What Is a Tax Sale: How Does a Tax Sale Work?

Across the country, real estate is booming. Everyone wants to have their little slice of the earth’s pie, but they aren’t making any more land, so we have to deal with soaring property costs. Unfortunately, this can price some people out of the market.

However, there is another, more affordable avenue to take, and it is a tax sale. Never heard of it? Let’s go over a tax sale and how you can get one.

What Is Property Tax?

For those who don’t know, property tax is a levy based on a property’s assessed value. A government entity, like a municipality, will determine a millage rate which is based on the value of a property within its jurisdiction to collect tax revenue that will cover various expenditures like:

  • Emergency services
  • Roads and highway construction
  • Water
  • Garbage collection
  • Education
  • Sewer
  • Libraries
  • Snow removal
  • Policing
  • Fire protection

All properties get charged this tax uniformly except for some exempt properties like schools and churches. While this is a mandatory expense for a home or business owner, some people neglect to pay and get into arrears. This can then trigger a tax sale.

Selling Taxes?

No, there isn’t a sale on taxes but rather a lack of tax revenue that is at play here. A tax sale is where a property owner has failed to pay the taxes on a piece of property for an extended period, typically two or three years. To balance that loss of income, the municipality is legally entitled to sell the property to recoup that tax amount.

This is not to get profit from flipping the home at all, though. The listing price for the property will be exactly the amount of taxes in arrears, plus interest and a few other expenses. The bottom line, a government entity can intervene and sell a piece of real estate to pay off the property taxes.

The Process

Every property owner starts with a clean slate. They will be assessed a property tax to be paid once a year, and if they fail to pay, the property becomes tax delinquent.

Depending on the jurisdiction, if this failure to pay reaches two or three years, it can be listed as a tax sale. The property owner is usually notified and given time to resolve the unpaid taxes. If that is not done, the property will be added to the current list and posted as part of the next tax sale.

Regular tax sales Ontario happen yearly and are either done by public auction or public tender. A minimum bid on each property will cover the delinquent taxes, interest, penalties and sales costs.

Public Auction

There will be an assigned date for a public auction, and you must attend in person. There are usually no forms to fill out to bid, so you just need to be there, ready to participate.

Make sure you have enough money to be successful and expect there to be competition for each property. If you successfully win the bid, you will need to pay immediately, either in full or a deposit, with the balance due within a few days. Failure to pay the balance will put the property back to be listed again at the next tax sale.

Auctions are exciting, and you can easily get caught up in the hype as the sale continues. Set a budget beforehand and stick to it without emotions getting in the way.

Public Tender

The other way a tax sale is conducted is through a public tender. This method involves submitting your bid in a sealed envelope, given in person or sent through the mail or courier. This is an official form that will include the following:

  • Your name
  • Your address
  • The description of the tax sale property you are bidding on
  • The bid amount you wish to pay for the property.
  • Some jurisdictions require a 20% deposit based on your bid amount in the form of a bank draft, money order or certified check.

Once all the bids are in and the date arrives, bids are open, and the highest tender is given the right to buy the property. If they decide to decline, the next person in line gets the opportunity.

While this is a great way to get below-market properties, the competition may be fierce. There are also a lot of things to consider, including:

  • Potential liens on the property
  • Adverse possession claims by a neighbour
  • Local zoning and building restrictions
  • Responsibility for any environmental cleanup on the property
  • Potential interior property damage
  • You may have to evict tenants
  • You can’t legally enter the property

While there are inherent risks with buying a tax-sale property, it can be like winning the lottery because you will pay far less than the current market value. Understanding the process allows you to participate in a tax sale and win big.

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