Does a Tax Sale Wipe Out Mortgages and Liens?

Here is a question that I recently received:

“We keep hearing from folks that if a property is sold for taxes, all the mortgages and other liens are wiped out. Is that true? Do you know where the law is on that?  We want to buy tax certificates but want to make sure we aren’t buying a bunch of old mortgages to go along with it.” (edited)

First, a disclaimer:  I am not an attorney or a real estate agent.  The below answer is strictly my personal opinion based on my personal observation and experience.

Short Answer:  Mortgages and liens are NOT automatically wiped out as a result of a tax sale and I don’t know what Alabama code section applies to this subject.  You won’t be “buying” mortgages per se but you may be obligating yourself to deal with residual mortgages, liens and judgments as you navigate the tax property investment process.

Long Answer:  When a parcel of property is sold at tax sale, it can have practically any kind of lien, mortgage or judgment attached.  In fact, if the property taxes have not been paid, it is VERY likely that other obligations related to the property are also unresolved.

I am only aware of the following ways that a mortgage, lien or judgment can be removed:

  1. The obligation is satisfied (paid) or otherwise expires.
  2. The lien is voluntarily abandoned or removed by the lien holder.
  3. The lien holder exercises what may be a right to redeem the tax deed by paying the tax deed holder.
  4. The lien is negated or removed as a result of a “quiet title” order or some other type of court action.

I don’t recall ever hearing of a ruling that diminished the position of the tax deed holder, as long as the tax deed holder didn’t do something foolish.  Normally, the other parties that once held an ownership, mortgage, lien, or judgment interest in the property, will have the opportunity to “redeem out” the tax deed holder at some point in the “quiet title” process.  They seldom do—even if it is the IRS.

In my opinion, functionally, there is no property interest that has a higher priority or carries more potential “weight” than an Alabama ad valorem property tax lien.  That does not mean that you will always be 100% satisfied with the outcome but your tax deed interest will receive “first place” attention in the process.


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4 responses to “Does a Tax Sale Wipe Out Mortgages and Liens?”

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  1. Denise Evans says:

    Hi Gary, To expand on your comments, mortgages and other liens are not really “wiped out,” but most of them are not enforceable unless the lienholder redeems. In other words, the bank, the IRS, the judgment creditor–none of them can foreclose their liens and take your tax sale property away from you. They MUST redeem first. The only exception is local government liens. Those are things like sewer liens, nuisance liens for cutting grass, demolition liens and similar things. They are always superior to the tax sale and can foreclose on your tax sale investment without redeeming. On the other hand, they have to reimburse you for the taxes paid on the property, but not for insurance premiums or preservation improvements. Usually, you can negotiate with those lienholders and buy releases for less than the full amount claimed.

  2. Gary Boyd says:

    Thanks Denise! Good point about local government liens. If I have a tax deed (or will have shortly) I would definitely try to negotiate a reasonable settlement with these folks not only for the reason you stated, but also because I want to “get them on my team”. I want to develop a reputation for making their job easier.

  3. Michael Stein says:

    Gary: Generally speaking, when one receives a price quote from the state for a tax deed and that price is over $1000.00 my practice is to order an “informational only” title search to see if there are any potential liens that are deal breakers. That way you can avoid a big mess where there are weed liens, demolition liens, sewer liens, and more. The title companies do not do well in the search when it comes to municipal liens. One would we well advised to head to the city hall and verify those liens. Some cities will work with you on their liens if you can show that you are unraveling a big mess and returning the property to a productive and tax producing state.
    Thanks