All You Need to Know About Tax Deeds
The tax deed system is very similar to the tax lien system except the investments are offered at a different point in the county’s timeline.
As we know, the county government is dependent on property taxes to support things like the fire department, the police department, roads, schools, etc. When property owners fail to pay their property taxes, the county is left in a tough position - how to get their primary source of income?
They can raise taxes for those that pay the property taxes, but there is a better option - let investors loan money to the county in exchange for some asset. With tax liens, the county issues a tax lien on the property that keeps the property owner from selling the property. They create a tax lien certificate and attach a state-mandated interest-rate and sell it to investors.
The delinquent property owners are given a set amount of time, usually between one and three years, to pay the property taxes back to the county (not to you, in fact, the property owners have no idea you actually own the tax lien certificates on their properties). The property owners only deal with county. The county issues the initial notice of default and announces the sale of the tax lien certificate. The property owner is also told that there will be a penalty for paying their property taxes late. When the property owner pays the property taxes plus their penalty to the county, the county immediately writes a check to the investor for the original investment amount plus the interest accrued to that point.
If the property owner doesn't pay during the redemption period? The investor gets the opportunity to take ownership of the property through foreclosure.
Tax Deed Bidding Process
Unlike tax liens, with tax deeds, a county doesn't sell a certificate with an interest-rate attached, instead, they sell the deed to an already foreclosed property.
Confused? Here are the details.
First, when a property owner is delinquent, the county issues a delinquency notice and then issues a tax lien against the property, so the property owner can’t sell the property.
Next, the county gives the property owner a set amount of time to pay off the late taxes plus a penalty. The redemption period starts when the taxes are due. So if the taxes are due on April 1, and the redemption period is two years long, then the property owner would have until April 1 two years later to pay their property taxes.
However, the property owners are incentivized to pay early because of the increasing penalty. If the property owner pays off the taxes and penalties, the county keeps the money and moves onto the next one.
Now, if the property owner doesn’t pay during the redemption period, the county begins the foreclosure process. The county takes control the property through foreclosure and then announces its sale.
The county makes public notice of the auction, usually in the newspaper, on the bulletin board at the county office, or on their website. Educated investors show up to the auction and begin the bidding on those tax deed properties.
How the tax deed bidding process works? The bidding begins at the amount of the delinquent property taxes and the bidding goes up from there according to the competition. Depending on the desirability of the property and the number of investors interested in that particular property, the property can go for from extremely low prices to above market prices (go figure! Some investors just lose their senses in a frantic bidding war.).
The winning bidder walks away with a tax deed to the property and a big smile (or a cry later on if they found they won at above market values).
Differences Between Tax Liens and Tax Deeds
The primary differences with tax liens and tax deeds are tax liens are typically a long-term investment where tax deeds are considered short-term investments (remember, with tax liens, you may have to wait until the end of the redemption period to get your money, plus interest, back; while with tax deeds, you walk away with a property of yours today!)
Also, you can get into text liens at typically lower prices than you can with tax deeds, because for tax liens, you get a certificate (amount of tax owed by the property owner) with the promise of an interest-rate, and with tax deeds, you get the property (presumably its value is many times higher than the annual tax amount) .
Tax deeds are extremely exciting for real estate investors for its potential to get incredible deals because the bidding starts so low. It’s an awesome way to get cheap properties.