Mark Manoil of the law firm Manoil Kime, based in Phoenix, Arizona, has more than 30 years of tax law experience. He has served as a member of the Board of Directors of the National Tax Lien Association and he authored the book Arizona Property Tax Liens -- Guide to Profit Protection and Prosecution. During our recent interview with him, he shared some key insights regarding how tax sales are conducted in Arizona.
Tax Lien Sales in Arizona
As Manoil explained, the Arizona tax lien sales take place annually, in the month of February, and most auctions are conducted online. There is a 2-year gap between the tax year being sold and the year of the sale. As an example the tax sales that will take place in February of 2023 will be for payment delinquencies of 2021 taxes. Meanwhile, the superiority of the tax lien has been challenged in Arizona courts over the years, and it’s important to understand which other liens may travel with the property – such as nuisance abatement liens, health care liens, and others. Regarding recoverable expenses – particularly legal costs when you are involved in a foreclosure process – there are some differences, depending on the county. There is also a case pending in the Arizona Supreme Court which could wind up resolving some of those differences. (The Court issued an opinion in 2022 resolving the issue of recoverability of legal expenses in favor to tax lien investors.)
How Auctions Work in Arizona
Most of the Arizona auctions are held online, and the winning bidder is issued a Certificate of Purchase (CP). The CP may be in paper or electronic form, depending on the county. When you buy a lien or CP, it confers to you an interest in the property – but no rights of possession. The interest rate of return is a maximum of 16%, but because AZ is a bid-down state, those highest levels of return are rare. If a property is not sold at the tax lien sale, the CP is assigned to the state and subsequently made available for over-the-counter purchase. Manoil points out that sometimes you can find a few gems amongst the liens available over-the-counter, which actually do qualify for that attractive 16% interest rate. That can happen if you’re the first one to show up on a first-come, first-served basis, and buy the lien at the Treasurer’s office.
Other Notable Rules
Once you have purchased the lien, some counties may require that you also pay any past delinquencies that could redeem past liens, so be sure to check with the county about their particular rules. Subsequent tax payments are allowed by the purchaser for any future delinquencies, and regarding the sale-in-error process, both the Board of Supervisors and the County Treasurer have certain limited authority to abate the back taxes if they find that the property wouldn’t have sold for the total amount of taxes, interest, and penalties. In that case they may use their authority to write down or eliminate those back taxes. A foreclosure suit may commence three years after the tax sale, but redemption is allowed on the property until a judge officially closes the window for the right to redeem. If you do foreclose on the property and need to do an eviction, the process moves quickly in Arizona – usually within two to four weeks after the court issues a judgment for possession. (The eviction proceeding is a separate action from the foreclosure case.)
One significant change over the past decade is that today, if there is a tax lien from the state, taking ownership of the property title will be subject to that lien. That could mean that a potentially profitable investment is undermined due to assumed liabilities. You earn interest for each new month or portion of a month, and it only starts to accrue in the month after the month in which you bought it. So, if somebody redeems it before the end of the month, you get that money back, but you're out whatever you spent in your research and due diligence in purchasing that lien. That includes the out of pocket fees that you pay that are not reimbursed on redemption.
As with all tax liens, there are risks in these investments and Mark Manoil shares those he believes an investor should consider. It’s also vital to establish your due diligence practices and investment criteria before tackling lien or deed investing. Manoil also speaks to the importance of these two items and his suggestions in this white paper. Download the paper in its entirety to learn the details about Arizona and watch the Tax Sale Resources interview.