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Tax Sales - Chapter 8

Dealing on Tax Defaulted Properties

Tax Sales and Tax Liens.

When a homeowner is delinquent on property taxes owed to the local taxing jurisdiction, the agency will enforce its right to collect the amounts due through a tax sale. Tax sales are a mechanism used to collect delinquent property taxes, so the local government can deliver the services and benefits it has promised to the citizens. This is generally accomplished through a public auction, where the local government sells either a Tax Deed or a Tax Lien.

The first process is called a Tax Deed Sale, where after legal requirements are met, the property is offered for sale at a public auction. Generally, minimum bids will be set at the sum of accumulated back taxes plus interest plus transaction costs associated with selling the tax defaulted properties.

Those states that offer a tax deed sale generally wait a number of years before they sell the property. However, when the property is ultimately sold at auction, the sale is usually final and the owner has no right of redemption. However, there are exceptions to this rule, so it is important to perform proper due diligence in each jurisdiction. For example, the state of Texas provides a 6-month redemption period where the former home owner can reclaim the property by fulfilling certain requirements. Additionally, the state of Tennessee allows a full year of redemption.

Over half of the states in the U.S. use a form of tax deed sale. Those jurisdictions that have tax deed sales will sell fewer properties at the tax deed sale than jurisdictions with tax lien sales. This is due to the fact that tax deed states usually require a much higher price for the property than you would end up paying for the same property in a tax lien state.

Tax deed sales are ideal for investors who want to own real estate. Contrary to a tax lien auction, the winning bidder at a tax deed auction purchases the deed to a piece of property, becoming the new owner and obtaining all rights to the property, clear of any mortgages, liens or deeds of trust. For most people investing in tax properties for sale, the key objective is to buy low and sell high. As with any real estate purchase, it is critical that you research the property and understand the value of the property before submitting a bid. Without the proper analysis, you risk paying more for the property than it is worth.

Those states that have Tax Liens Sales (sales with a redemption period for the owner) take a different approach. Rather than waiting several years to collect delinquent taxes via tax deed sale, tax liens states sell tax lien certificates that are investment documents which are transferable to third party investors.

Similar to tax deed sales, tax liens sales are performed through a public auction. The buyer of a tax lien is buying the rights of the taxing jurisdiction to receive interest, penalties and costs. The security for this investment is that the buyer holds the right to acquire the property if he is not paid before the expiration of the redemption period. This makes the potential upside of tax liens a very attractive investment. However, it is important to note that the national tax lien redemption rate is approximately 95%. This means that investors will usually not end up with the property, but will make a return on their investment that is quite attractive. The returns vary from state to state but can be as high as 30% and often exceed 12%.

To summarize the opportunity with tax liens sales, there are generally two ways to profit. The first opportunity being when the property owner redeems the lien and you are compensated with interest and penalties. Again, this can be very lucrative interest rate depending on the jurisdiction. The second opportunity being when the property owner does not redeem and you receive title to the property and become the new owner. The opportunity to receive title to the property can make investing in tax lien property for sale a very exciting and lucrative opportunity.