You have likely heard the occasional reference to Tax Lien and Tax Deed Investing before, if you are experienced in the real-estate commerce.
It Is a market that’s the possibility to be insanely lucrative and it’s supplied a lot of big breaks for investors around the state. It Is a strong, time tested strategy that’s made a bundle for a lot of folks, but I still have my problems with it (and we’ll get to that a bit after :).
I Have found that most investors do not have a really extensive comprehension of how this investing strategy works (it even took me a few years to figure it out), so I need to give you a basic summary of what is going on in this world, how the mechanisms work, and most importantly – I need you to see the worthiness behind this tactic and why it is an important chance to cash in on a TON of free real estate equity. With any chance, I presume you will begin to see what all the excitement is about.
The Principles: Tax Foreclosure & Delinquency
Every bit of real estate in the USA is subject to property taxes – as any property owner can tell you. If you own real estate, you will be anticipated to pay these property taxes annually. If you don’t pay these taxes, your property will become “tax delinquent”, this means it’s began down a route that can eventually result in tax foreclosure (i.e. – your property will be confiscated and repossessed by the county or municipality) IF you neglect to pay these taxes present within the needed time frame.
Just how long can a property can go “tax delinquent” before it’s impounded by the county? Everything depends upon the state.
In every state in the U.S. – there’s a set date during the year when, if the taxes have been delinquent for a set period of time, they’ll be impounded by the county. In some states, the county will wait for 2 years, others will wait for 5 years, but none of them will wait eternally. Irrespective of whether a property is possessed “free and clear” of any mortgages… if a property owner determines to stop paying their property taxes, they’re going to necessarily intend to lose their property to tax foreclosure.
Tax Sales: How Each State Works
Every state has a distinctive set of regulations and rules in regards to the timeframe required to pay taxes present, how each county will attempt to regain its lost tax revenue and the way the foreclosure procedure is managed. According to which state you are working in, there are some fundamental rules you should understand about how a procedure operates.
Virtually every state has SOME sort of variation in how they manage the various facets of the procedure. No two states are the same in all regards, regardless of which kind of tax sales they’ve – so whichever state you determine to work in, don’t forget to take your time and do your research.
Typically talking, a county’s principal concern will be to create enough sales from every property to compensate for their lost tax revenue (whatever that amount occurs to be). Astonishingly, the real “market value” of each property is largely unimportant. Even if your property could feasibly sell for $500,000 – the county’s purpose is to create enough funds to restore the sum of outstanding taxes they were owed from the delinquent property owner – so for example, if a property worth $500,000 just had $10,000 of delinquent taxes at the time of foreclosure, this $10,000 number is typically the county’s only genuine concern (and occasionally they’ll even begin the opening bid sum at this cost).
The imagined $500,000 “market value” holds little relevance to the county – and this is where the actual chance comes from at a tax sale.
A lot of properties are available for ridiculously low costs at a tax sale. Why? You are coping with the local government, because you are not coping with a standard property owner who cares about getting total market value. Contrary to popular notion, it is not the government’s aim to get wealthy off every property they sell. They simply need to get these properties off their publications and in return, they need the cash they were owed in the first place (with the expectation that these properties will find yourself in the control of someone that will keep the property taxes paid present).
How Tax Liens Work
In Tax Lien States, when a property becomes delinquent for nonpayment of property taxes, the county will sell a “tax lien certification” to an investor as a means of recouping these outstanding property taxes.
They’re not purchasing an ownership interest the property, when someone buys one of these tax lien certificates. Rather, they’re purchasing a lien on the property. As whoever owns a tax lien certification (aka – tax lien), the delinquent property owner still possesses the property. Yet, the lien holder has the right to repayment for the quantity of the tax lien certificate plus interest. If the property owner doesn’t pay off this lien within the “redemption period” stipulated by their state, the lien holder has the right (but not the duty) to foreclose on the property and choose possession. Usually, if the lien holder will not move forward with foreclosure within the period of time set by their state, the lien will be forfeited and the lien holder will lose their investment.
Every state has an alternative set of rules viewing the redemption period, other facets of the procedure, the foreclosure proceeding, and the quantity of interest that can be billed. In most cases, after you comprehend how it works in one state, you will be capable to learn how other states work comparatively fast (because you can find straightforward variations to the exact same fundamental procedure).
How Tax Titles Work
Because when you purchase a tax title, you’re purchasing the real property in Tax Deed States, the procedure is quite a bit more straightforward than that of tax liens. The procedure is easier because in most Tax Deed States, there’s no redemption period. Similar to tax liens, the county’s principal interest will be to recoup the outstanding property taxes on each property. The previous owner cannot come back and retrieve their property, once a tax title was sold to an investor. You possess the property free and clear – when you buy a tax title.
Similar to tax lien states, every tax title state has an alternative set of rules about the length of time a property must be delinquent before foreclosure happens, but given that there’s no redemption period, most of the complexities are removed, making it a much more straightforward system for investors to work with.
How Redeemable Titles Work
When you can see Tax Liens on one end of the spectrum and Tax Titles on another, Redeemable Titles reside someplace between the two because they share some similarities with both sets of rules (and several likenesses depend which state they’re being sold in).
When you buy a redeemable, you’re actually buying a title to the property (only like a Tax Title). Yet, a redeemable title can be subject to some redemption period (just like a Tax Lien), which adds a little sophistication to the procedure. For a set period of time after the redeemable title is sold, the previous owner is entitled to “redeem the title” and buy the property back in the investor. To be able to buy the property back, the previous owner must pay the total sum that has been paid for the property at the tax sale in addition to some high-priced fees and penalties (regardless of how much time has accrued during the redemption period).
If the previous owner doesn’t redeem their title within the stated redemption period, they’re going to lose all their redemption rights and the investor can rest easy knowing they are the official owner of record.
How Miscellaneous States Work
There are a number of states with some counties that sell others that sell Tax Titles and Tax Liens. There is an assortment of reasons because of this type of set up (which I will not get into here) – but the key is to just do your assignments with you are working in these states (detailed above) and make sure you comprehend what you are coping with at each tax sale, so you can prevent any confusion about what you are bidding on at an auction.