Property Tax Sales
Tax sales come in two forms, either Tax Lien Certificates or Tax Deeds. The certificates serve as privately held notes secured by a common tax lien on real property. The virtues of this kind of investment are that they provide good security along with competitive rates of return. As you research states, you will learn which sell certificates, which sell deeds, and which do both. This is outlined on a separate page of this site.
The government needs its revenue
A typical county government obtains at least half its annual revenues for everyday operating expenses from property taxes. These taxes help fund school, hospitals, law enforcement, fire protection,, road construction and maintenance, social services, parks and recreation programs, to say nothing of county administration. They support public libraries and mosquito abatement programs. Some of this money goes to the local justice system and to public transportation. The county depends on these revenues. When taxes are not paid, the county cannot function as it should.
When the county is not collecting the revenues due it, it does what other creditors have done for as long as creditors have existed. It sends it out for collection. And this is where savvy investors can make high return on secured investments.
In this case, the collecting entity is the fellow citizens of the delinquent taxpayer. It works well for both parties. The county gets the budgeted revenues from property taxes, and the fellow citizen has a nice investment with high returns, secured by real property. In any case, the purpose of selling the property tax lien is to allow an investor, in place of the property owner, to pay the delinquent property taxes due. The county receives immediate revenue and the investor benefits with a low risk—high yield investment.
How does it work?
When a property owner is late on paying real property taxes, the taxing entity (county or municipality, in Louisiana, the parish, in Alaska, the borough) issues a tax lien on that property, while assessing an interest accrual penalty. The government could wait for the lien to be paid by the property owner, but in order to meet budget needs, would rather get the money now. A tax lien becomes a first priority lien on the property; in certain states a certificate representing this can be sold at auction. Investors can then buy the lien (cash only) and receive the following in order:
1. Guaranteed yield from the lien, which the delinquent property owner must pay in order the release the lien
2. Title to the property after a redemption period, the length of which is set by the local jurisdiction, if the property owner fails to pay.
In other states, the taxing entity sells a deed at public auction. The deed buyer now owns the property outright and is entitled to collect rents on it or sell it for a profit..
One state, Texas, sells a deed that allows a redemption period, in which time the previous owner can pay the taxes plus a large penalty (25%) to the investor in order to get the property back. The redemption period is six months on most properties, two years on homesteaded or agricultural use properties.
With a Texas tax deed, the investor owns the property, can collect rents if possible, but if the investor were to sell that property, he or whe must make allowance for the fact that the original owner may redeem it and take back the property the investor already sold - you would have to indemnify the person that bought it from you against any loss of money.in the buy-back. In other words, if you buy a deed for $5,000, and then sell the property for $10,000, the previous owner would have to pay you $6,125 for redemption. You would need an extra $3,750 to return to your buyer to make up the rest of the $10,000. That should not be difficult if you saved $3,750 out of your $5,000 profit in a reserve account. However, neither we nor anybody we know have every seen or heard of a tax deed redemption on a non-homesteaded property in Texas. It may happen with homesteaded properties, where it involves the previous owner's personal residence, but with the six month redemption, generally speaking the owner does not care enough to redeem, only has six months to do so, and has to pay more than double the original tax amount to do so.
Georgia, Tennessee and Hawaii observe a one-year redemption period, as well. Although some sources list them as a redeemable deed states, in reality the document that you buy in these states does not give you ownership of the property until after a year. If it quacks like a duck and waddles like a duck, it must be a tax lien certificate.
Tax Lien Certificates
Tax lien certificates are a very attractive investment for people who know how to find them and how to buy them right. The offer guaranteed income mandated by a government agency, and may lead to the title to real property at a substantial discount. You get rates of return on your investment like 16%, 18% or even 24%. The risk is that you buy a lien and it gets redeemed within a month. For example, if you purchased a $1,000 lien at 18% interest, and the owner redeems the lien 30 days later, your total income would be $15.00. You may have spent more than that in gasoline to travel to the auction.
Therefore, the best way to buy lients is in bulk: if you buy 20 at a time, the law of averages holds that some will be redeemed quickly, others in a few months, and another group of owners will wait until the last minute to redeem. In fact, out of twenty there is a chance that one of the properties will not be redeemed and you can take possession of it.
Tax Deeds
With tax deeds, you acquire great properties for pennies on the dollar. Put tenants in that property that you now own free and clear, and your passive residual income continues for as long as you want it. Just remember to pay the property taxes, of course. Or, if you wish, you can just sell the property for a handsome profit.
Quick Profits
If quick profits are more important right now than passive growth of capital over time, you will want to acquire properties rather than liens. The good news is that there are multiple ways of acquiring properties in this market.
* Buy at auction
* Buy directly from the property owner prior to the date on which that owner loses possession of the proeprty
* Buy from the county on an over-the-counter basis - these are properties that the county has in inventory and wants to sell immediately.
This course will focus on all three of these purchase methods. All three work very well. The obvious advantage is that if you happen to live in an area where only tax lien certificates are available, you can still purchase properties by using the two non-auction methods of purchase. Not only is that possible in all parts of the country, but you can easily do it without having to be there: if there is no auction to attend, you don't need to travel. The postal system and the telephone system will allow you to make money at home.
