So, you have likely heard it pitched that there is little risk investing in tax liens. By and large, that maxim rings true. Most people purchase tax liens because they can achieve a very high interest rate and know that the lien they have purchased is secured by the underlying real property. The dynamics of the Arizona tax lien market have changed over time with more and more investors and large hedge funds and banks gobbling up tax liens at very low interest rates. If you are a tax lien investor that has a number of liens that are ready to begin the judicial tax lien foreclosure process, you need to be aware of a few potential risks in moving forward.
The most crucial aspect that any attorney handling an Arizona tax lien foreclosure matter can do is to verify the addresses of all interested parties and get them served with a copy of the Summons and Complaint as quickly as possible. Under Arizona Revised Statutes Section 42-18206, if an interested party (owner of record, deed of trust beneficiary, judgment creditor, etc.) redeems the tax lien after having been served in the tax lien foreclosure action, the tax lien holder has the right to pursue the party that redeemed the tax lien for all fees and costs incurred in pursuing the tax lien foreclosure. This is a crucial protection built into the statutory framework to protect tax lien investors and make those investors more willing to take on the risk of purchasing tax liens.
The risk of course is that an interested party may redeem the tax lien in the time between when it was first filed and when the person or entity redeems the tax lien. If this happens (and it certainly can happen for any number of reasons), the tax lien holder will be left holding the bag for costs and fees incurred with no recourse. The upside, I suppose, is that the tax lien holder, if the lien was indeed purchased three years prior, will have the accrued interest to offset any losses incurred.
While getting a judgment is some protection, that judgment will be worthless if the person redeeming the tax lien has no assets to execute against. In the case of a person redeeming who owns the subject property of the tax lien case as their primary residence, there is no chance of executing against that property to satisfy your judgment for fees and costs. In the case of a property that is NOT the primary residence, the tax lien investor may execute against the property to satisfy the judgment, subject to the owner’s statutory right of redemption, which is six months.
Part of the due diligence in investing in tax liens is fully understanding the ramifications of all potential outcomes before diving in.