All homeowners are required to pay real estate tax to the government; which fund numerous services, such as public schools, law enforcement, fire and EMS, road construction, libraries, and parks.
If a homeowner fails to pay taxes on a home, the county will offer the property at a tax sale auction to help recoup the lost tax revenue. It may be via a tax lien sale or a tax deed sale. Both result in a flexible and secure investment with little market risk.
With tax lien sales, the county government sells their right to the tax lien on the real estate property, typically via public auction. The buyer would be bidding on the tax debt, not the deed to the property, for the right to collect on the unpaid taxpayer’s debt. Typically a property tax lien is sold for a small fraction of a property’s market value allowing the new buyer to bid on the tax debt for a favorable return on investment.
In tax deed sales, the county government sells full ownership and possession rights of the property to the investor.
Tax Lien Sales
This can be a lucrative investment, as a property tax lien is usually sold for a small fraction of a property’s market value. The purchaser pays the delinquent taxes to the county on behalf of the delinquent property owner. In exchange, the purchaser is given first lien position on title, ahead of mortgages, deeds of trust, and other private liens, secondary only to state tax liens. The purchaser then receives a certificate of purchase or a “tax lien certificate.”
Under the terms of the sale, the investor has the right to receive interest penalty charges when the lien is paid off by the delinquent property owner, many times at a high rate of 16 to 24 percent. The purchaser also has the right to foreclose the tax lien and take title to the property if the lien is not paid.
Usually, tax lien investing is a win-win for the investor: if the delinquent taxpayer pays off the late taxes, the investor will receive the principal paid for the lien plus any interest that has accrued. If the late taxes are not paid by a specified date, the investor can foreclose and take title to the property.
Tax Deed Sales
Unlike a tax lien sale, a tax deed sale is when the deed to the property of a delinquent taxpayer is auctioned. The winning bidder purchases the deed to the property, becoming the new owner and obtaining all of the rights to the property free of all liens, mortgages, deeds of trust, etc.
In a tax deed sale, the property is usually sold for the back tax amount plus any fees, interest charges, and court costs. Like a tax lien sale, investors purchasing a tax deed can acquire full property rights at a fraction of the market price, since property taxes are a small percentage of market value.
How Do I Find a Tax Sale?
If you are interested in participating in a tax lien or tax deed sale, probably the fastest way to find a sale is to contact your county government’s office for specific information and details about potential sales and the properties involved. Once you find out what properties are for sale, you don’t have to wait for a property’s auction to begin the purchasing process. You may be able to use the list of tax sales from the county to find motivated sellers who want to sell their lien or deed before the auction. Or, you can get an old tax sale list and contact the new owners of the lien or deed to see if they are interested in reselling their purchase.
As with any real estate investment, proper research of a property involved in a tax lien or tax deed sale beforehand will minimize any risks that may arise. Before your purchase, be sure to view the property and research its value. In addition, it is important to research the title for current property, in addition to any tax, judgment and/or mortgage liens, and trust deeds.
Finally, know and understand which type of sale you are attending, a tax lien or tax deed sale. Each has specific rules and guidelines which must be followed, which can differ from county to county. In addition, not all states allow tax lien and tax deed sales, so it is important to investigate your particular state’s tax laws before pursuing a tax sale.
For more information and to find Madison County properties for sale: click here.