A common question in the tax lien investing arena is what happens to a tax lien if a property is foreclosed on?
In a tax lien state like Arizona, counties do not sell property; rather they sell a tax lien in the form of a certificate of purchase for unpaid property taxes. This tax lien is an encumbrance or enforcement right held by the county. While the lien does not grant full ownership rights to the property, it does provide the investor with two commanding rights: 1) The right to receive interest penalty charges (up to 16%) if the lien is paid off by the delinquent property owner, and 2) The right to foreclose the tax lien and take title to the property if the lien is not paid.
What makes tax lien investing so potentially powerful is that property tax lien is a high priority lien, which is superior to judgment liens, mortgage liens, trust deeds, and other private liens. However, property tax liens do share priority with other liens. For example, in a Chapter 7 bankruptcy, the bankruptcy trustee may be permitted to pay the expenses of administering the bankrupt estate before paying the tax lien. Another example is when a bank fails due to insolvency. In that case, any loans owed to the bank are administered by the Federal Deposit Insurance Corporation ("FDIC"). This is a rare instance, but one any investor must be aware of.
The long and the short of tax liens in the foreclosure process is that the tax lien will be paid even if the property goes to a trustee’s sale because of its superior priority.