Lien SaleExplained with Advantages & Disadvantages

Lisa Borga

A lien sale is the sale of a claim on an asset that is held on an asset in order to satisfy an outstanding debt.

These sales are generally performed in public auctions.

These liens may be placed consensually as part of a loan agreement or other arrangement, or they may be placed nonconsensually due to a failure to make payments on tax debts or for services rendered.

Lien Sales Explained

Lien sales are the sale of a claim held on an asset in order to satisfy a debt.

This often takes the form of tax liens which are a claim placed by a taxing authority on a property due to a failure to make tax payments.

These delinquent tax liens have received growing attention from investors in recent years.

These investments are similar to the purchase of a long-term Certificate of Deposit, but in contrast to these investments, they cannot be redeemed with the taxing authority.

A lien sale must be held until it is repaid by the debtor.

Lien sales on an outstanding property debt may, in turn, increase the amount of debt owed.

This is because when a lien is sold, generally by a government agency, the buyer will often be required to employ a professional lien servicing company.

This will often result in additional fees and interest.

These additional charges will be passed on to the debtor, who must pay these additional costs.

Oftentimes, a debtor will be sent several notices warning that a lien sale will be taking place before the notice stating the date of the auction is filed.

There are some exemptions that may protect a debtor’s assets or property from a lien sale even when they owe taxes and fees on them.

Some of these exemptions may apply to senior citizens, veterans, and disabled homeowners.

In some cases, active duty military personnel may qualify for an exemption, thus preventing a lien sale on their property.

Exemptions vary by jurisdiction, with different jurisdictions having different application processes, criteria, and time limits during which a debtor can contact the appropriate agency.

The Difficulties of Buying a Home With a Lien

lien sale

A lien buyer is subject to limits on the amount of interest they can charge.

The government sets interest rate limits, and states have different limits.

The sale process is like an auction, with the highest bidder winning.

However, buyers should be careful how much they pay since there will be a limit to the interest rate they can charge.

Lien Sale Example

Suppose there is a maximum interest rate of 10% that is allowed to be charged for a lien.

In this case, it would be advisable to place a limit on the highest bid you intend to make.

In fact, a lower winning bid would be better due to the fact that this situation is competitive, and buyers want to decrease the risk of not getting paid on time.

Basically, it is preferable to pay a 3% premium in order to be allowed to charge 10% then it is to pay a 7% premium.

Additional Considerations

If someone owns a property that may be sold in a lien sale, they can stop the sale by arranging to make payments that would ensure their account is current.

For different kinds of lien sales, there may be different procedures.

This means the procedure for a lien sale on a camper could be different from that of a piece of farm equipment. Lien sales may be advertised through newspapers or online, among other methods.

Are Lien Sales Worthwhile?

For anyone interested in investing in a lien sale, it is best to make sure they understand the risks along with the many benefits.

Tax lien certificates can be useful for diversifying a portfolio.

But, this will likely involve legal fees. Additionally, it is possible the owner will fail to pay.

Also, if a property is foreclosed on, it could be in poor condition, which might result in a number of expenses after you own it in order to sell it.

Key Takeaways

  • A lien sale is the sale of a claim on an asset such as a property tax debt in order to satisfy an unpaid debt.
  • Lien sales are generally performed through public auctions, and notice that these sales are to be performed may be announced online or in local newspapers by the agency overseeing the sale.
  • Lien buyers acquire the claim on the asset from the seller and can profit from the purchase; however, there are significant risks and costs involved.

 

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  1. Yale University "Property Tax Lien Sales, Private Capital, and Gentrification in the U.S." Page 1 . August 11, 2022

  2. Cornell Law School "tax sale" Page 1 . August 11, 2022