Niches That Bring Your Riches:Tax Deeds/ Tax Lien Sales – PART 1

Niches: Tax Lien

I am currently doing a series on my blog covering a little about each of the types of niches you could consider when investing in real estate.  Go here to go to the beginning of this series.

When homeowners fail to pay real estate (property) taxes, the government has the right to sell their property in a state “tax sale.” In a tax lien state, homeowners have an opportunity to pay back the amount owed within a specific time frame even after their property has been “sold” to an investor. The investor may be paid back with interest. Should homeowners miss the pay deadline, the investor becomes owner of the property at great savings. In a tax deed state, investors bid for immediate ownership of a property or are eligible for the deed and ownership of the property after a redemption period passes.

By law, tax deed sales must be announced to the public, and are usually sold to the highest bidder. The winning bidder purchases the deed to a piece of property, becoming the new owner and obtaining all rights to the property – clear of any mortgages, liens,deeds of trust, etc.

One interesting thing to note is very few people know much about tax deed sales. So competition may not be as fierce in this niche as it is in others.

Why is this a good niche to consider?

  • Tax deeds are sold in almost every state throughout the United States. 50 states are governed by state-mandated laws to protect & reward investors.
  • You can pick Your Price.  Research the list and pick ones out that are in your price range.
  • You can obtain properties which allow for all types of exit strategies (flip, rent, or live).
  • Investors & Banks have been using this strategy for over 150 years.
  • The rules vary from state to state, in certain circumstances you can obtain an entire property for only the taxes and penalties owed. Generally you will pay between 50 to 90 percent below market price.

General downsides of this niche?

  • Lacking Liquidity of Funds: In a tax deed transaction you can have your money tied up for several years before you can sell the property, because title companies may not issue title insurance on the property until all liens are cleared and it is obvious that clear title can be granted. This process will sometimes take more than a year. Fixing up and or remodeling properties to maximize your eventually sale can also take considerable time.
  • Time and Complexity: Tax deed laws vary from state to state and sometimes from county to county within a state. This requires a time commitment to learn the rules of a state and its counties, research properties and attend auctions. In addition title companies sometimes will not issue title insurance for at least the first year on any property bought at a tax deed sale. This means it could be hard to get a loan until it is clear.

Risk: Purchasing property at a tax deed sale definitely has risk if you have not done extensive due diligence. You must do your homework, title searches, drive buy inspections, history reports etc. Once you buy a tax deed, you will own the property including all of it potential problems. The major thing to keep in mind is that at a tax deed sale, unlike a tax lien sale, you are buying the real estate and we believe that the required level of due diligence becomes extremely high. The other thing you want to know at a tax deed sale is if the property is being purchased free of all other liens and encumbrances. There are a number of states where this is true and a few where it is not true. You need to make sure that you get what you paid for. This requires knowledge of what the values are and what the potential hazard could be.

In summary, Real Estate tax sale laws vary from state to state, as do the redemption periods, and there are risks investors should be aware of in addition to the potential rewards of buying tax sale properties.

Here is a brief explanation and some of the pros and cons of tax lien vs tax deed sales.

TAX LIENS:   A lien is a financial claim made against a property. A tax lien is a claim for unpaid property taxes issued by the local taxing authority. Failure to pay real estate taxes is one of the leading causes of distressed properties leading to home loss. Investors typically buy tax lien properties through an auction after a homeowner fails to heed warnings by the tax authority to pay property taxes. Most states allow homeowners to reclaim their property by paying off the debt in full by a certain date. This is called the “Redemption Period”. The redemption period offered varies from state to state.  However in some locations, investors may have to wait two full years before being paid back or gaining the deed for the property.

Tax lien Pros:

  • Possibility of good returns in interest (up to 24 percent in some states) paid by homeowners.
  • Possibility of owning property at a fraction of its true value.
  • Option to sell, rent or hold the property for additional profit once title is held.
  • Lower Investment Risk: If the homeowner doesn’t pay up, the tax purchaser is first in line to own the property. No tenants, banks or brokers to deal with.

Tax Lien Cons:

  • Required Capital: You must pay what is typically a large amount of cash for your bid at the tax sale. You definitely will need more capital to buy properties at tax deed sales. Although it varies from property to property, from county to county, and even from state to state, you will likely need a minimum of $5,000 to $10,000 to get started in tax deed investing. A good credit rating may also be necessary to sign finance contracts. Check local rules and regulation as well as the history of tax deed auctions in an area to get a feel for the capital you may need.
  • May Not Make Any Money: There is no guarantee the homeowner will pay off taxes and interest on the lien. The process of getting the deed at the end of the redemption period isn’t simple and may require a lawyer.
  • Uncertainty of property condition: With no prior home inspection, there is no guarantee of the property’s condition or value.
  • Property Owner may Be Foreclosed on: If you foreclose, you are stuck with the hassle of selling the property from which you may profit but on the hand you may not recoup your initial investment.

TAX DEEDS. A tax deed is a legal document indicating ownership of property, also referred to as “title.”When the government intervenes to put properties delinquent in real estate tax payments up for auction, investors can pay the back taxes and own the property for well below market value. To locate and invest in tax deed sales, check local newspapers, local tax collectors or the Internet, where many websites post relevant information.

Tax Deed Pros:

  • Quick and easier way to become a property owner.
  • Opportunity to acquire existing equity.
  • Opportunity to purchase property directly from the property owner at bargain-basement prices prior to a tax deed sale.

Tax Deed Cons:

  • Must have prior knowledge of the property’s worth.
  • Since tax sales in certain states do not wipe out existing liens, without knowledge of state laws for deed sales, you may end up owning other liens on the property.
  • You are fully responsible for all property liens, as well as current taxes and property assessments.

Fortunately, investors who sow the seeds of diligent research can reap the rich rewards of tax property sales.  Go Here to download your due diligence report if you have not done so already.

Please watch for my next blog post Tax Deeds/ Tax Lien Sales – PART 2 going over the steps to do tax lien/deed investing.
This concludes my article on Investing in Tax Deeds / Tax Lien Sales – PART 1.  If you are interested in my personal coaching/training services for this and all the Niches I have shared, go here to see if my program fits your needs.

To learn more about 12 of the most popular real estate investing niches, please enjoy the articles I have written detailing how to use them and grow your real estate investing business. Enjoy!

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