Let’s talk about the tax deed system, but first let’s review.
The county is dependent on property taxes to support crucial programs like the fire department, the police department, roads, and especially, public education. When property owners fail to pay their property taxes, the county is left in a tough position. We find that an average of 30 percent of property taxes go unpaid every year, which is unsustainable for most counties.
The county is left trying to replace their primary source of income. They could raise taxes for those that are actively paying to cover the deficit, but they have devised a clever system that allows investors to essentially loan money to the county in exchange for a tax lien certificate plus interest. This interest isn’t paid to the investor by the county, but rather it is paid by the property owner along with their delinquent taxes to the county, then the county pays the investor the amount paid to them by the property owner.
The tax lien certificate holder doesn’t ever need to interact with the property owner. The investor needs only to interact with the county.
If the property owner fails to pay the delinquent property taxes during the redemption period, then the investor has the option to take ownership of the property through foreclosure.
TAX DEED DIFFERENCE
Approximately half of the United States sell tax lien certificates and half sell tax deeds. Feel free to use the Reference Guide on this website to see all of the states and their respective methods, interest rates, redemption periods, and so forth.
The tax deed system is a bit different than the tax lien system, but it still offers an amazing opportunity to investors. The primary difference between the tax lien system and the tax deed system is point in time when the county allows investors to enter the picture.
With tax lien investing, the county offers the tax lien certificate for sale the year that taxes are marked as unpaid and delinquent. If taxes were due in 2021, and it’s now 2022 and the taxes are still unpaid, then the county sells the certificate in 2022.
In a typical tax deed state, the county will issue a tax lien against the property in 2022 similarly to a tax lien state, but instead of selling a tax lien certificate for the amount that is owed to them in property taxes, they hold the tax lien and wait for the property owner to pay the delinquent property taxes, or redeem themselves. The county will hold the tax lien awaiting redemption for a period usually between 2 – 7 years; if the property owner still has not paid the delinquent property taxes plus the penalty that has accrued, then the county will begin the foreclosure process to take ownership of the property. Before the county files the deed, thus taking ownership of the property, they sell the tax deed at a public auction, then file the tax deed in the name of the investor.
The starting bid for the tax deed is typically the original delinquent amount plus interest, fees, and penalties to date. All of that money goes to the county; however, the difference between the starting bid amount and the final winning bid amount is called the excess proceeds and it technically belongs to the property owner. Excess proceeds offers a unique opportunity that investors can take advantage of. We will discuss that strategy in another training video.
One thing to note is that when an investor purchases a tax deed from the county, they are not purchasing a warranty deed – the investor will likely want to clear title through what’s called quieting title, which is done through an attorney costing anywhere from $750 to $2,500. Ideally you would’ve worked that number into your due diligence, and everything makes sense financially.
Tax deeds offer a great opportunity for investors looking to acquire real estate at a discount. Barriers to entry usually include a higher average initial investment amount, real estate investment knowledge and experience, and higher inherent risk. Upsides generally include larger potential profits through property acquisition and exit strategies like flipping, wholesaling, or holding and renting.
In our next session we will talk about redemption deeds.