What makes tax lien and tax deed investing such a safe investment? Seasoned investors love investing in tax deeds and tax certificates because they have great ROI and they are considered very safe.. to better understand what makes the investment so safe e and secure it is important to understand how they work.
A Tax Deed Investment starts out as a Tax Certificate
City or municipalities govern the collection of property taxes. These governing bodies have budgets for things like fire departments, police, parks and recreation, highway departments, etc. These are expenses that are paid for in part through the collection of property taxes. As these bills need to be paid, it is imperative that all revenue gets collected when due without exception. So what happens when an individual fails to make their property tax payment? The governing body must insure the revenue is always collected. They do this by selling a certificate to collect the face value of the neglected tax payment, (called a tax deed certificate).
Tax deed certificate
A tax deed certificate is essentially an instrument which is sold to an investor for face value of the missing tax payment plus a predetermined rate of return. (varies by location and has some variables to it, but averages around 18% return) This tax deed certificate sale replaces the lost revenue from the property tax that was not paid for so the governing body can continue to pay their expenses and continue functioning without a break in their services.
To Protect Investor and Property Owner
The property itself is the collateral for the value of the certificate This provides a very secure instrument for investors as a property value is typically many many times greater than the value of the certificates.
A property owner has a redemption period in which they can buy back these certificates and pay all fees and interest (along with the principal payment) these time periods may vary by location but typically a property owner has 2 years to redeem the certificate. During the time the property has a certificate placed on the property, the property owner is unable to sell the property. This is further incentive for the property owner to redeem the certificate.
The property owner is protected because they have a full 2 years to come up with the money to buy back the certificate and the investor is secured knowing he will either get his principal and interest paid to them as they have the entire property as collateral ( here it is important to remind you that tax liens take precedent over the mortgage itself.
Here is how the Tax Certificate Converts to a Tax Deed
The investor is in first lien position on the property (making this one of the most secured investments available. One way or another he will get paid his initial investment plus annualized rate of return that was promised. If the property owner did not make good and redeem the certificate the investor now has the right to foreclose on the property. ( in some locations the governing body automatically does this foreclosure process)
One of a Number of Things May Happen Here
1. The lender ( if any for this property) may redeem the certificate so they can maintain their interest in the property
2. You the investor may foreclose on the entire property for just the cost you currently have invested in it.
When governing bodies foreclose they auction these properties now known as an actual Tax Deed Auction and you can bid to acquire the entire property. The auction price will start at what fees are owed to the tax certificate investor ( so you will indeed be awarded your investment plus guaranteed rate of return). What ever the auction price closes at is the price the investor will own the property for.
To bid on these tax deeds you will want to do your diligence so you have an understanding of the value of the property. Often you can buy these properties for a fraction of the retail price.
Rules and procedures for these tax liens and tax deeds vary by location. This information is a general guideline of the process. If you have further interest in learning more about how you can capitalize on tax deeds let us know. We have lots of detailed information we can share.