Chapter 3: Tax Liens and Tax Deeds
While we were at the Tax Assessor’s Office looking-up Ida Mae’s name, we also asked for a list of the properties the Tax Assessor is going to auction for back, unpaid property taxes. Each state has their own method of collecting delinquent property taxes. In our state, we use what is called a tax lien. The property owner has failed to pay the property taxes when due so after giving the owner a reasonable time in which to bring the tax payments current, the Tax Assessor turns-over the property to the Sheriff who will then auction-off the tax lien to the highest bidder. Counties do this on a regular basis, usually monthly. The counties need the tax revenue now so they sell the lien to a private individual who pays the back taxes to the county in return for that lien. Then, the property owner has a limited time in which to redeem that lien and clear the title to his property. In our state, that time limit is six (6) months. If the property owner has not repaid the tax bill plus costs plus 25% interest, the actual title to the property goes to the person who bought the tax lien. Either way, the investor wins. If the property owner pays, the Tax Assessor collects that payment plus interest and then sends the entire amount to the investor. If the property owner does not pay within the allowed time limit, the investor gets title to the property itself, free and clear.
To give you an idea of what some of the states offer, here is a listing of some of the better tax-lien/tax-deed states and the rates they pay:
Arizona 16%
California after 5 years auctions the deed absolute
Florida 18%
Georgia 20% 1st year, then 30% 2nd yr, then 40% 3rd yr, then 50% 4th yr
Illinois 18% first 6 months, then another 18%
Iowa 24% at the rate of 2% per month
Maryland 24%
Texas 25% in 6 months but special rules for homestead/agriculture-registered
Previously, we were looking at an active investment when trying to purchase the house from Ida Mae. Now we’re looking at a passive investment in which we sit back and wait to collect. We either collect our costs plus a 25% profit in 6 months or we get title to the property itself just after 6 months has elapsed. If we are paid off in cash, we can use that cash to purchase another tax lien and effectively earn over 50% interest per year on our money. If we get title to the property, we can sell it or rent it as we choose. Even if there were other liens on the property such as a mortgage, mechanics lien, IRS lien, or creditor (of the original owner) lien, all those liens disappear when we get title to the property after 6 months. Think of that. You can effectively purchase property for just pennies on the dollar.
In other states such as California where we discussed the “Bubble” real estate market in Orange County, they collect property taxes via tax deeds. In California, the property owner is given 5 years in which to pay past-due property taxes plus interest. If left unpaid, the property is then sold at auction to the highest bidder and the successful bidder receives immediate title to the property, free and clear. The former owner has no right of redemption.
After we sent the original letter to Ida Mae, we drove around to look at the various properties that are to be auctioned on the first Tuesday of next month at 1 PM on the Courthouse steps. Some of the properties turn out to be vacant land. One lot is a waterfront lot on a 23,000-acre lake while another lot is located in a gated community and backs-up to a private golf course. Another parcel consists of 4.1 acres inside the city and is zoned R-3 (meaning approved for multiple units such as apartments). Still another property on the auction list is a 3-bedroom plus den house on a 0.144-acre lot. We decide that we are very interested in the 4.1-acre parcel and the 3-bedroom plus den house. We’re mildly interested in the waterfront lot and the golf course lot. In checking prices, we find that a 7-acre parcel two blocks down the same street from the 4.1-acre parcel was recently sold for $20,000 per acre. That, perhaps, was somewhat unusual in that the old folk’s home next door purchased the 7-acre parcel in order to construct an assisted living facility. We surmise that the sale price was higher than perhaps a normal market might dictate, but we also surmise that at ½ the price, $10,000 per acre would be a good buy. Houses similar to the 3-bedroom plus den in that neighborhood are selling in the $60,000 to $75,000 range. The golf course lots seem to be in the $9000 to $12,000 range while the lake front lot has no comparables from which to evaluate.
Now that we’ve done our research homework, we attend the Sheriff’s auction on the first Tuesday at 1 PM. Ours’ is a small county and there are perhaps 30 potential bidders present. The first property offered that is of interest to us turns out to be the 3-bedroom house. The Sheriff offers it at the minimum bid of $14,698. We raise our hand and verbally acknowledge that we bid that amount. The Sheriff acknowledges our bid and asks if anyone is willing to bid higher. There is a deafening silence. No one else seems to be willing to bid. After a few tries to elicit higher bids, the Sheriff announces “Sold” and asks for our bidder number. Wow! We got the property for the minimum bid. Prior to the bidding, we registered to bid and were given a number. We also arranged to pay by personal check rather than cash or cashier’s check and received approval. Larger counties are reluctant to accept personal checks so it is very important to determine the rules before you open your mouth.
The next property to be offered that was of interest to us was the golf course lot. The Sheriff offered it at the minimum bid of $1850. We again raised our hand and offered the minimum bid. The gentleman sitting next to us then over bid us at $1900. We remained silent. Finally, a woman won the bidding at $2400. Afterwards, we learned that she was unaware that the lot had an $1100 Homeowner’s Association lien against the lot which she would have to pay. She had not done her homework. While most outside liens are eliminated when a property goes to auction, the Homeowner’s Association lien remains and is now due from the new owner. Needless to say, the woman was not a happy camper. We again are thankful that we did our homework.
The third property in which we had an interest was the 4.1-acre parcel. We again made the opening minimum bid of $12,400. This time, another woman bid $12,450. We raised our bid to $12,500. This continued back and forth in $50 dollar increments until we submitted a bid of $14,150. The woman did not raise our bid at that point. Since no one else had bid against either one of us, we once again were successful with our bid. We will either be repaid $17,687.50 within 6 months ($14,150 plus 25% interest) or we will own over 4 acres at a cost of $3451.22 per acre. Recall that we determined that this land would be worth at least $10,000 per acre, so we have a sizable profit no matter whether the current owner redeems the property or not.
The waterfront lot, the final property in which we were mildly interested came to auction. The minimum bid was $9250. There were no bids so the property remained unsold. We could now submit a written offer for less than the minimum bid to the Tax Assessor’s office. We decided that the location of the lot even though on the water was not such as to make it worth our while to offer a written bid. If we later change our mind, we can submit a written bid at any time prior to the next auction offering of this lot.
We again stop to consider what we’ve accomplished to date. We spotted a vacant property that tweaked our interest. We determined the owner’s identity and made successful contact. We got additional information about a forthcoming tax lien auction while we were identifying the vacant property owner. We were successful in purchasing two (2) properties at the auction where we stand to either earn 25% interest on our investments in only 6 months or we will own the properties outright for pennies on the dollar. One success leads to another success leads to another. And it’s fun. So far, we’ve spent perhaps a total of four (4) hours overall creating these successes. Not exactly a full-time job, but it sure pays better than a full-time job.
At 5 PM, we called Ida Mae’s daughter, Sally, to see if her mom was willing to sell us her home at a reduced price in exchange for an all-cash immediate sale. We were shocked when Sally told us her mom had decided to just list the house for sale through a local realtor. We were not prepared for this turn of events. We did point out that by listing the property, she would receive substantially less money net after paying commissions. We also told her that the local real estate market as managed by the local realtors required on average about 9 months to sell a house. We were here today and ready to buy now. If she sold to us, she could immediately walk away with more money and go on about the rest of her life with out worrying about a vacant house located over 200 miles away. Our logic had no effect on Sally or, apparently, Ida Mae. Perhaps our error was to not have talked directly with Ida Mae. Whatever the reason, we had to accept the fact that not everyone we try to deal with is rational. Their decision made no sense to us, but that was their problem, not ours. The by-product was two successful tax liens simply because we went to the Tax Assessor’s office. You have to accept that fact that not everyone will be willing to work with you. Your objective is to find those people who want to work with you. How can we improve our percentage results in finding those folks who want to work with us? We’ll create the environment where interested sellers will contact us. We’ll run an ad in the classified section of our local newspaper.
NOTE: Stay tuned for installment #4