Ultimate Guide to Tax Deed Sales & Tax Lien Investing
If you’re a real estate investor, you’ve probably heard the terms “tax deed” and “tax lien” before. But whether or not you fully understand the details of each might be an entirely different story. Tax deed and tax lien investing each come with a unique set of processes, regulations, and legislation with variations depending on the state, and sometimes the county or town, 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 one and ten 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. The delinquent tax amount plus any interest, admin fees,etc.. 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. The county does not want to force someone to lose their property but the county also has fiscal responsibilities and responsibilities to the other residents to provide schools, law enforcement, good roads, etc…
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 taxes 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 5%-18% annually in unpaid property taxes and the associated interest. However, tax lien investing can be riskier if you are investing to eventually foreclose as delinquent owners still have rightful ownership and are given a lengthy redemption period. Although the interest rate provides a stable and fair return while you wait, there is no guarantee to what condition the property will be in after your foreclosure. This is why most people investing in tax liens hope for the delinquent taxpayer to satisfy their debts.
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 most cases, 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. However, the few states that do have a redemption period typically offer the investor a favorable interest rate penalty if the property is redeemed.
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 cash is the only form of payment accepted by the county. For most tax deed states the highest bidder wins and in tax lien states you may not spend a lot on a single property but if you are bidding to eventually receive a property you will need to buy many tax liens as almost 90% of tax liens redeem before foreclosure. Either way, investors need to have liquidity; 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 maximize the profits of your investment.
This can only be remedied in two ways:
- 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 6 and 24 months, resulting in more than $2,500 in legal fees to settle title disputes through the judicial system. Many states the base price is over $4,000.
- Due Process Certification: You can secure the help of Tax Title Services, 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 Due Process Certification, which certifies the completeness and accuracy of the tax lien foreclosure due process which ensures no one can lay claim against your interest in title. We’ll also match you with one of our nationally recognized title insurance partners located throughout the country.
After you’ve eliminated the title concerns on your investment, you’ll be able to enjoy the full benefits of title insurance. This can help you as an investor when either selling or taking a loan against the property. Having the ability to obtain title insurance on a tax sale property can also help alleviate any concerns a potential buyer or realtor may have about your property.
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 low risk-stable return situation, tax lien investing may be the right choice as it will allow you to collect a stable annual percentage on your investment which does not occur with a tax deed purchase. Buying a tax deed property, however, can have a more immediate payoff with an elevated risk involved—especially if an investor has not completed their research, understands the risks and does not understand how title insurance works.
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. If you have invested in a tax deed, we can help you immediately after your purchase. If you invest in a tax lien, we can help you as soon as you have foreclosed and taken possession of the property. 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 title insurance underwriters or agencies 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.