Basic Foundation of Various Tax Sales

Hi everybody, as we all know, this great country is in the midst of troubled economic times. One of the major side effects of the recent recession is the inability of homeowners to pay their real estate property taxes. Each individual County has to have a way of collecting the revenue they are owed in delinquent property taxes. Some counties place a tax lien on the property and then sell the delinquent tax debt to investors in the form of a Tax Lien Certificate. These certificates are a guaranteed investment with a high yielding return. Counties in tax deed states will skip this process and hold an auction to sell/auction the property to the highest bidder, with the opening bid usually starting at the accumulation of the delinquent taxes. When a property is sold at a Tax Deed sale there is no redemption period and the highest bidder gets the title & deed to the property.

So now we know that each state will either sell tax lien certificates or will sell the deed to the property. In some states though, the county will have both tax lien and tax deed auctions. I like to call these states ‘hybrid’ states. There are several states like this and Florida happens to be one of them, and I became very interested in pursuing tax lien certificates in the sunshine state. I’d like to share with you what I’ve learned about this investment in Florida:

In the state of Florida, a tax lien certificate represents a first priority tax lien on real property; it does not convey title to the land. Purchasing a tax certificate does not entitle the certificate buyer to enter the property or have any custodial rights to the property. The certificate is a high yielding investment and not a deed to the property. So it is not the sale of land, but rather the sale of a lien against the property. Every county will have an auction and sell these certificates on any property with unpaid taxes. The highest the certificate can pay is 18% annually. The bidding will start at 18% and will be bid down in increments of ¼ %. The certificate will be issued to the bidder who is willing to accept the least amount of return. As long as the certificate is not bid down to 0%, then the certificate will always earn a minimum of 5%. If there are no bidders for a certificate it is issued to the county at 18% interest and is available for purchase as an ‘over the counter’ or ‘leftover’ certificate.

The supplemental tax deed sale is made up of tax certificates originally purchased at our lien sale and forfeited because of non-payment. If requesting for a tax deed sale, the certificate holder must redeem all other certificates that he or she does not own. The Clerk of Circuit Court will issue a tax deed. This document will transfer title to the highest bidder, but it is not a guarantee of clear title. It is the buyers’ responsibility to determine whether any liens or encumbrances survive the issuance of the tax deed. You may be asking yourself, “What is an encumbrance?” The answer is anything owed against the property. For example (not necessarily in order of priority); taxes, assessments, liens, easements, mortgages, trust deeds, pending legal actions (lis pendens,) vendors claims, encroachments (zoning easements,) or building restrictions. What liens in my state may survive the issuance of a tax deed? You have to get the state statutes for your state and scroll through to the section on real estate laws or public land laws.

This forum is awesome…Look on the left hand side of the screen, under Investor Resources, and you will find a link to State Property Codes…They have all of the state statutes already here…that is really awesome and helpful.

If an individual who owns the tax certificate starts the tax deed sale application and there are no bids made, the property is considered to be sold to that certificate holder. If the property is sold to another investor, the secured certificates survive the tax deed sale and are satisfied to the fullest extent. Again, if you are interested in a property, it is your responsibility to do the necessary research to determine the property’s address, value, and if any liens or encumbrances exist after the sale.

In the following paragraphs, I am going to give an example for each of the 4 different methods a state can use to collect the revenue they are owed in delinquent property taxes. Every state is going to be one of the following; Tax Liens, Tax Liens & Deeds, Tax Deeds, and Redeemable Tax Deeds.

If the state is just a LIEN state, the process works like this; anybody can pay the delinquent property taxes for the previous year. The county will issue the investor (you or I) a tax lien certificate with a guaranteed ROI (Return on Investment.) For example Kentucky Counties pay 12% annually. That means if someone purchases a tax lien certificate (meaning they paid the county the amount they were owed for the delinquent property taxes) the County will issue the investor a tax certificate. Since Kentucky pays 12% and has a 1 year redemption period, this means that each month that the certificate is delinquent, you would earn 1% each month. If the certificate is not redeemed after 1 year, then you would get the property free and clear of any mortgages.

If the state is just a DEED state, the process is this; the county will not issue a tax certificate for the unpaid year. If the property taxes have not been paid for 2-7 consecutive years (this differs from state to state), the county will hold a TAX DEED auction and auction off the property starting at the accumulation of the unpaid property taxes. For example; in California, if the owner has not paid their property taxes for 5 years, (and lets say they owe $5,000 each year), then the starting bid for that property will start at $25,000, and title to the property will be issued to the highest bidder. Tax deed states have no redemption period. Once you get the property it is yours, and with some rather simple yet highly effective selling techniques that I can share with you, you can sell the property to another investor or a family looking for a great but on a property.

If the state is a LIEN/DEED state the process is different: let’s take Florida for example; In Florida, the county will issue a tax certificate on a property that has not paid their taxes. If after 1 year it is not redeemed, then the county will issue a 2nd year certificate (this is because the redemption period in Florida is 2 years). So the county will contact the 1st year certificate holder and ask them “would you like to purchase the 2nd year certificate?” the answer is always YES, because you would be earning another 18%. If after the 2 years the owner still hasn’t redeemed, then you would fill out a form “request for foreclosure” or “tax deed application” and the county will take that property to the tax DEED sale. If any mortgages are on the property, then before it goes to the actual DEED sale, these mortgage companies will be notified. Most of the time the mortgage company will pay you all your money plus all the interest, because if they don’t, and it goes to the tax deed sale and someone bids on the property, then all the mortgages are wiped out. Please note that during these times less and less mortgage companies and banks exist, so the number of tax lien certificates that are not being redeemed by the banks is increasing more and more. The certificate holder always gets paid no matter what. If there are no bids made, the property is considered to be sold to the certificate holder.

If the state is a REDEEMABLE TAX DEED state, that stands for a penalty state. For example Texas is a Deed penalty state; In Texas if the property taxes have not been paid on a particular property, then the county will take it to a tax DEED auction just like California. But the DEED that is issued is considered a “Sheriffs deed” not a “deed absolute”. So in Texas the county will give the homeowner 180 days to redeem the property. If they do not redeem the property then the deed holder will get a title to the property free and clear of any mortgages. The interest rate you will receive in TX is 25% but this is a flat rate. That means the homeowner could come in on day 4, day 24, or day 54, and have to pay you a flat interest rate of 25%. If the Deed Certificate holder chooses not to foreclose on the property after 6 months, the ROI becomes a flat rate of 50% if the Deed Certificate is redeemed in the 2nd year.

The easiest way I describe it to people is the acronym PCS…Predictable, Certain and Secure.

Predictable: certificates are predictable because the guaranteed rate of return never changes no matter what the market does.

Certain: when you invest with the government your $$$ is protected by the Government Property Tax Codes. You will get the guaranteed ROI, or you will get the property.

Secure: the certificate that is issued is always attached directly to the real estate. When property lines are drawn up on an area of land, that land is issued a parcel #. The certificate is attached to this parcel number, thus making the tax lien certificate always the 1st priority lien.

** Only 2 possible outcomes can come about when investing with Government Secured Certificates:

1 … the certificate holder will get the guaranteed return of investment
2 … the certificate holder will get the property mortgage free

(although there are a few exceptions to this rule. For example: if a property owner you have a certificate on files for bankruptcy, then the redemption period before you can begin the foreclosure process can be extended until the bankruptcy process is rectified, and the amount the certificate will pay you back in interest can be lessened to as low as 6% annually…this depends on the court system and the judges ruling and of course what state you are in and the state laws…however, you will not ever lose the investment due to a bankruptcy ruling.)