Tax Deed Sales & Tax Lien Investing

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Ultimate Guide to Tax Deed Sales & Tax Lien Investing

If you’re a real estate investor, you’ve probably heard the terms “tax deed sale” and “tax lien investing” before. But whether or not you fully understand the details of each might be an entirely different story. Tax deed sales and tax lien investing each come with a set of processes, regulations, and legislation with variations depending on the state in which you’re investing.

It’s a tricky topic that takes some investors years to fully understand; however, when done correctly, each option can be extremely lucrative for investors depending on what their end goal is. The good news is that once you understand how tax lien investing and tax deed sales work in one state, you’ll be able to grasp the concept in other states a lot quicker.

Understanding Tax Delinquency & Foreclosure

Before you skip ahead to learn all about the process, you must first understand how foreclosure works in relation to tax lien certificates and tax deeds. If you own real estate, you know that paying property taxes is essential for steering clear of tax delinquency and ultimate tax foreclosure.

When you fail to pay the taxes on your property, the county or municipality under which the property falls has the right to claim those delinquent taxes and subsequently foreclose on the property if the taxes are not paid during the specified timeframe. The time frame varies depending on the state and county in which you live and can be anywhere between two and five years.

The Big Secret Behind Tax Sales

Contrary to popular belief, local government bodies aren’t interested in collecting the real market value of a property. Rather, they’re focused on collecting the money that was owed to them in the first place and any interest related to it. They need to generate enough revenue from each property within the municipality to make up for lost tax revenue.

For example, if someone owns a property that could sell for $350,000 but has a delinquent tax amount of only $10,000, the delinquent amount is the only sum that matters to the county. Sometimes, the delinquent amount is what the county will set the opening bid at during a tax sale or auction, which is why tax lien and tax deed investing can be so profitable.

Tax Deeds & Tax Liens: What’s the Difference?

Tax deeds and tax liens both come into play after delinquent taxes subject a property owner to tax foreclosure; however, some states only allow tax lien transactions while others only deal with tax deeds. Some states will allow both, but whether or not the tax sale is a deed or a lien will depend on what county or municipality in which the property is located. You’ll need to know the transactions available in your state prior to investing.

How Tax Lien Investing Works

For states that only deal in tax liens, non-payment of property taxes results in the sale of a tax lien certificate in order to claim the unpaid taxes. When a tax lien is purchased, you do not become the owner of the property. And, contrary to what some may believe, you don’t become an invested partial owner of the property either. Instead, the delinquent owner remains the rightful property owner.

So what’s the purpose of tax lien investing?

When you purchase a tax lien certificate, you become entitled to the unpaid delinquent charges plus interest on the property. Therefore, the property owner now owes you for the unpaid property taxes as well as any interest that accrues during the redemption period—the period the delinquent owner has to pay off all tax debts and interest to retain ownership. If the owner fails to pay all of the money owed by the end of the redemption period, the lienholder has the right to foreclose on the property and claim ownership.

Tax lien investing has the potential to give investors a strong annual return. In some cases, if you invest in the states with the higher maximum rates of return, you can have an ROI of 25% annually in unpaid property taxes and the associated interest. However, tax lien investing can be riskier as delinquent owners still have rightful ownership and are given a lengthy redemption period. Should they pay back the delinquent balance plus interest, you will have essentially lost your investment.

How Tax Deed Sales Work

Tax deed sales are different from tax lien investing in one crucial way: Rather than purchasing the right to the unpaid taxes, a tax deed sale grants you ownership of the property upon purchase. In other words, after you purchase a tax deed, you own the property—no questions asked. Most states don’t even offer a redemption period to delinquent owners after a tax deed sale, further simplifying the process and securing your investment.

Because tax deed sales offer fewer complications and ambiguity about the security of your investment, this tends to be the more desirable option for real estate investors. Investors get to purchase property way below market value and then flip it for a profit after the tax deed transaction is successful.

However, with both tax deed and tax lien investing, there are additional processes to consider in order to further substantiate both your investment and your claim to the property.

Potential Problems with Tax Deed & Tax Lien Investing

While real estate investing can be extremely profitable for investors, there are some aspects of tax delinquent sales that complicate the process and make it harder for investors to capitalize on the opportunity.

Paying for Your Investment

Tax sales typically occur at an auction, where the highest bidder wins the right to the tax lien certificate or the property itself. This type of purchase, however, means investors need to have the money readily available for immediate payment following the auction. Failure to provide payment may result in a lost deposit, and—in some cases—may even prevent you from participating in future sales.

The Cost of Competition

It’s true that while tax sales offer alluring properties at an almost unbelievable price, you’ll have to compete with other investors in the room to successfully bid on the properties you want. With so many other interested parties in the room, the small asking price at the beginning of the auction can quickly result in a final cost that’s a lot more than what you originally bargained for. This can be a source of discouragement for some. For others, it can be a great way to read the market and select properties that are not desirable to other investors but can equal a huge payout in the long run.

Tax Sales & Blemished Titles

Whether you’ve invested in a tax deed or a tax lien, your purchase may require additional time and money in order to ensure that it’s truly yours. When you purchase property through a tax sale, that property suffers a serious blemish on its title, meaning that the chain of title becomes unclear and other parties who have owned the property in the past can claim interest on the title. Additionally, you won’t be able to secure title insurance for your investment. Without title insurance, you won’t be able to perform any real estate transactions with potential buyers to make a profit. If your buyers can’t get title insurance, they can’t get a mortgage, which means you can’t make money off your investment.

This can only be remedied in two ways:

  1. Quiet Title Action: You can pursue an action to quiet title in order to show that you are the true owner of the property. This typically lasts between three and nine months, resulting in more than $2,500 in legal fees to settle title disputes through the judicial system.
  2. Tax Deed Title Clearing: You can secure the help of a title clearing service, which will verify that the county’s foreclosure procedure was executed correctly, eliminating any uncertainty on the title. Tax Title Services offers this quiet title alternative through our unique certification process, which certifies the completeness and accuracy of tax lien foreclosure due process to ensure no one can lay claim to your property title. We’ll also match you with one of our nationally recognized tax title insurance partners located throughout the country.

After you’ve eliminated the title concerns on your investment, you’ll be able to enjoy the benefits of title insurance, which protects you again any future claims from unknown parties on your property title.

Tax Title Services Makes Investing Easy

The decision to invest in tax deed properties or tax lien certificates depends on your goals as a real estate investor. If you’re looking for a high risk-high return situation, tax lien investing may be the right choice as it will allow you to collect a higher annual percentage on your investment than a tax deed purchase. Buying a tax deed property, however, can have a more immediate payoff with less risk involved—especially since there isn’t typically a redemption period associated with the property after purchasing through an auction.

Whether you decide to invest in tax deeds or tax liens, Tax Title Services has the skills and expertise you need to become a successful real estate investor. Our unique certification verifies that tax lien foreclosure due process has been completed accurately, performing an in-depth risk assessment on your investment.

After certification, our team will match you to one of our nationally recognized partner tax title insurance underwriters to secure your investment for years to come. More importantly, we’ll do it all in as little as four weeks at a much lower price than it would cost to bring an action to quiet title. Find out what TTS can do to help make your real estate investing a positive and profitable experience every time.

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