Tax Sale Basics
By Rick Dawson
Many, if not most, of my subscribers initially come to my site because they are interested in learning more about tax sales in general. I’m going to give you the information you’re looking for right here.
I’ll tell you how bargain purchases are made at tax sales, and why I don’t think most people should try to buy at tax sales.
When a property owner does not pay his taxes for a certain period of time, the city, county, or state will take action to collect those back taxes. The procedure varies by state, and sometimes within counties and cities in a state.
For the latest statutes, you can search online for your state’s procedures.
Most states and localities follow one of two formats: A tax lien format, or a tax deed format.
In a tax deed format, the county or other governmental entity adds up the amount of taxes owed, and sends notice to the owner and all interested parties (like mortgage companies) that the county will sell the property to the highest bidder at a tax deed sale some time in the future.
If the owner or any interested parties do not pay the taxes, fees, and tax sale costs owed, the county will auction the property. The winning bidder at the sale gets a deed to the property.
In a tax lien format, the county does not sell the property itself. Instead, it sells a lien against the property, starting at an amount equal to the taxes owed on the property.
Sometimes these liens are auctioned to the highest bidder as well, or there is a lottery system to determine who gets to buy each lien.
Usually the investor who buys the lien will have to wait a period of time for the owner to pay off the lien with interest and costs. The investor earns a good percentage rate on the money he paid for the lien, usually 8-30% or more, if the lien is paid off.
If the lien does not pay off during the time allowed by the state, the investor can apply for a deed to the property.
Most tax deeds, whether bought directly at a tax deed sale or received after holding a lien, convey the property free and clear to the purchaser. The former owner is wiped out, and generally speaking all liens are wiped out.
How do Bargain Purchases at Tax Sales Happen?
In a tax deed format, maybe all of the other bidders could overlook a valuable property and you would be the highest bidder at a bargain amount. Or maybe there won’t be very many bidders at the sale, and everyone else’s money will run out before all the properties are auctioned.
In a tax lien format, maybe the owner would not pay off the lien and you would acquire the property for the amount that was owed in taxes, or a low amount.
Here’s the truth, which you won’t hear from most people selling information about getting rich from tax sales:
Tax deed auctions are almost ALWAYS very competitive. Prices for the properties paid often reach or exceed the current value of the property. There are too many investors out there who think a property at a tax deed auction is automatically a bargain and will get auction fever.
Unless you’re working with a large sum of money, there will be deeper pockets there than you, guaranteed. Therefore, there is not generally any money to be made by buying property at a tax deed auction.
Most bargain purchases come through a tax lien that matures into a tax deed because of non-payment by the owner.
However, many states have competitive bidding to buy the lien itself, and the amounts paid for the lien reach or exceed the property’s value.
If you manage to purchase some liens at a bargain price, or your state doesn’t have competitive bidding, be prepared to wait. Some states allow the owner to pay the lien off for 4 or more years after it is sold.
Then, 95% or more of bargain liens pay off, leaving you with just an annual return on your money. If you’re looking to invest a large sum of money to get a percentage return, and not property, tax liens may be great for you.
Large companies managing various funds often attend tax lien sales and invest millions of dollars at one sale on tax liens. It can be very difficult to compete with them. You may have to buy liens for several years to get a lien at a good price that does not pay off.
Your quest to get a deed to the property does not end there, however. You must do legal noticing along the way, at your upfront expense. If your lawyer makes any errors along the way, you could be denied a deed to the property or even lose your investment.
If you get a tax deed from a lien, or buy one at an auction, you will then often have to do an additional legal procedure to get clear title, called a quiet title action. During this procedure, all parties involved with the property get to appear and challenge your deed.
I have seen many deeds overturned in the quiet title process due to a number of issues like improper legal noticing, bankruptcy, and judge’s discretion.
So, if you have a six figure sum to invest, you can research hundreds of properties and buy some liens. Maybe you’ll even wind up with a property or two after you wait the redemption period, and you’ll get a good return on your money on the liens that pay off.
Or maybe you can attend enough tax deed auctions to get a bargain property there. Just remember you’re going to have to research every property first and assign a value to it that you’re willing to pay, without inspecting the interior, and show up with cash at the sale.
Why not just contact the owners who are about to lose their property to tax sale and buy it? I suspect most readers of this article want to get tax sale property now, without waiting for liens or bidding at auctions.Sincerely,
Everything You Need to Know to Profit From
Tax Property Before the Sale -
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