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Tax Liens and Tax Deeds – Some Basics for Your Success

We have all heard the stories and heard the claims about tax foreclosure sales. You know the stories where someone purchases a house or property for $1,000 dollars with a true market value of $50,000. They then turn around and sell it for a huge profit. In fact everywhere I turn someone is talking about the wonderful purchase opportunities that tax sales and tax liens can hold. Before I started investing in tax sales my first question was, “If this is such a great investment technique, why is it that I have not heard about it? There has to be a catch, something that no one was telling me about this technique.” The truth is that you can gain a very favorable return by purchasing tax lien certificates and tax deeds, but as with everything you need to learn from other people’s knowledge, use common sense, do your research, and stay positive!

The General Tax Sale Process

Almost all states allow for a tax sale foreclosure process that allows common citizens, just like us, to purchase tax sale properties. Here’s how it happens:

If an owner of real property does not pay their taxes the county or the taxing entity will file a lawsuit to collect the unpaid taxes, and if such taxes are not paid, the property will be sold at a public tax auction to the highest bidder.

The certificate or tax deed will be sold at a public auction and the opening bid will typically be made up of the amount of back taxes owed. This amount will usually be made up of:

  • Delinquent Property Taxes
  • Interest Charges
  • Penalty Fees
  • Legal Costs
  • Administrative Charges and Fees

When a tax certificate or a tax deed is sold, the purchaser acquires the rights held by the county or taxing unit. Tax sales may be held annually, semi-annually, quarterly, or monthly. There are no restrictions for bidding in these sales (i.e., you do not have to be a real estate agent, professional investor, etc.); however you usually must be able to pay the bid amount within a short period of time.

For a specified period of time the delinquent owner has the right to buy back or “redeem” the property. This is called the right of redemption. In many cases this redemption period may be as short as 6 months or in states such as South Dakota and Wyoming, as long as 4 years. If the delinquent owner does not redeem the property during the specified time, then the successful bidder is entitled to the property regardless of the purchase price. Let me say that again: the successful bidder would be the owner of the property even if it was bought for $1,500 and it has a market value of $150,000!

That sounds great, but what happens if the delinquent owner decides to exercise their right of redemption? Do I lose my deal and all the money I spend at the action? No not at all! In that case they (the delinquent property owner) must pay you an interest penalty charge on top of what you originally paid for the property. This interest charge could be from 10% to 25% (for redemptions occurring during the first year) or up to 50% (for redemptions occurring during the second year). What this means is that you will get back the money you originally invested plus the interest charge while the delinquent owner will get their property back.

So in most cases either you purchase real property for pennies on the dollar or gain a high rate of return on the money you used to purchase the property!

Here is list of the returns paid out at redemption for various states. Remember redemption refers to the statutory or legal right for the original owner to buy back the property.

Alabama12% per annum
Arizona16% per annum
Florida18% per annum
Georgia20% first year
40% second year
Iowa24% per annum
Kentucky12% per annum
Mississippi18% per annum
Nebraska14% per annum
North Dakota12% per annum
West Virginia12% per annum
Texas25% first year
50% second year

Let’s look at an example so you can clearly understand how the redemption return works:

George attends a tax foreclosure sale and he is the successful bidder. He files the deed with the County Clerk or Recorder’s Office. Four months after the deed is recorded the delinquent property owner “redeems” the property. George receives his initial investment back plus 25%!

Here you can see that George was the successful bidder on the tax sale property and he received a tax deed at the auction (more on the difference between deed states and certificate states in a later article). Also note that since the original owner redeemed the property she must pay George the original amount invested plus the state mandated penalty return.

What Happens If the Owner Does Not Redeem?

If the property owner does not redeem you will typically get title to the property. That’s right title! Remember what I said above: If the delinquent owner does not redeem the property during the specified time period then as the successful bidder, you would be entitled to the property regardless of the purchase price. Let me say that again: you would be the owner of the property even if you bought the property for $1,500 and it has a market value of $150,000!

Alright…But What Kind of Deals Are Out There?

Tax auctions can allow you to buy some pretty substantial real estate for pennies on the dollar. Let me show you some examples from my state of Texas that went to sale last year:

Tax Sale Listings from Harris County:

Precinct NumberCase StyleJudgment DateAdjudged ValueEstimated Minimum Bid
4CYPRESS-FAIRBANKS I.S.D. VS. 8916 TAUB ROAD INC16-MAY-2001$76,230.00$19,127.75
5CITY OF HOUSTON, ET AL VS. TUDOR PROPERTIES INC.25-JUL-2000$173,090.00$8,415.61

Can you figure out why I shaded some of these property listings? These would obviously be the best deals to investigate and start researching immediately.

Word Of Advice

The shaded deals look great, right? Yes, they sure do but you MUST realize that tax sale listings can be fairly complicated to understand and read correctly. I have run across situations where the significance of one just number before a dash or hyphen can make or break the WHOLE deal! So I want to warn you that nothing comes without its hard work and proper knowledge. For every good deal that you find there are 100 that stink! The best route for the new and experienced investor is to keep learning, asking and researching new opportunities. Always invest in your education and find the right mentors.

Don’t Ever Stop Learning and Never Give Up

No matter what happens you should never give up on learning or give in to the dark riders of failure and fear. Did you know that fear motivates more human action than any other emotion combined? Sadly fear stops many people from trying to learn new things. And you know I don’t blame them! Sometimes it’s really hard to keep learning and growing when you always seem to get knocked down.

I got knocked down a bunch of times then decided that I just had to find a way to make things work. I started to change my mental attitude and think only positive thoughts, see myself doing the things I was destined to do, and completely fulfilling my purpose in life. I decided to go forward regardless of the cost, regardless of the fear and learn new ways to earn income and new ways to help others.

I realized that the more I learned about investing the safer my financial future would become and the more I would be able to enrich the lives of others. I thank everyone for reading my article and being interested in tax sales. Proper information is important so always ask the right questions and find real mentors who have a passion to help.

Don’t forget that this is just information. The real wealth is inside us all. It comes from the power of our minds. So let’s open our eyes to all the new things in front of us, let’s open our hearts to the person we were born to become and towards bright prosperous lives of abundance. Applied faith and knowledge are always your first two steps!

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