Should I be Investing in Tax Sales Right Now? - part 1

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.

Tax lien Certificates

The Simplest way to understand Tax Lien Certificates is to realize all real estate is taxed by the county and municipality. Taxes are collected to provide many different benefits to citizens. Every property owner is assessed for property tax one or more times each year. Tax districts and municipalities receive their revenue from property taxes.

In many states, if the property owner does not pay the property taxes the county or municipality will accrue the taxes and penalties for many years. Ultimately, if the property owner does not pay the taxes, the county or municipality will sell or auction the property at a tax sale or auction.

The objective in selling the certificates is to allow an investor (rather than the property owner) to pay the property tax on a particular property. This benefits the county with immediate revenue and benefits the investor with a low risk certificate that has a high-yielding interest rate. The interest ROI could be from 8% all the way up to 50%.

The basis of our tax system dates back to the foundation of our country. The system was brought over from England. From the English, we learned that the basis of a person’s wealth was land holdings. Consequently, the land provided the tax assessor a method of attaching the property owner’s wealth. Real property cannot be hidden and it’s easy to assess. So this system that we use has been in place for 200 years, but it has been well hidden by the judges, lawyers, and bankers until recently. Ted Thomas was the first person in the country to bring this amazing investment out into the general public back in 1989.

The difference between a tax lien & a tax deed

The easiest way I can explain the difference is tax liens are an investment, while tax deeds are a purchase. If you want a passive investment with a guaranteed high-yielding ROI (return on investment,) start with Government Secured Tax Lien Certificates. If you want a more aggressive investment and you want to start a cash flow business, begin purchasing Tax Deeds. If you would like to take several hundred or several thousand (depending on how much money you have set aside to invest with) and invest it in tax liens, you can expect 1 of 2 outcomes. Usually you will receive all of your money invested back, plus a high interest rate depending on what state you invested in. You get paid back when the tax lien certificate gets redeemed by the property owner or someone on his or her behalf. The redemption period (the amount of time the property owner has to redeem the tax lien before the tax certificate holder can foreclose on the property and obtain the deed to the property free and clear of any mortgages) can be as short as 6 months and as long as 4 years. If the property owner does not redeem the property in the allotted time permitted by the County, then the tax certificate holder can foreclose on the property and receive the deed free and clear of any mortgages.

Investing in tax certificates right now

First of all, tax lien certificates are the safest and most lucrative investment in America today. Tax lien certificates are predictable, certain, and secure. Tax liens are predictable because the guaranteed rate of return never changes no matter what the market does. Tax liens are certain because 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 free and clear of any mortgages (with the exception of the state of New Mexico.) Tax liens are a secure investment because the certificate that is issued is always attached directly to the real estate. A parcel number is attached to an area of land when property lines are drawn around that piece of land. The certificate is attached to this parcel number, thus making the tax lien certificate always the 1st priority lien.

With tax certificate investing you can earn guaranteed high yielding interest rates that you can find in no other investment arena in America that I know of. Let me show you how your money will progress by simply taking it out of your savings account and investing it in tax lien certificates in the state of Florida for example. Right now Bank of America is offering a savings account with a 1.59% annual percentage yield. I don’t think you will be able to build much security at that rate, but for fun we can do the math to check. Start with a $2,000 investment and just keep rolling it over every year. With a $2,000 investment at 1.59%, after 10 years you will have $3,548. After 20 years you will have $6,294. This means that after 20 years you would have earned only $4,000. So this means that Bank of America gladly takes your money, invests it in tax lien certificates that pay 16%, 18%, 25%, all the way up to 50% in some cases, and then returns to you a 1.59% annual rate. If Bank of America is investing in tax liens, should you be? I think you already know the answer to this question.

Now let’s take the same initial investment of $2,000, and instead of putting in a savings account at 1.59%, we are going to invest in Government secured tax lien certificates in the state of Florida. I think you will like these numbers much more. With the same $2,000 investment at 18%, after 10 years you will have $10,467. Well that is pretty good, but take a look at how much you will have after 20 years. After 20 years you will have $54,786. So that same investment of $2,000 put in tax liens will generate $50,000 more than a savings account. What sounds better to you after 20 years, $6,200 or $55,000?

Now let me show you something that should get you excited about the tax lien business. You and I are going to stay in Florida for a minute. Now instead of starting with $2,000 we are going to start with an initial investment of $10,000 and invest it in tax liens in Florida that pay 18% a year. After 10 years you will have $52,338. That’s pretty good, but what will my initial investment of $10,000 be after 20 years? After 20 years you will have $273,930. Hello America! Take $10,000 and invest it in tax liens in Florida and 20 years later with a little time and effort invested you should have at least $220-$270,000. I don’t know about you, but $270,000 will definitely add some security to my retirement plan.

Now why do you think I said in the last paragraph that you should have at least $220-$270,000? First of all, you may not always lock in to an 18% annual return. Sometimes you may bid a more desirable property down to 14-15%. Second, if you keep purchasing tax lien certificates over the years, the statistics show that you will acquire properties 1% - 3% of the time, although the chances of getting one in FL is only about 1% or less. That’s okay though fellow Floridians, you have no need to worry, you live in the best state in the country for Tax Defaulted Property sales, and I’ll get to that a little later on in this report.

Buying Tax Defaulted Properties

If you would like to invest in tax deeds, this means you are prepared to purchase a property at a tax sale, and then once you acquire the property you can either rent it out or sell it. Typically you can make much larger profits in a much shorter time purchasing properties at a tax deed sale and then selling them in the same condition (or with minimal improvements) to another investor or family looking to buy a home at a great price. Let’s say for example a home at the tax sale is worth $100,000, and the minimum bid is $6,000 (or the total amount of delinquent property taxes owed.) There is a good chance that you will be able to purchase that property for around $10,000 - $20,000. This means you have now successfully purchased a property for 10-20 cents on the dollar. Not a bad deal, right? Now you can resell the property fairly easy for $35,000-$40,000 in today’s market, or maybe even more. This means you have profited around $15,000 - $25,000 in just one deal, sometimes even $30,000 or more. I have reviewed many case histories where people have made $60,000 - $100,000+ in only 1 deal. Now, this will be less common in 2010 with the current market conditions, but it does happen.

Now let me get back to the point I just made about FL being the best state for Tax Defaulted Property sales, or tax deed sales. Here in Florida, every county is currently having sales all the time. Every county is going to have a sale at least once a month, with a few exceptions in the northern part of the state. For example, Jacksonville, FL. which is in Duval County, will have a tax deed sale 4 times a year, or once every 3 months. On the other hand, the sale in Duval County will consistently have a hundred or more properties auctioned off for just the unpaid taxes. In my County here in Brevard, we will have an auction every other week, sometimes we even have a sale every week. The point is, there are sales happening all the time in every county and all you need to do is learn how to research, bid on & buy, and sell tax sale distressed properties to make huge profits. Your bank account will be all the proof you’ll need.

Investing in tax lien certificates out of state

Well, there are a few things to consider. Why is it that you only want to invest in tax liens? Your answer may be that since you are new to the business you feel more comfortable just buying the delinquent tax lien rather than purchasing the entire property. I can completely understand this, a lot of people prefer to start with tax liens. Your answer also may be that you want to start investing with a small amount of money, and you simply don’t have enough set aside to purchase a deed to the property. I can understand this scenario as well. If you live in California, which only sells the deed to a property with the starting bid being 5 years of delinquent property taxes, it is going to be quite difficult to find a property that you can purchase for just a few thousand or even a few tens of thousands. So what are you to do?

I recommend that if you do have enough money set aside to go ahead and bid on the deed to a property, just stay in your state and go to a tax deed sale. You can acquire more money faster by purchasing a property at a tax sale and then flipping it to someone else. Members of Ted Thomas can participate in a joint venture partnership where Ted will put up 100% of the funds to purchase distressed homes at tax sales all across country.

If you don’t have the monies set aside to purchase a property, or if you simply don’t want to, then you will need to decide which tax lien state to start with. I would get out a map of the United States and see if there are any tax lien states that are within driving distance to the North, South, East, or West. If there are, then start there. If there are no lien states close to you, then just choose a state. Maybe you have family or friends in a tax lien state, maybe you take an annual trip or vacation to a particular state, an upcoming business trip may have you going to a tax lien state, or you may want to choose a tax lien state that is among the highest in the interest that the county will pay you back. This you will have to make a decision on your own.

Now, on the other hand, what if you live in a state that only sells tax liens and you want to buy tax deeds? You may not live in a state that has tax deed sales, although even if they don’t, the county is more than likely overstocked and may have properties that you can purchase directly from the county. There could be a number of names for these sales including: Scavenger sales, left over properties, unknown surplus lands, over the counter auctions, strike off lists, and front running - this is a real money making skill, and it can make you a small fortune with barely anything out of your pocket if you know how to do it the right way. The person who does the most research and asks the most questions to the officials in charge of collecting property taxes wins the game.

Some questions on my mind has been clarified by this post. Thank you.

CAVEAT EMPTOR…le the buyer beware.

A well written piece on tax liens and tax deeds. THere is some that I disagree with.

I’ve been doing tax liens for a long time…before 1989 as mentioned here.

  1. There is NO GUARANTEE by any state that I am aware of for any return on tax liens. In most states the bidding will determine what your actual return on investment is. If the proerty is NOT REDEEMED all you get is the property which may well be WORTHLESS.

  2. In most tax deed states there IS a REDEMPTION PERIOD, you get a deed, SUBJECT TO the redemption period.

  3. Tax liens are NOT necessarily the safest real estate investment. There is NOTHING guaranteed in this type of investment. You can get worthless property, drainage ditches, left over right of way, burned out crack houses, swamp land, just to name a few…I know as I have seen one strip of land that is 5 (Yes 5 feet wide) X 2,000 feet long along the side of a very nice local highway sold many times…the inexperienced investor sees the 2,000 feet along the highway and bids and buys a worthless piece of left over right of way.

  4. Technically yes, you will receive the land free of any mortgages, practically NO. You will have to go through Quiet Title to clear the title. I suggest you read “Jones vs Flowers”, a S C O T U S deciion in which after SEVEN years the tax lien investof LOST the p[roperty back to the original owner. DUE PROCESS must be served.

  5. All in all a nice article, as most sales pitches go it shows only the positive side of things. Success sells, failure teaches.

  6. My advice, get an EDUCATION in tax liens and tax deeds BEFORE you start to invest. Go to your local courthouse law library and ask the liberian to give you copies of all statutes on tax liens or tax deeds for your state…read them at least three times to get past the legalese…start your investment program…small…grow and invest…secure your future.

  7. I DO NOT SELL BOOKS, TAPES, SEMINARS, etc. I am not a lawyer, have never played one on TV and DO NOT give legal advice…just an old time investor who believes that you should be told the unvarnished truth even if it hurts.

Buyers should read this, this can make them aware of the properties and homes they wanted to have and buy.