Tax deed investing 101: A beginner's guide

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Our previous post on tax lien investing was a prelude to tax deed investing, if you missed it go here to read it as it is important to understand how a tax deed becomes a tax deed as the result of an unpaid tax certificate.

As stated previously, it is important to share that the rules and guidelines for purchasing tax deeds vary by county and by state. However, here is a general guideline on what they are and how you can purchase them.

If and when a tax lien certificate should fail to get paid off by property owner, you have recourse. Perhaps even a better return potential on your investment.

First of all, if the property has a loan on it the lender has vested interest in paying off this tax lien as tax liens tend to have first lien position on a property, and established lenders know this. For example, you may have a $2,000 tax lien on a property that is worth $200,000. If the lender has a $150,000 loan on a property you can safely assume the lender wants to pay off this tax lien and keep control of the debt they have on the property. This further makes a tax lien a “safe” investment.  But what if the lender does not redeem, or what if there is no loan.

Enter the Tax Deed;

Some states are considered tax deed states; this is where the county in which the property is located actually forecloses on the property. The county then puts the tax deed up for auction. This action is designed to cover the cost of the tax lien and any other penalties or fees that may be accrued for the property. The total of these fees will be the minimum bid. So essentially you can buy the tax deed for as little as the fees to cover back taxes and penalties. This is often pennies on the dollar for the true value of the house. When there are multiple buyers for the tax deed, the minimum price can raise. However, it is important to understand that the total fee needs to be paid right away, or in some cases you are allowed up to, but not to exceed 24 hours. For this reason the typical tax deed has little competition and is sometimes sold at a huge discount below tax assessed value.

Non tax deed states: The process is similar to tax deed states as outlined above. The big difference is the counties and or states do not do the foreclosure process. You, as a tax lien owner, can take this lead position and perform these tasks and actually foreclosure on the property.

If you are savvy you may negotiate something else with the current homeowner as well there are many ways you can benefit by being in the driver seat as you are now holding first lien position. Creating the win-win is what many investors shoot for. Often a foreclosure ensues, you may opt to share some of this equity with the current homeowner. It is not an obligation but think how good it feels when there is something in it for everyone. I’d like to think that for most of us investors, it is not about putting people on the streets. It is about making a good profit for yourself and if that comes with helping someone else out too, well, all the better.  Most of the time the homeowners are excited to find a living, breathing human being on the other side, as they do not know what their options are at this point.

Buying the tax deeds

As you can see, you can acquire property for pennies on the dollar. You can purchase these tax deeds cheap and have the ability to make lots of money with the property. You can go to the courthouse steps and buy these at live auctions  

Many counties now allow you to do this online, making it even easier. Keep in mind the counties that allow you to buy these online tend to have more buyers because it has become pretty easy to do so from the comfort of your own home. Online purchases can be made by smart investors from around the world.

The counties that do not have online sales tend to be very lucrative investments as very few people attend in person with money orders to purchase a property with cash.

For those who are prepared and have done their homework there are great deals to be had. Like with any investment, you do not know what you do not know. This is why being informed is paramount. Knowing how to read a tax record and find encumbrances that may make an investment risky is the key to insuring you are in vesting in safe and sustainable investments. 

My friend Mike Wolf, with Mike Wolf Mastery, is a coach and trainer who has been involved in hundreds of these tax deed Sales. Attend a 3 day intensive training with a bus tour and actual tax deed sale where you can actually purchase with Mike by your side.

The author’s opinion cannot be construed as tax or legal advice, and may not represent the views of HTBUSA or its stakeholders. HTBUSA is not a legal professional tax service. As with any investment, there is an inherent risk in investing in real estate.

Larry ArthComment