Tax sale auctions can be very lucrative, but they involve you working closely with the county. Why do some investors think that's a problem?
Like the entrance to Dante’s ninth circle of Hell, those entering their local county offices often imagine a scratchy voice whispering in their ear: “Abandon all hope, ye who enter here”. With reputations for bureaucratic inefficiency and endless complication, it’s no wonder that many people wonder why county offices exist in the first place.
But counties (and the taxes they collect) actually serve a very important purpose in the communities they serve.
All across the United States, local governments provide essential services for their citizens. They send firefighters to control blazes and to handle emergencies; they build roads and keep them in good repair; the build and staff schools to prepare the citizens of tomorrow; and they keep police patrols on the street to keep us safe and protected.
Do you know how local governments obtain the funds for their budget to make sure they can keep working on behalf of the people?
Counties and municipalities get most of the money they need from property owners and their yearly property taxes.
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The graphic below is a snapshot of how an average county uses the money they collect from property taxes.
Here's how counties spend your property tax dollars
But when owners stop paying their taxes the whole system is in danger. Without money coming in, there can be no money going out to pay the police officers and firefighters, to build the roads and the schools.
Counties are anxious to collect the money they are owed and regularly turn to investors for help at events called “tax sale auctions”. Investors, for their part, are making record profits and celebrating all the way to the bank.
Let’s examine two ways used by counties to collect delinquent taxes before looking more closely at one little known investment method that can mean creating big checks in a very short time.
Tax sale auctions
A tax sale basically gives the county or town the ability to collect the taxes they need by selling either a 1) tax deed, or 2) a tax lien certificate. Investors who attend the auction get a unique investment opportunity and counties get the money they need to keep functioning.
About half of states in the US sell tax deeds while the other half sells tax liens.
Tax sale auctions in states that sell tax deeds
The tax deed process works like this: after the property owner has missed several property tax payments (and ignored multiple written notices), the county will get the right to sell the deed to the delinquent property. The deed is offered at the auction with the starting bid being the amount of taxes owed, and bidders compete until the highest bidder takes the deed home.
Because opening bids are just taxes owed, that means that a $150,000 house in a tax deed state like California can have an opening bid of just $9,000 – and may be even lower in other states! Investors can either keep the property and rent it out or resell it and pocket the difference (often in the tens of thousands of dollars).
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Notice a sample timeline of how the process works in a tax deed state:
The process for tax deed states
Now let’s look at the other half of the country.
Tax sale auctions in states that sell tax liens
In the states that have chosen to sell tax liens, the process is a little bit different.
Typically the day after property taxes are due (or thereabouts), a lien will be issued against the property in question. At the next tax sale (which can be held every month or even every week in some counties), the county will auction off the tax lien to investors. The county uses the money to fill the hole in their budget, and if the property remains delinquent then the lien holder will continue to pay the taxes.
After the sale of the tax lien, the property owner will have a few years in which to pay off their delinquent taxes. If they pay what they owe (plus some fees), then the investor gets their money back PLUS a high percentage return. But if the allotted time passes and the owner still hasn’t paid what they owe, then the holder of the tax lien has the right to foreclose on the property (at their own expense) and to take possession of it.
The process for tax lien states
In a tax lien state, the investor wins either way.
After reading all this, does it surprise you to know that tax sales are used to collect debt? Really, sales of homes and possessions to pay off delinquent taxes and debt are nothing new.
Tax sale auctions are as old as America
On his deathbed, Founding Father and principal author of the Declaration of Independence Thomas Jefferson found himself swimming in debt. A combination of a national recession caused by land speculation and having co-signed on a loan had led to his financial woes. After he died, Jefferson’s daughter had to auction off most of his belongings (and later sell his house Monticello at a loss) in order to pay the debts that her father had left behind.
Tax sales continue to play an important part in each and every community across the United States. Not only do they ensure that counties have the money they need to function, they also provide a unique investment opportunity and a much safer way to invest than the stock market.
But why do property owners let their properties be sold at auction if the debt is just a few thousand dollars in back taxes? There are various reasons. It may have to do with the owner moving out of state and not bothering to leave a forwarding address, or maybe the property was inherited but the person who received it doesn’t want it. Perhaps the property was purchased with the idea of relocating but then plans changed.
In any of these cases, the owner may decide that the property has become a burden, and the property taxes have become an unwelcome expense. They are ready to let the property be sold and to get nothing for it.
All sorts of properties are available at tax sales
Tax sales create a win-win situation, whereby the county gets the money it needs for its budget and the investor gets a property for way below market value.
But one major complaint investors have about tax sales is the high competition and long waiting periods before they get a return on their investment. They see too many bidders driving up the prices of tax deeds and liens, and they see that there are often more bidders that items up for auction.
Is it possible to take advantage of the opportunities created by tax sales?
Yes – by circumventing the auction.
The advantage of going around tax sale auctions
If an investor were to circumvent the auction, he could avoid the competition that drives up bids, have his pick of the deals, and not have to wait until the lengthy redemption period expires to get a return on his investment. After all, many property owners who stop paying their property taxes have decided far in advance that they are no longer interested in keeping the parcel. So why wait five years to transfer the title?
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If an investor could get in touch with the owner soon after the property becomes tax delinquent, the he could potentially create a win-win-win situation: the county gets its money, the owner gets paid and is relieved of the burden of ownership, and the investor gets a property for a fraction of its market value.
This is exactly what Richard Branson did in 1978 when he bought Necker Island. He saw that the owner of the island no longer wanted to keep it and needed some quick cash. Branson made a lowball offer, negotiated a bit, and his final offer of $180,000 was accepted.
Even though the island was valued at $6 million at the time – which means Branson’s offer was only about 3% of its value – the owner no longer had any interest in keeping it and needed money. Branson had the money and wanted the island. Win-win.
There are many ways to get paid from real estate investing
Today, when an investor contacts the owner of a tax delinquent property and the owner accepts an offer, the investor can create an even better deal by avoid the headache of repairs.
To do so, he can simply advertise the deal to a network of professional cash buyers, and once he finds an interested buyer, all he has to do is assign the contract to them and make sure that he gets to keep a percentage of the deal as a finder’s fee. That finder’s fee can easily be $10,000 or more, just for being the person who connects the dots.
Tax sales are an incredible way to make money with real estate, and by circumventing the auction investors can take advantage of a little known investment opportunity. They can get more deals with larger ROIs in less time.
Click here to get a free course about investing in tax delinquent real estate investing
