Ray: Please excuse the title, but I had to get your attention somehow. I have been speaking to friends who are looking for ways to invest in real estate because they recognize the great earnings potential that real estate offers. However, like most Americans, they don’t have much cash to work with right now. Rather you have a lot of cash or not, buying real estate tax deeds may be a great way to get huge returns on your investment.
What is a Tax Deed or a Tax Lien Certificate?
We are all familiar with the concept of taxes. One of the taxes that municipalities on the county level use to generate tax revenue is the property tax. When home owners do not pay property taxes, the amount owed becomes a lien on that property; which means this tax obligation must be paid when the house is sold. The problem for counties is that they don’t raise money simply by placing liens on the property. Somebody has to pay! That’s where you, the investor, steps in to save the day and hopefully earn some serious gains.
Why Buy Tax Deeds?
Buying tax deeds can be a great way to make a lot of money with a relatively small investment. For example: Sarah owns a house worth $80,000. If Sarah has not paid her $3,000 tax bill, then the county will issue a lien on her property. In order to raise money, the county will typically auction of the tax lien which will give ownership to the tax lien purchaser… that would be you. At the auction, your winning bid of this tax lien is $8,000. You win! Now what?
This is where it get’s tricky. Once you own the tax lien, the home owner is given a right of redemption which is a certain time period the home owner is mandated to pay you back the amount of the tax lien plus interest. These rules vary by state. Let’s compare three states, Georgia, California and Tennessee:
- Georgia: Georgia does not sell tax lien certificates. However, Georgia has many tax deed sales and the process is a little more complicated than some states. In Georgia tax deed sales have a right of redemption that pays 20% if the owner redeems the tax deed within one year.
- California: California conducts many tax deed sales, rules and times vary based on county. The interest rate is 18% if tax lien certificates auctions are held. The redemption period is 2 to 3 years depending on the county.
- Tennessee: State only conducts tax deed sales but there is a one year right of redemption on tax sale properties with a 10% right of redemption fee. There are no tax lien auctions, only tax deeds are sold. Clerk and Master of the Chancery Court conduct tax deed sales
As you can see, each state has it’s own rules but the process by which to buy them is pretty similar. You’ll need to work closely with the authorities at the county level.
Where’s the Money?
Money buying tax deeds can be made in 3 ways:
- Collect the state’s mandatory interest rate on the investment you made. The interest rate is usually nothing to scoff at (like the 20% in Georgia).
- The homeowner does not pay and you foreclose on the home. In the earlier example, you paid $8,000 for an $80,000 home. Sell it and keep the difference!
- The homeowner does not pay and you foreclose on the home. Instead of selling it, you may want to rent the property out and collect monthly income.
Do Your Homework
As you can see, buying tax deeds can be a great way to invest in real estate. But before you jump in head first, you’ll need to research real estate trends and understand the market in which you plan to buy. You’ll also want to do some investigation on a property before you attempt to purchase it’s tax lien. There are many companies that offer courses on buying tax deeds all around the country. If you can, take one. But whatever you do, be sure to educate yourself and invest wisely.