Tax lien investing can take years or months to pay off, there is immediate gratification to buying tax deeds. Whereas a tax lien can take months or even years to pay off. However, when you buy a tax deed you own the property. You can purchase tax deed properties at huge discounts.
It is important to always do your research prior to buying any type of defaulted real estate, especially tax deeds. There are advantages and disadvantages of buying tax deeds, and to be successful, you must know the rules of the state and county where you will buy tax deed properties. We have a nation wide manual that provide information as well as the unique techniques to use in all 50 states and the US Territories.
There are some disadvantages to buying tax deeds also.
- There could be additional fees and liens that do not show up when buying them at an auction or directly from a government agency
- It is very possible that the property is in need of a lot of repair. It could be facing condemnation, or, has dilapidated structures that are unsafe or need to be demolished.
- Entry into a tax sale property is prohibited by law, so investors must base their purchase price often sight unseen
- Some states allow the previous owner to bring the taxes current even after the tax deed sale, and redeem their property. In these instances the investor recovers their entire investment plus interest. This varies state by state, see or tax sale manual for details.
- Tax deed auctions can be highly competitive. Investors can spend days researching properties to bid only to have them canceled just before the sale or be sold at a high price.
Another big drawback is the absence of receiving an insurable title when you buy tax defaulted properties. Without an insurable title, a title company will not readily insure the property. Title companies are risk averse and they believe there is a chance the original owner will find out they have lost their property after the sale has taken place, and contest the ruling and sale.
Not having an insurable title may can easily be resolved
— by having the title company exclude the previous owners from the
— by tracking down the owner and offering them payment for signing a
quitclaim deed, or
— with a quiet title suit; but you must consider how the additional expense will impact your profits since it is a legal court action. A Title Certification and Exclusion may be a solution and it does not incur additional costs.
— with a Title Certification and Exclusion which is faster and simpler process than a full quiet title suit. These additional costs need to be factored into the analysis before buying a tax deed property.
ALWAYS get a title report BEFORE you buy Tax Deed properties. Pro Title Services can help anywhere in the U.S.Our nationwide
The Tax Lien Process
The tax deed process is the final step in the county’s timeline in the tax lien process and is equivalent to a mortgage foreclosure, with one big exception – in a tax deed sale all mortgages are WIPED OUT!
Let’s review the tax lien process. The county is dependent on property taxes to support things like the fire department, the police department, roads, and schools. When property owners fail to pay their property taxes, the county is left in a tough position. They are left with the problem of trying to replace their primary source of income. Instead of raising taxes for those that pay the property taxes, they have devised a clever system that allows investors to loan money to the county in exchange for some asset. With tax liens, the county issues a tax lien on the property that keeps the property owner from selling the property. They create a tax lien certificate and attach a state-mandated interest-rate and sell it to investors. They give the delinquent property owner a set amount of time, usually between one and three years, to pay the property taxes back to the county. Let me also remind you that the property owner doesn’t write a check to you, the investor. The property owners only deal with county. The county issues the initial notice of default and announces the sale of the tax lien certificate. The property owner is also told that there will be a penalty for paying their property taxes late. When the property owner pays the property taxes plus their penalty to the county, the county immediately writes a check to the investor for the original investment amount plus the interest accrued to that point. If the property owner doesn’t pay during the redemption period, then the investor gets the opportunity to take ownership of the property through foreclosure.
The Tax Deed Process
But with tax deeds, the county doesn’t sell a certificate with an interest-rate attached; they sell the deed to an already tax delinquent property. This is how it works. When the property owner is delinquent, the county issues a delinquency notice and then issues a tax lien against the property, so the property owner can’t sell the property. The county gives the property owner a set amount of time to pay off the late taxes plus a penalty. The redemption period starts when the taxes are due. So if the taxes are due on April 1, and the redemption period is two years long, then the property owner would have until April 1 two years later to pay their property taxes. However, the property owners are incentivized to pay early because of the increasing penalty. If the property owner pays off the taxes and penalties, the county keeps the money and moves onto the next one. If the property owner doesn’t pay during the redemption period, then the county begins the foreclosure process. The county takes control the property through foreclosure and then announces its sale.
The county makes public notice of the auction, usually in the newspaper, on the bulletin board at the county office, or on their website. Educated investors show up to the auction and begin the bidding on those tax deed properties. The bidding begins at the amount of the delinquent property taxes and the bidding goes up from there according to the competition. Depending on the desirability of the property and the amount of investors interested in that particular property, the property can go for extremely low prices. The winning bidder walks away with a tax deed to the property and the opportunity for making big profits.
The primary differences with tax liens and tax deeds are tax liens are typically a long-term investment where tax deeds are considered short-term investments. Also, you can get into text liens at typically lower prices than you can with tax deeds, and for tax liens, you get a certificate with the promise of an interest-rate, and with tax deeds, you get the property. Tax deeds are extremely exciting! It’s possible to get incredible deals on tax deeds because the bidding starts so low. It’s an awesome way to get cheap properties.
Hope this brief background on tax deed investing helps!
As always, here’s to your success!
Creator of The Deed XChange™