Tax sales are a special type of foreclosure sale that are conducted by the State to recover delinquent property taxes. Buying tax delinquent property in Arkansas has become an increasingly popular investment opportunity with many investors and even some individuals looking to purchase a home because the properties typically sell for pennies on the dollar compared to their actual value. However, this can be a risky investment strategy because of the complex laws governing the sales and the risks of purchasing a property with a “clouded” title.
Overview of Arkansas Tax Lien Sales
People who own real estate in Arkansas are required to pay property taxes every year to the county government where the property is located. Failure to pay taxes can result in the property becoming subject to sale by the State. The amount of taxes due annually is based on the assessed value of the property. When a property owner fails to timely pay the assessed tax, the property may become subject to sale by the State.
Property taxes paid to the county government, are a major source of local government funding, and are due on October 15 each year. The county collector holds all delinquent lands for one year past the due date to give the owner the opportunity to pay all delinquent taxes, penalties, interest, and expenses; this is known as redeeming the property.
Properties that remain delinquent for one year past the due date are certified to the Arkansas Commissioner of State Lands (“the Commissioner”), no later than July 1 of the following year. This essentially transfers title to the property to the State and give the Commissioner authority to sell the property to collect the tax on behalf of the county or conduct a sale of the property. Tax delinquent lands are not sold at the county level.
Understanding Tax Delinquent Property
Tax delinquent property refers to real estate where the property owner has failed to pay the required property taxes. When these taxes remain unpaid, the local government may place a lien on the property, which can eventually lead to a tax sale. There are various reasons why properties become tax delinquent, including financial difficulties, neglect, or abandonment by the property owner. Understanding the concept of tax delinquent property is crucial for property owners, investors, and local governments as it helps navigate the complex processes of tax sales and redemption. For property owners, staying informed about their tax obligations can prevent the risk of losing their property. For investors, recognizing the potential and pitfalls of tax delinquent properties can lead to informed investment decisions.
What is the process?
Prior to the Sale
Before the County can certify the delinquent property to the Commissioner, the county collector must publish notice in a local newspaper that contains a list of unredeemed properties, the names of the owners, the amount of taxes, penalties, interest due in order for the owners to redeem the property, the date of expiration for redemption, and notice that unless the property is redeemed by the expiration date it will be forfeited to the State. Likewise, the county assessor must verify certain information regarding the existence and assessed value of the property during the redemption period.
Prior to December 1 of each year the county collectors are required to provide a list of delinquent lands, including the last known property owners of record and legal descriptions of the property, in a local newspaper; the local papers then have one week to publish the list.
Once property is certified to the Commissioner that office must send notice that the taxes are unpaid, and that the property will be sold at a public sale to the owners, lienholders, and any other party determined to have an interest in the property. The notice contains the sale date, the assessed value of the land, the amount of taxes, penalties, interests, and costs due (this is the Minimum Acceptable Bid), the legal description, and parcel number of the property, and state that the land will be sold to the highest bidder if the bid is equal or greater than the Minimum Acceptable Bid. The sale date must be at least one year after the land is certified to the Commissioner. After the Commissioner satisfies the notice requirements, it will advertise the property for public sale to the public, providing the same information contained in the notice sent to the owner and other interested parties.
How Does the Sale Happen?
Most public sales are conducted at auction in the county where the property is located, but occasionally the sales are held in neighboring counties. Bidders may bid at the sale or mail their bid to the Commissioner’s office or at the appropriate place and by the deadline provided in the public notice of sale.
If the Commissioner does not receive any bids equal to the Minimum Acceptable Bid at or prior to the public sale, the Commissioner can offer the property through a private sale. If the private sale occurs within two years after the unsuccessful public sale, the sale must still meet the Minimum Acceptable Bid requirements. If the private sale occurs after more than two years, the Commissioner can negotiate the price even if it is below the Minimum Acceptable Bid.
What Happens After the Sale?
Payment to the Commissioner is due within 30 days after the sale, and the Commissioner will issue a deed to the successful bidder or private sale purchaser. However, the sales can be challenged under certain circumstances. If the Commissioner failed to provide the appropriate notice to the owner or any other party with an interest in the property prior to the sale, those parties have 90 days to challenge the legitimacy of the sale. The 90-day limit can be extended up to two years in some limited circumstances. A taxpayer can also challenge the validity of the deed if the taxes have actually been paid. Finally, the redemption period does not expire until 10 days after the sale, giving the property owner the option to redeem by paying the equivalent of the Minimum Acceptable Bid. If the sale is invalidated, either by court order, where the Commissioner determines that the sale was flawed, or the taxpayer redeems the property, the purchaser is entitled to a refund of money they paid for the property.
Types of Tax Sales
Tax sales can be broadly categorized into two main types: tax lien sales and tax deed sales. Each type has its own set of characteristics, advantages, and risks, making it essential for potential buyers to understand the differences before participating in a tax sale.
Tax Lien Sale vs. Tax Deed Sale
A tax lien sale occurs when the local government sells a tax lien to a private buyer to recover unpaid property taxes. The buyer of the tax lien essentially steps into the shoes of the government and has the right to collect the unpaid taxes, plus interest, from the property owner. If the property owner fails to pay the lien within a specified period, the buyer can initiate foreclosure proceedings to take ownership of the property.
In contrast, a tax deed sale involves the local government selling the actual property, including any unpaid taxes, directly to a buyer. The buyer at a tax deed sale receives the property title and becomes responsible for paying the outstanding taxes. This type of sale transfers ownership of the property to the buyer, who then has full rights to the property, subject to any existing liens or encumbrances.
Understanding the differences between tax lien sales and tax deed sales is vital for investors. Tax lien sales can offer the potential for high returns through interest payments, but they also carry the risk of having to foreclose on the property. Tax deed sales provide immediate ownership but come with the responsibility of resolving any outstanding issues related to the property.
What are the Risks of Purchasing Tax Delinquent Properties?
The most obvious risk is that the sale might be invalidated. When that happens, the buyer will receive a refund of the purchase price, but will not be compensated for any expenses they have incurred or improvements they have made to the property. The bigger risk at that the title to the property might be “clouded.”
A cloud on title is any document, claim, mortgage, mechanic’s lien, tax lien, or other encumbrance filed of record that might invalidate or impair a title to real property or make the title doubtful. A cloud on title usually stems from unresolved issues regarding the property. The property may have liens from lenders or from contracts to which the previous owner agreed. If the owner owned the real estate outright, they might have used it as collateral for new financing to pay other expenses or debts. Such a transaction may include a lien being placed on the property until the debt is repaid.
Many of these clouds will be wiped out if the Commissioner properly provided notice to all the parties with an interest in the property. Because the Commissioner does not always know who all of the lien holders and other interested parties are, it is not uncommon for notice to be defective. When notice is defective, and the sale is not invalidated, the cloud could stay on the title, and become a burden on the buyer. Additionally, the Arkansas Department of Finance and Administration has recently adopted the position that its tax liens are not foreclosed by the tax sale, even when it receives proper notice. It is unclear whether the courts would agree with this position or not.
Another issue is mineral rights. Some buyers might be interested in a property because there is oil, natural gas, or other valuable minerals underground. However, these interests are frequently owned by someone who is not the owner of the surface. If the interests are separated, the buyer at a tax sale is not buying the mineral rights.
How Can You Protect Yourself?
The first thing that a purchaser should do is obtain a title report. This will disclose all of the potential clouds on title, and help the buyer decide whether the purchase will be a good investment. However, time is a critical concern here. Payment is due to the Commissioner 30 days after the sale, so buyers should make arrangements prior to the sale if they are serious about purchasing the property so that the title work can begin as soon as possible. If serious problems are found before payment is due, the purchaser can back out of the deal. The title work can also be done before the sale if a potential buyer is serious and fully expects to be the successful bidder. However, they run the risk of incurring the expense and then being outbid on the property.
After the sale is completed and the time to challenge the sale has expired, the buyer should quiet the title. This involves obtaining a court decree confirming that the buyer is the true owner of the property and that the title is clear. By quieting title, the buyer ensures that title to the property is marketable and readily transferable. Obtaining the decree is a process that requires precisely following the rules. Many buyers have lost their property and the money they invested due to failure to adhere to the rules. Most of these mistakes can be avoided by an experienced attorney.
Redemption Period
The redemption period is a critical aspect of the tax sale process. It is the time frame during which the property owner can redeem their property by paying the outstanding taxes, plus any accrued interest and fees. The length of the redemption period varies by state, but it typically ranges from several months to a few years.
During the redemption period, the property owner has the opportunity to pay the delinquent taxes and reclaim their property. For buyers, this period represents a waiting game, as they must wait to see if the property owner will redeem the property. If the property owner fails to pay the taxes within the redemption period, the buyer can proceed with foreclosure to take full ownership of the property.
Understanding the redemption period is essential for both property owners and buyers. Property owners need to be aware of their rights and the time frame they have to redeem their property. Buyers, on the other hand, must be prepared for the possibility that the property may be redeemed and understand the implications for their investment.
By comprehending these key aspects of tax delinquent properties and the tax sale process, both property owners and potential buyers can navigate the complexities with greater confidence and make more informed decisions.
Risky Business
The process of purchasing tax delinquent property in Arkansas is complicated and fraught with risks. If mistakes are made anywhere along in the process, the buyer runs the risk that they could be responsible for the previous owners’ debts or even lose the property and the money that they have invested. At wh Law We can Help. If you are thinking about purchasing a tax delinquent property please give us a call and we can help lower your risk.
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