What are tax sale overages? Simply put, when tax delinquent real estate sells at a tax defaulted property auction for more than the back taxes plus any fees owed to the county, the surplus amount is a tax sale overage.
So who owns this overage, and how could you as an entrepreneur potentially profit from it? Today I’ll explain that as answer your question, “What are tax sale overages and how can you profit from these hidden gems?”
You’ll learn about this virtually unknown way to make money from tax defaulted property. For newcomers and experienced investors, there are always surprises in the tax lien and tax deed business, and this is one of them.
The marketplace has many hidden gems that amaze and delight those who are involved. One of them is tax sale overages.
I’m Ted Thomas, and I’ve been involved in the tax lien and tax deed business for over 30 years. It’s definitely interesting, and it’s certainly profitable, especially when you know the rules and are willing to follow them. So let’s get started on what are tax sale overages, and we’ll start at the beginning.
Counties & Municipalities Are Taxing Jurisdictions
Before I answer what are tax sale overages, let’s start with a little insight into what’s happening with tax liens and tax deeds. Then we’ll progress to how an ordinary person, someone just like you, could be earning outrageous profits with little or no risk.
Starting with a little history and geography, the United States has over 3,000 individual counties and approximately 1,400 municipalities. The counties and municipalities are each separate taxing jurisdictions. In other words, they are separate governments within the state.
All governments need money to pay employees and to take care of the business of government. For example, paying county employees, firefighters, police, and contributions to keep the hospitals open, hire and pay school teachers and build school buildings. The county or municipality is responsible to pay for these services.
The first concept the student investor needs to understand is that the government has power which is authorized by the legislature. The legislators represent the people, and they create laws which are called statutes.
Local Governments Levy Property Taxes on Real Estate
Money is the subject we are discussing today. The government needs money, and it takes the money it needs from property owners in that county or municipality. The process is called property taxes.
The law of the land is that everyone must pay property tax on the land and on the real estate which is put on the land. These laws have been inherited from the old English law which was originally a wealth tax when only rich people owned property.
The law of the land and property laws for real estate are relatively simple. We are free to own land independent of the government. However, we must pay property tax, or the local government will take action and require you to pay.
Confiscation of Tax Defaulted Property
The government will take the property if the property taxes are not paid. Again, over simplified, if you fail to pay taxes, the government will confiscate your property.
Property taxes, are determined by local people employed by the county under the direction of the county commissioners or a board of supervisors. Tax collectors, official treasurers, are authorized to confiscate and remove owners or tenants who refuse to pay property taxes.
Sounds harsh and it is! However, there are many reasons people forfeit property. First and foremost is people pass on. Dead people can’t pay taxes.
I can assure you nationwide there are plenty of private property owners who do not pay property taxes on time.
Approximately, 2 ½ million property owners will enter a delinquent default situation every year. These millions of tax defaulted property owners are the subject of tax lien certificates and tax deeds.
Once again, the state legislature authorizes the county board of supervisors or county commissioners or those running municipalities to levy property taxes and collect property taxes.
If they’re collecting property tax, you’ll never know it. However, if they are not collecting property tax, the government keeps accurate records of who is and who isn’t paying; the county maintains a tax roll of honorable and responsible taxpayers, and they also have a list of delinquent taxpayers.
If the owner fails to pay property taxes, after being given proper notice, “due process of law,” notices of default explaining in detail the consequences of nonpayment, then the owner will suffer the consequences.
The consequence is seizure, confiscation of the property, eviction of the owner or tenant, and a tax defaulted property auction. It’s at these auctions that tax sale overages occur, so now let’s answer the question, what are tax sale overages?
What Are Tax Sale Overages?
All counties are authorized to have at least one tax defaulted auction annually.
Simultaneously, with the auction process, a local government will delete, wipe out, extinguish the mortgage or deed of trust from the public records. The auction property is sold to the highest bidder with no mortgage. The industry jargon is “free and clear.”
So what are tax sale overages? Are tax overages real? The answer is going to shock you and amaze you.
Defaulted properties are auctioned to the public at live and online auctions. The starting bid at the auction in most instances is very low and very close to the delinquent back taxes.
For example, a property may be assessed for as much as $400,000, keeping in mind it’s slightly used and abused. At competitive auctions the starting bid may be as low as $30,000. If you do the math, there is considerable margin.
Dreamers and late-night television viewers will hear it explained that these properties are sold for 10 cents on the dollar. In my 30 years of experience, I’ve seen few properties with market or assessed values as large as mentioned sell for 10 cents on the dollar.
That’s not going to happen in the competitive marketplace. Bidders will pay more than 10 cents on the dollar. Experience has taught me these properties will be sold for 25% to 50% of their value.
An Example of a Tax Sale Overage
What are tax sale excess funds? For example, if you paid 30 cents on the dollar, and the property was valued at $400,000, you would need significant dollars, $120,000 maybe even $140,000. However, the back taxes were only $35,000 when the county tax collector auctioneer began the bidding.
So, if the property tax, which is delinquent, is $35,000, and the buyer pays $130,000, the county will accept $130,000 and a full 75% will be an overage. In other words, the buyer has paid over the amount of taxes due, and there is a $95,000 tax sale overage.
What Happens to the Overage?
What happens to that $95,000 overage? That money belongs to the property owner who has probably abandoned and disappeared not even realizing that the $95,000 is still sitting there at the county.
At this point, the county or municipal government will likely go quiet or silent. Rarely does the county send out a search party or attempt to locate the delinquent taxpayer regarding unclaimed tax overages.
Then what happens to excess funds from a tax sale? The money will be held at a county or municipality and ultimately “escheat,” be confiscated by the county and state if the property owner fails to claim or demand the money.
I don’t make the rules. I’m not an attorney or real estate broker or CPA; I’m a prepared auction buyer, author and publisher and a red-blooded capitalist who sees the dollars. So now let’s answer the question, can you make money with overages?
How to Make Money With Tax Sale Overages
Those who understand and know the county rules and the processes learn very quickly how to take advantage of this situation and start a tax sale overages business. Certainly, others have figured out how to track down the defaulted property owner
They have figured out ways to become finders for this money, that will ultimately be lost by the desperate owner as the money escheats to the county and state by laws enacted by the legislature.
It’s rare for an investor or student to understand that the state and the county have many rules, but the savvy investor knows how to find tax overages and capitalize on them.
Conclusion
We hope you enjoyed Ted’s lesson, “What Are Tax Sale Overages?”
When a tax delinquent property is seized and sold at a tax sale, the bidding begins at around the amount of the back taxes owed. However, at competitive auctions, the bidding can go much higher than that.
For example, if the bidding goes as high as $130,000 when the back taxes were only $35,000, what happens to the extra $95,000? That $95,000 is a tax sale overage and belongs to the property owner who lost that property due to unpaid taxes.
The owner may not know this, and if he or she doesn’t claim that money, it will ultimately escheat to the state, which has no incentive to go out of the way to locate the former property owner.
Some people have made a business out of locating these owners regarding their tax sale overages in exchange for a finder’s fee. This is a little-known way to make money in the tax defaulted real estate business.
If you’d like to know more about all the ins and outs of tax delinquent property investing, there’s no one more qualified to teach you than Ted Thomas, America’s leading authority on tax lien certificates and tax defaulted property.
Ted Thomas is the only one who provides full support and complete training with home study courses, Q&A webinars, live tutorials, workshops & web classes, and personal coaching.
Want to learn how you can make big profits from deep discount real estate? Would you like to buy nice homes for pennies on the dollar for quick cash flow? Or earn double-digit interest rates securely? Then get started today by taking advantage of this FREE Gift.
Ted Thomas is America’s Leading Authority on Tax Lien Certificates and Tax Deed Auctions, as well as a publisher and author of more than 30 books. His guidebooks on Real Estate have sold in four corners of the world. He has been teaching people just like you for over 30 years how to buy houses in good neighborhoods for pennies on the dollar. He teaches how to create wealth with minimum risk and easy-to-learn methods.
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