Tax deed sales can be a part of a real estate investment portfolio, potentially allowing investors to explore properties priced differently than market value. However, understanding the intricacies of this type of auction is crucial. Outcomes can vary and are not guaranteed.
Here’s what you need to know:
The ins and outs of tax deeds
A tax deed is a legal document granting property ownership to the government when taxes on the property are unpaid for a certain period. The government then resells the deed, usually at a public auction, and all due taxes must be paid before new ownership is established.
Tax deed sales give investors unique opportunities to acquire real estate at below-market prices.
Tax sales
The process begins when an owner fails to pay their taxes on a property, and the local county tax collector is forced to foreclose. In most states, after some time passes and if the delinquent taxes remain unpaid, the local government will issue a certificate that entitles them to seize the property for nonpayment.
The certificate holder (usually the county) may sell this property via a public auction. Typically, potential buyers offer an opening bid for the amount owed in delinquent taxes and other encumbrances or assessments, such as fees plus any interest accrued.
The winning bidder must pay at least unpaid taxes by cashier’s check, money order, or wire transfer to be awarded the deed. However, if multiple bidders exist, the highest bidder may pay more than the minimum amount due.
In some cases, investors may pay much more than what is owed in back taxes to secure a great deal on a property. Depending on the jurisdiction, any extra amount paid by the successful bidder over and above their minimum bid may (or may not) be returned to the delinquent property owner.
Redemption periods
Tax deed auctions may have certain obligations regarding the sale of a property. For instance, some municipalities may allow a redemption period, where original owners can reclaim their property by paying all delinquent taxes plus interest or other fees. For example, Florida statutes state that if property owners settle their outstanding property taxes before the sale date or before a tax deed investor makes the full payment, the tax deed sale is invalidated.
It is important to note that not only can the homeowners of a property use the redemption period to pay off their overdue taxes, but so too can other interested parties with legal interests in the residence, such as mortgage companies.
Ownership of the property
A tax deed holder can take ownership if all legal requirements are met. Once a tax deed holder has taken ownership of the property, they can decide what to do with it.
They may flip the property, renovate or resell it for a profit, rent it out, or hold onto it as an investment. Ultimately, the decision comes down to the individual investor’s goals and financial situation.
Example of a tax deed sale
Assume the value of a property in a tax deed sale is assessed to be $200,000 and has $25,000 in back taxes, including any accumulated interest and fees. The winning bid on the property is $150,000.
The county could take $25,000 from the bid amount to cover the property taxes due, and the remainder will be paid to the original owner if required by state law. In this example, $25,000 is remitted to the county, and $125,000 ($150,000 – $25,000) in excess funds is sent to the original owner. The bidder gets title to the home and an instant equity profit of $50,000 ($200,000 – $150,000), less recording fees and closing costs.
The return on investment (ROI) is 33% before expenses, calculated by taking the $50,000 profit ($200,000 – $150,000) divided by the initial investment ($150,000) x 100.
The possible returns earned from investing in tax deeds can make them an attractive part of any real estate portfolio. With a thorough understanding of how tax sales work and considering all applicable laws and regulations, investors can take advantage of these opportunities for potentially large rewards.
Benefits and risks of investing in tax deeds
Investing in tax deeds can be an attractive option for real estate investors looking to buy property below the fair market value. However, while there are many potential benefits, it’s essential to understand the risks of investing in tax deeds.
Benefits
There are several advantages for investors in tax deed sales. First, these sales can provide access to discounted properties that may be purchased significantly below market value. Additionally, since the county or municipality backs these liens, investors can ensure their investments are secure.
- Offers a chance to acquire properties at discounted rates.
- Liens are backed by the county or municipality, providing security for investors.
- Potential for a quick return on investment with minimal effort.
- Minimal competition, as not all potential buyers understand how the process works.
Risks
Despite its potential benefits, investing in tax deeds can be risky. While they are generally secure, they may still fall victim to legal challenges that can delay or even derail the entire purchase process, resulting in losses of both time and money. Additionally, buyers may purchase properties with unknown issues and liabilities due to a lack of rigorous inspection opportunities.
- Potential for legal challenges or delays in the purchasing process.
- Lack of inspection opportunities for properties.
- Unforeseen liabilities with properties due to lack of information.
- Investment capital can be tied up until the property is sold or redeemed.
How tax deeds differ from tax liens
A tax lien certificate is a claim against property owned by someone who has not paid their taxes, while a tax deed is a legal document transferring property ownership to an investor due to unpaid taxes.
Tax liens give the lien holder the right to collect past-due taxes plus interest from the delinquent taxpayer, while tax deeds transfer ownership of the property to the investor. According to the National Tax Lien Association, anywhere from $3-$5 billion in delinquent real estate taxes are offered for public sale each year.
When investing in a tax lien, real estate investors pay off the debt owed on a given property and receive a certificate proving their rights as holders of said debt. The certificate entitles them to receive all payments made by the delinquent taxpayer until either full payment is made or the lien expires.
On the other hand, a tax deed is issued when property taxes remain unpaid for a specified period, and the lien has yet to be satisfied. This process allows a government to take ownership of the property instead of payment from the delinquent taxpayer to recoup their losses.
The homeowners lose all legal rights to owning that property, including any equity they may have built up over time. Depending on the state or local laws, properties obtained through tax deeds are sometimes auctioned off to third parties to satisfy the debt owed.
While tax liens may offer more security than tax deeds due to their return, they may also be less profitable. On the other hand, even though there is potential for a high yield from tax deeds, investors need to be aware of risks, such as costly repairs on the property, before bidding on it. Tax deeds can be risky investments, but those willing to take a chance can reap significant rewards.
Where to find tax deeds for sale
If you’re an investor looking to participate in tax auctions and purchase tax deeds, there are several ways you can find them.
One way is to attend a live auction. These are held by county governments and provide current information on when and where the auctions are taking place and what properties or lists of lands are for sale. They also offer great opportunities for negotiating prices or bidding against other bidders for a better deal.
Another way to find tax deeds for sale is to search online listings. For example, many state and local governments list available tax deed properties online and include public records such as the property’s address, the amount of taxes owed, and any liens that may be attached to it. Some websites, such as GovEase.com, even host online auctions so investors can bid directly from their computers or smartphones.
Investors can also contact local real estate brokers specializing in tax deed sales. Brokers have insider knowledge of upcoming sales, including foreclosure auctions that could yield great investment opportunities. In addition, brokers have access to data about the market value of properties, allowing them to make more informed decisions before bidding on a property in person or online.
Investors could also consider working with a research service or a title searcher who specializes in locating potential tax deeds for sale. These professionals have access to official records and comprehensive databases containing up-to-date information about available properties in their areas, making it easier for investors to keep track of special deals and ensure they take advantage of all potential investments.
Bottom line
Tax deed sales offer a unique opportunity for investors to purchase property for well below market value — but it’s important to know what you’re getting into beforehand. Understanding how tax liens work, familiarizing yourself with the bidding process, and ensuring you have all the information necessary before making an offer can help ensure a successful investment experience.
Arrived offers investors a platform of real estate investment opportunities with the potential for long-term growth without worrying about the uncertainties of tax deed purchases and auctions. View our available single-family residential and vacation properties today.
The opinions expressed in this article are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security or investment product. The views reflected in the commentary are subject to change at any time without notice. View Arrived’s disclaimers.
