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Law Offices of Ronald W. Rutz
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October 31, 2005: Tax Lien Sale

Q: I understand that in the past you have written about the upcoming Larimer County tax lien sale. Since there are few places the average guy like me can earn 14% on my money, please give me some details.

A: The Larimer County tax lien sale is set for November 16, 2005 at 200 West Oak Street at 9:00 a.m. here in Fort Collins. The capacity of the room is limited to 280 people.

In order to keep real estate tax and assessment money flowing to our governmental coffers, if such charges are not paid on time by property owners, those tax liabilities are annually sold to the public with the buyers receiving the right to be repaid the amount of the levy plus interest when the property owner finally does pay. This year the interest is 14% percent so at the tax sale the actual property is not purchased but only the right to "invest" money with the opportunity to receive the money back plus interest at the rate established for the year.

If taxes are not paid the following year, the tax lien certificate purchaser from the prior year has the right to pay the taxes for that next year. If the purchaser elects not to pay, then the property is entered into the general tax lien sale.

After three years, if the tax certificate is not redeemed (paid off) by the property owner, the purchaser can apply for a deed. A procedure is set up to give the owner of the property one last chance to pay the amounts owing plus interest before a treasurerŐs deed is issued to the tax lien certificate purchaser. In order to receive "marketable" title, the holder of the treasurerŐs deed must then hold the property for nine years or do a quiet title action through the Courts.

Although the procedural steps to secure a treasurerŐs deed are often started, few properties are ever transferred. Since the tax lien takes priority over most other title encumbrances, even if the owners fail to respond, to preserve their claims existing mortgage holders and others with enforceable claims against the property will step forward and pay off the amounts to the tax lien purchaser before the treasurerŐs deed is actually signed.

At the Larimer County sale, rotation bidding is used. When it is his or her turn, a bidder will have to decide whether to take the "property" on the list or pass so the next person will decide whether to pick up that property. Except for smaller amounts, a bidder who passes then must wait until his or her turn comes up again (maybe two hundred and eighty bidders and 60 minutes later).

An exception to rotation bidding is "premium bids." In some counties every property is auctioned without rotation bidding. In Larimer County any property with more than $3,000 due (in Weld County I am told this year the amount will be $1,000) will trigger an actual auction.

What does that mean? As an example if the amount of the taxes is $1,000, a winning bidder in an actual auction might pay $100 to buy the $1,000 tax certificate. (The amount paid to the county is $1,100.) The bidder will not get back the $100 and if the $1,000 is not paid for a year, then the bidder will receive $1,140 (the amount of the tax due plus the 14% interest for the full year) but not the premium bid of $100.

Thus instead of earning $140 of interest, only $40 is netted back to the purchaser on the investment of $1,100, or about 3.7 %, not 14%. If the $1,000 is paid back in 6 months, for $1,100 paid at the sale, the bidder will receive back $1,070, thus losing money. If other fees and expenses are considered, a bidder would net back even less.

Yet I have seen time and time again, often early in the proceeding, people bidding more than one-half of the expected rate of return while many of us look at each other smiling, raising our eyebrows and rolling our eyes.

In past columns I have written about strategies to use and which tax liens not to buy. I will let you dust off those old columns for your review. But like most things that appear too good to be true, the possibility of earning 14% interest is offset by you only being able to buy maybe four certificates after three hours. Then it will be the luck of the draw whether the amount of any tax lien, when it is your turn to decide whether to buy or pass, will be several hundred dollars or up to $3,000. Thereafter your money will only draw 14% interest until you are paid off, possibly shortly after the sale. If you elect to participate in the premium bidding then that is a whole different ball game.

Thus with premium bidding, the costs and fees of securing the tax lien certificate, the length of time before the tax lien certificate is redeemed, your time spent at the sale, and the chance you might lose your money because of the conditions affecting the underlying properties (topics covered in past columns), 14% interest may not be that great a deal after all.

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