There are three kinds of tax lien sales in Illinois; Annual, Forfeiture and Scavenger Sales.  The annual and forfeiture sales are similar in that the buyer purchases the tax lien by paying the unpaid taxes. A Scavenger Sale is different. At the Scavenger Sale, taxes on properties with three or more years of delinquent taxes are offered for sale. Taxes are sold for cash bids. The amount bid may be less than the total amount of taxes and interest due. The highest bidder wins a lien on the property and can obtain the deed after the requisite period of time passes.

The Annual Sale happens every year, generally in the fall or early winter. Parcels as to which the previous year’s taxes are delinquent are offered for sale.  Counties are required by the statute to publish the list of delinquent properties in a newspaper in advance of the sale. You may also obtain a list of the properties from the county for a fee.

Many counties have now switched over to electronic bidding which takes places in a variety of different methods using different vendors and processes to conduct the bidding. Each county will provide information regarding the timing, place, and method in which the bidding will be conducted. Counties generally require some form of registration before the sale, and some counties may require a substantial cash deposit by first time buyers to ensure the properties won in the auction are paid in full. Either way, there is generally a $500 dollar fee for registering which is deducted from your tax sale bill at the end of the auction or returned to you if no liens are purchased.

Due diligence and a strategic plan are necessary for a successful tax lien investment purchase. While it may be tempting to bid on properties sight unseen, some level of due diligence is advisable. It important to know that if you are the winning bid on a tax lien but do not submit your payment for the lien, the county may still hold you liable for the purchase and any difference between your bid and the rebid amount.

The county may list properties by address and PIN (Property Identification Number). Caution is warranted as the address listings may not be accurate. You are buying the tax lien on a PIN not a mailing address. To avoid confusion, you should identify the properties by PIN using the county GIS system.  You should also visit the property in person and investigate the state of the property and its surroundings. Potential value in the property is tied to its previous uses and its location. Walk the property, check for evidence of previous commercial uses, and make sure you know what you are buying. Remember to check for visible evidence of easements which may affect the desirability of the property. The more due diligence you do, the better prepared you will be when you purchase the property.

Whether visiting the property in person, or doing a more comprehensive check on the property, it is important you have a firm idea of the investment strategy before bidding on a property. Remember, you may end up with an unsellable property and a complete loss of your investment unless you understand the property, the law, and the real estate market.

Introduction to the Illinois Tax Lien Sale Process

Every state’s delinquent property tax process is dictated by state statute. States can be generally divided between tax lien states or tax deed states. Illinois is a tax lien state. However, not every tax lien state operates the same. Illinois is particularly attractive to investors looking for a solid rate of return as the penalty interest amount can be as high as 36%. While the Illinois Property Code provides the rules governing tax lien sales, the procedures for the sale are decided by the county government. To understand how to maximize your investment, you need know what the law says and how each county administers the statute.

As a preliminary matter, property taxes are superior to all other liens and encumbrances on a property. This fact is what makes the tax lien so potent. The county has a lien on all property with delinquent taxes and can sell that lien at a tax sale. These tax lien sales are held on an annual basis and afford an individual an opportunity to buy the tax lien by paying the amount of delinquent taxes owed on the property. To successfully purchase the tax lien at the annual tax lien sale auction, a buyer bids the lowest tax penalty rate they are willing to accept. The individual with the lowest rate wins the auction.  The penalty rate you bid is the interest rate charged on the debt every 6 months. The owner of the property must pay the tax debt plus the accrued penalty rate to redeem their property.

When a property owner fails to redeem their property within the statutory period, the tax lien buyer has the option of obtaining the tax deed. The tax deed gives the buyer ownership and possession of the property free and clear of most encumbrances and liens. Because of this, individuals with an interest in the property, such as a lien or mortgage on the property, must be notified and given opportunity to pay the taxes and penalties on the property to avoid losing their interest in the property when the tax deed is granted.

Because of the priority tax liens receive under the law, an interest in property can be erased during the tax deed process. Individuals who have an interest in property are advised to ensure tax payments are made on the property regardless of their personal obligation to pay those taxes. Even if your interest is an expectancy interest and not a legal interest, your interest may be eliminated by the power of the tax lien priority.

Each step in the complicated process requires understanding not only the statute and caselaw, but also the nuances in how each county’s process and procedures vary. Tax lien buyers must be aware that the courts require strict compliance with the statutory procedures to obtain a tax deed. Failure to follow the procedures means a risk of having your petition for tax deed denied. Absent a valid, statutory reason for declaring a sale in error, the result would be a total loss on your investment in the tax lien. Whatever your situation, whether you are preparing to purchase a tax lien, or petitioning for a tax deed, our office can help guide you through the process from start to finish.