Tax defaulted property investing can deliver big returns and make you rich, but you must know the rules and do your homework.

TAX DEFAULTED PROPERTY INVESTING

The whole process is simple once you understand how it works. In this article, I’m going to tell you:

  • What is a tax sale?
  • Tax liens and tax deeds. What’s the difference?
  • Tax Liens
  • Tax Deeds
  • Is this safe? (and legal)
  • Make big bucks
  • Stocks or tax liens?
  • A guide to sales.
  • How to find tax sales
  • Tax sales and mortgages.
  • How much money do you need?
  • What do to with the property

WHAT IS A TAX SALE?

Every state and every county in that state collects property taxes. These taxes fund local government services like police, fire, the ambulance and more. So, what is a tax sale?

If a property owner does not pay his property taxes, the county places a tax lien on the property. The lien means the property cannot be sold or transferred until the tax lien is paid. If the property has a mortgage, the mortgage cannot be refinanced until the lien is paid.

If the property owner refuses to pay the lien, the county holds a tax defaulted property sale. The sale is an auction. This is your chance to invest and make big bucks. You must know the auction rules. Every state is different and every county has its own rules for the auction.

These auctions are open to the public. Some have registration rules. You must sign up to participate in the auction. Some places do not have registration.

Regardless, you must know the rules for each auction.

Here are some examples:

Online auctionModoc County, California, has online only tax sales. The tax collector there contracts with Bid 4 Assets to conduct the sale. Bid 4 Assets has the instructions for signing up for the Modoc auction.

In-person auctionCobb County, Georgia, has in-person only auctions. You have to attend the auction in person or you must have someone there to represent you. The tax collector’s web page explains what you need to know to participate in the auction.

In-person and streamedBeaufort County, Texas, has in-person auctions, but only allows registered bidders in the building. The auction is streamed live for everyone to watch. The tax collector has information on how to sign up for the auction.

No matter where you live in the US, your county has a tax defaulted property sale. Call the tax collector to find out when and where the next auction is planned. Get the rules for becoming a bidder.

I recommend you attend an auction to see how the process works. You might even buy something and start down the road to getting rich with tax defaulted property investing.

TAX LIENS AND DEEDS – WHAT IS THE DIFFERENCE?

Tax auctions are split between tax lien certificate sales and tax deed sales. About half the states sell deeds and half sell liens. What is the difference?

With a tax deed, you get the property. With a tax lien, you get the right to collect the past-due taxes plus interest.

In both cases, the property owner has the chance to redeem the property and pay you for everything you spent at the auction plus interest. Some states also allow you to collect any money you spent maintaining the property.

More than 95 percent of tax liens and deeds are redeemed, and the redemption period is different in each state.

TAX LIEN

In a tax lien sale, you do not get the property. You have no right to go on the property. You are buying the right to collect the past-due taxes plus interest. The interest is where you make money. The respected legal information website Nolo has more details.

In Illinois you can make as much as 36% interest a year. That’s big money.

To redeem the property, the owner sends a check to the tax collector for the past-due taxes plus interest and any other fees you’re allowed to collect. The tax collector then sends you a check for everything you’re allowed to collect.

TAX DEED

In a tax deed state, you are bidding to get the property. “When you bid at a tax deed sale, you are bidding to gain title to the property itself, not to receive a specified rate of return,” explains Motley Fool, a highly respected investment company.

“Property may be redeemed any time prior to the issuance of a tax deed but cannot be redeemed once the Clerk has received full payment for the tax deed,” says the Palm Beach County, Florida, tax collector.

Tax deeds are sold in the auction for the past-due taxes and any fees and interest the tax collector adds to the base tax.

BOTH

Some states sell tax deeds and tax liens. Talk to the tax collector’s office in each county to see which sale they have.

HYBRIDS

A few states sell a hybrid tax certificate. The hybrid combines elements of a tax deed and a tax lien. A hybrid sale is also called a redeemable tax deed. Texas, Georgia, Hawaii, Tennesse, Connecticut and Rhode Island are hybrid states.

In these states, you buy a tax deed that the owner can redeem, plus interest. The owner has to pay you.

Just like in a tax lien state, you earn interest. In Texas, you get “25 percent of the aggregate total (interest) if the property is redeemed during the first year … or 50 percent of the aggregate total (interest) if the property is redeemed during the second year of the redemption period,” explains the Lone Star State’s tax deed law.

In Georgia, you earn 20 percent interest, and the property owner has a year to redeem his house.

PAY OTHER TAXES

When you buy a property at a tax auction, make sure you check for other past-due taxes before buying. This is part of your homework. Those extra taxes have to be part of what you plan to spend.

School boards, counties, cities and special tax districts can levy property taxes. A single sale may not cover all these taxes. For instance in Georgia, most counties hold a sale and most cities hold a sale. A county sale does not cover city taxes and vice versa.

Check with other tax collecting agencies where the property is located. If other taxes are due, pay them. You can collect interest on these taxes too.

During the redemption period, you also have to keep the taxes current. Pay them as they come due. If you do not, someone else can buy those past-due taxes and jeopardize your investment. You collect interest on those taxes as well.

FORECLOSE

If the property owner does not redeem the house, you can foreclose and own the property. I strongly recommend talking to a real estate attorney. You must get the foreclosure process right.

Below I explain how this affects a mortgage.

IS THIS SAFE? (AND LEGAL)

Investing in tax liens and deeds is safe, and investing in tax liens and deeds is legal.

When you know the rules and do your homework, you can make big bucks.

SAFE

To start, learn as much as you can about the property. The real estate website Zillow is your friend. Zillow can tell you everything you want and need to know about the property. I have videos at my website Ted Thomas that teach you everything you need to know about using Zillow.

Your research will tell you if the property is a sound investment or not.

This kind of investing is also safe because it’s backed by the government.

Local governments need tax money to operate. When property owners do not pay, the government must have a way to collect the taxes. The tax defaulted property sale is the most efficient way to do this.

Every state has a set of laws that set up these sales. Your investment is literally backed up by state law. If the tax collector makes a mistake, you get your money back.

LEGAL

Tax sales are legal. The US Supreme Court has ruled the sales are legal many times. The most recent case, Jones v. Flowers in 2006, talked about how much notice a property owner needed before his home was sold at a sale.

While the justices disagreed on how much notice was needed, all nine agreed that the sales are legal and necessary to keep local governments operating.

MAKE BIG BUCKS

You really can make big bucks with tax defaulted property investing. Don’t take my word for it. People who take my tax defaulted property investing courses will tell you in their own words.

Still not convinced? Forbes magazine said investing in tax liens is a good idea. As the article says, “the buyer gets the right to collect the delinquent tax, a penalty and interest on the late payment that can run as high as 12% to 36% a year, depending on the state.”

Where else can you earn that kind of return on your investment? Remember, tax sales are backed up by state law and several US Supreme Court decisions. Do your homework and know the rules, and it’s a safe investment.

STOCKS OR TAX LIENS

Illinois Tax Lien Certificate

How does tax lien investing compare to stocks? Which is better, stocks or tax liens? Let’s take a look.

According to Business Insider, the average stock market return for the past 140 years is 9.2 percent. Sounds pretty good, right?

That’s an average. Stock market returns can run much higher. You can also lose everything you invest in stocks.

The stock market is subject to buying and selling trends. Even worse, outside influence can really make a mess of things.

The GameStop story is a good example of problems with the stock market.

As the Wall Street Journal reports, some GameStop investors “bet big and lost big.” The reporter interviewed a man who invested heavily, because of the hype around GameStop, and lost a lot of money.

GameStop is only the most recent example of how the stock market can go crazy and people lose everything they invest. Yahoo News has a report on 25 stock market giants that crashed and cost investors millions.

Investing in tax liens and deeds is legal, and it’s also safe, as explained above.

You can earn as much as 36% interest per year. Even better, your investment is secured by the property. If the owner does not redeem the property, you can own it free and clear through a foreclosure.

When you buy a tax lien or deed, you’re investing in real estate for a fraction of the value. When you buy stocks, you are investing in a promise from someone you have never met. You hope they keep that promise to make money for you. But as we see above, you cannot always trust the promise.

In tax defaulted property investing, you can trust the real estate. It’s something you can see and touch. Tax defaulted property investing is also backed up by laws in every state. The stock market cannot match that.

A GUIDE TO SALES

Every tax sale is different. Every state has different laws and every county has different rules based on those laws. You have to know the rules.

Here is the easy way to get the rules.

1) Pick a state.

2) Pick a county in that state.

3) Look up the tax collector’s office in that county. For instance, you can google “Travis County tax collector.” That will give you contact information for the Travis County Tax Collector’s office.

4) Visit the tax collector’s website or call the tax collector and ask for the sale’s rules.

HOW TO FIND TAX SALES

Finding tax sales is the easiest part.

1) Newspapers. Sales must be advertised in the public notice section of the local newspaper. Read the newspaper online or in person.

2) Online. Every state has a newspaper or press association. Every press association runs a public notice website, and tax sales are posted on those websites. Visit Public Notice Resource Center for a list of every state’s public notice website.

3) Tax collector’s office. Some tax collectors will put you on an email list to tell you when the next sale is. They also email you a list of the properties for that sale.

With this information in hand, it’s time to do your homework. Research the properties and find one worth your investment.

TAX SALES AND MORTGAGES

A tax sale wipes out any mortgage on the property. This rule is the same in every state.

“The good news about tax liens is that they take priority over almost all other liens against the property. This includes judgment liens taken by unsecured creditors and even first and second mortgages and deeds of trust. If you purchase a tax sale certificate – the paper transferring the lien to you when you win the bidding – and if you do ultimately end up with the property, only government liens such as for state or federal taxes take precedence over yours,” says Zacks, a premier investment research company.

Part of your homework is knowing about those other government liens, almost always taxes, and paying them off.

HOW MUCH MONEY DO YOU NEED?

With tax defaulted property investing, you’re spending pennies on the dollar. You can spend anywhere from less than $100 to more than $50,000, depending on the property and the auction.

For example, Cass County, IL, held a tax sale in 2020. The results are posted online. A 1-story home in the town of Virginia sold for $2,800 at the auction. I used the parcel number to look up the address at the tax collector’s website. The property is 130 N. Front St.

Zillow says the house is worth $51,643.

The buyer will earn up to 36 percent interest on his investment. If the owner does not redeem the property, the buyer can foreclose. For a few more dollars to cover the foreclosure work, the buyer will own that house outright.

WHAT TO DO WITH THE PROPERTY

If you invest in tax deed sales, you get the property when the tax collector completes the paperwork. This can take anywhere from a week to a few months.

If you invest in enough tax liens, eventually, you will buy one and have to foreclose to claim the property and permanently secure your investment. So, what can you do with the property?

RENT IT

Rent the property. You have a guaranteed monthly income. Zillow can tell you what the average rent for that market is. It will also give you a suggested rent amount.

If you do not want to be landlord, you can contract with a real estate company to handle the rent for you. You determine how much rental income you want. The company adds their fees to that cost. They screen renters, collect the money and handle evictions if needed.

SELL IT

You can sell the house and realize an immediate profit. You can take that money and go find another tax sale to invest in.

Example: You buy a house in a tax deed sale (or foreclose on a tax lien) for $25,000. The house is worth $175,000. If you want to sell it quickly, put it on the market for $150,000 plus any real estate agent fees and commissions. When the house sells, you pocket $150,000. Your $25,000 investment returned $125,000.

That’s a big profit.

If you sold it below market value, you might help someone who really needs a house realize the American Dream. You have a profit and a good deed at the same time!

KEEP IT

Some people invest in tax sales in the mountains or the beaches because they want a vacation house. You can do that too. You buy a house in a tax deed sale, and it’s yours. You now have a second home.

Even better, you can rent the house out to people on vacation to make money. Just be sure to reserve time for you to use the house when you go on vacation.

CONCLUSION

Tax defaulted property investing is a secure way to earn interest rates as high as 36%, or acquire properties for pennies on the dollar if you know the rules and do your homework. Notably, tax defaulted property investing is a lot less risky than stocks, which have historically had an average return of 9.2%.

If you haven’t heard of tax defaulted property investing and wonder if it’s legal. It’s been around as an investment opportunity for over 200 years. State law backs it up, and the US Supreme Court has repeatedly ruled that tax defaulted property investing is legal.

It’s an excellent way to pick up mortgage-free properties at bargain prices, leaving you plenty of profit margin when you resell. Tax defaulted property investing is among the safest, high profit opportunities out there for knowledgeable investors.

If you’d like to know more about tax defaulted property investing, I have a FREE gift for you, the Safe Haven master course (a $197 value).

Safe Haven is 2 streaming videos and a PDF, that teaches you about tax liens & tax deeds.  To learn more about tax defaulted property investing, act now and get your FREE Safe Haven course today.


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