You’ll hear me say “do your homework” and “know the rules” a lot when I discuss buying tax defaulted property (tax lien certificates and tax deeds). You have to do your homework and know the rules to be successful, meaning you avoid mistakes and maximize profits.

Doing your homework includes knowing what the rules are, but there’s a lot more. This is just a brief overview of what you need to know when buying tax defaulted property. My website, Members.TedThomas.com, has videos and articles that tell you in more detail what you need to know to be successful with tax lien certificates and tax deeds.

KNOW WHAT YOU ARE BUYING

Buying Tax Defaulted PropertyThe U.S. has two kinds of tax defaulted property auctions, a tax deed auction and a tax lien auction. You need to know the difference between them. Nolo.com is a highly respected website that explains legal matters in plain English. This Nolo article discusses property taxes, past due taxes and tax defaulted property auctions.

Tax Deed

If you buy a tax deed in a tax defaulted property auction, you are buying the property. The owner cannot redeem the property. Redeeming the property means the owner pays the past due taxes plus interest and penalties, which must be done before the tax deed buyer takes possession for the tax defaulted owner to keep ownership of the property.

California is a tax deed state. Once the property is sold in the auction, the owner cannot redeem it. “The successful bidder may take possession of a property after making payment in full and after the Tax Deed to Purchaser has been recorded, which is generally within a few days of the tax auction,” says the Orange County, California, tax office website.

Once your winning bid at the auction is recorded, you have the property. You just need to wait until the tax deed is recorded at the courthouse to officially take possession, which can be days in some states like Florida or weeks in states like Washington.

Every state is different. Every county is different. When you’re buying tax defaulted property, you must know the state law and the county’s rules. Do your homework and learn what the rules are. Read the rules on the county websites or talk to the county officials to get all the county-specific information.

Tax Lien

Tax lien certificates are also sold at tax defaulted property auctions. Buying a lien gives you the right to collect the past due taxes, plus interest when the delinquent taxes are paid. The property deed is not involved unless the taxes remain unpaid and the property goes into foreclosure. Foreclosure is a legal process, which in this case is designed to take the property from the delinquent taxpayer and turn possession to the tax lien certificate buyer to pay the past due taxes. If the taxes are not paid, foreclosure means you get the property.

More than 95 percent of tax lien certificates sold in a tax lien certificate auction are redeemed, meaning you will get all your investment back plus interest.  Unredeemed tax lien certificates usually result in the tax lien certificate buyer getting the deed to the property.

Hybrid

A few states, like Georgia and Texas, offer redeemable tax deeds. In this case, you are buying the deed to the property, but you cannot take immediate possession of the property. The delinquent taxpayer has six months to a year to pay the past due taxes plus a penalty and regain full rights to the property. If those back taxes are not paid the redeemable tax deed buyer can foreclose on the property and get full legal possession of it. If the property is redeemed the redeemable tax deed buyer gets back all his investment plus an additional penalty of up to 25% paid by the delinquent taxpayer.

So which is best? That depends on what you want to get out of buying tax defaulted property. If you want to own property, then invest in a tax defaulted property auction in a tax deed state. If you want to earn interest on your investment, bid in a tax defaulted property auction in a tax lien state.

My website, Members.TedThomas.com, has an interactive map showing which states hold tax deed auctions, which hold tax lien auctions and which are the hybrids, offering redeemable tax deeds.

FIND AN AUCTION

To buy property, you must find a tax defaulted property auction. My website has an auction calendar to help you find tax defaulted property auctions.

You can also find auctions on your own. Pick a state, then pick a county. Almost every county and municipality in the U.S., over 3,000 counties and over 1,400 municipalities, hold an auction at least once a year and many more often, even several times a month. That means over 10,000 auctions a year and a list of the tax lien certificates or tax deeds being offered in almost every one of those auctions can be found online. In a few rare cases you will need to contact the government office holding the auction to get the auction list.

KNOW THE AUCTION RULES

Every state, county and municipality can have different rules for tax defaulted property auctions. Some states and counties have online auctions. Some require you or your representative to attend the auction in-person. Know the rules so you can be successful when buying tax defaulted property.

INVESTIGATE THE PROPERTY

This is a very important part of the homework you have to do. You need to know as much as you can about the property. Websites like Zillow.com are used by real estate professionals to check out property online. You can use Zillow too. My website, Members.TedThomas.com, has a two-part video that explains how to navigate around the Zillow website.

Going to see the house in person is best. If you can’t go, having someone trusted checkout the property for you and send you pictures and their evaluation of the property is an essential step. Another great resource when you’re buying tax defaulted property is a street view program like Google Maps to examine the property, but it is not a substitute for a personal inspection.

FIND OUT ABOUT OTHER LIENS

The California Secretary of State says there are some liens that are not set aside by a tax defaulted property auction. Knowing about these other liens is part of your homework. When you get the amounts owed, add this to the minimum bid on the property. This is not part of your bid at the tax defaulted auction, because these liens may have to be paid off separately if they are not paid by the amount bid above the minimum bid.

The other liens are part of the total you will spend. Your total includes:

  • Tax defaulted auction cost. This includes the buying price and any recording fees the tax office may collect. The auctioning agency will tell you this amount. The cost of any other liens such as special assessments, government judgment liens and fines that are not covered by the amount bid above the minimum bid. Your homework includes knowing about these other taxes and liens.
  • The current year’s taxes. You must add these other lien costs into what you will spend. Most often when you get a tax deed property, it will be free and clear of all liens, but not always. If you just buy the property at the tax defaulted property auction and ignore the other liens, the total cost to you may be more than you are willing to pay.

HAVE A PLAN WHEN BUYING TAX DEFAULTED PROPERTY

Do you know what you want to do with the property once you buy it? Do you want to rent it? Do you want to sell it? Do you want to live in it or use it as a vacation home? My website, Members.TedThomas.com, has marketing tips to help you sell the property quickly. If you are interested in renting the property, Forbes has a 12-point list of things to consider. Forbes is one of the nation’s most respected financial magazines.

Ted Thomas is a Florida-based author and publisher who specializes in tax defaulted properties (investing in tax lien certificates and tax deed properties). Visitors to his website will find 4 must see FREE instructional videos. No credit card required. The video lessons will give you everything you need to understand the fundamentals of government tax defaulted real estate which is sold at public auctions for a starting bid of back taxes; often just a few  cents on the dollar. You’ll also learn the secrets of tax lien certificates which pay guaranteed returns of 16%, 18%, up to 36%. Go to tedthomas.com for more information.

All reasonable efforts have been made to ensure the accuracy of the information presented in this article about buying tax defaulted property.  Laws and regulations may change and you must be knowledgeable in the current laws and regulations at any tax defaulted property auction.  Website links may also have changed since this article was written. 

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