The Creative Investor - Understanding The Difference Between Tax Sales And Scavenger Sales

It has come to my attention that many people, even real estate professionals, often get confused when it comes to understanding the difference between tax sales and scavenger sales. In order for tax sales and scavenger sales to be used as a profitable tool in real estate investing it is important for any real estate investor to clearly understand how they each work and the differences between the two.

After a property owner has not paid their property taxes for a specific time frame the government will auction off the homeowner’s delinquent property taxes at a public auction (often called a tax sale), while allowing the homeowner to keep ownership of the property. A tax sale

is a periodic government auction where individuals bid on the interest rate they are willing to receive if they pay off the delinquent taxes on specific pieces of real estate. At a tax sale people are actually biding on the amount of interest they want to receive if they pay off a homeowner’s delinquent taxes. A successful bidder at a tax sale will receive a tax certificate after paying off the delinquent tax amount that was owed. This tax certificate can be redeemed for cash once the delinquent tax amount is paid in full by the property’s owner. Usually when a tax certificate is redeemed, the tax purchaser at a tax sale can expect the amount of money they paid plus the cumulative annual percentage rate they successfully bided at the tax sale. Generally, the percentage rate at tax sales can range from as low as 5% and as high as 30%. Tax sales are an excellent source of investment, however there are primary two potential problems with how they work:

1) A homeowner who has their property taxes auctioned off at a tax sale my never actually pay their property taxes; which means the successful bidder potentially may never get any money back.

2) Every year there are millions delinquent property taxes that are available at tax sales that are never purchased.

The solution to the first problem is that that the holder of a tax certificate can acquire ownership of the property through a lawsuit if the original homeowner does not pay their property taxes off in a certain time frame. This may cost a few thousand dollars but is well worth it because the property is usually worth a lot more. The solution to the second problem is where the scavenger sale comes in.

After a property has appeared at a certain number of tax sales and it’s property taxes have not been purchased the government then auctions off the actual property to the general public. The beginning bid for properties at scavenger sales is not based on the market value of the property, but rather on the unpaid delinquent tax amount or accessed value of the property. A successful bidder at a scavenger sale will receive an actual deed to the property.

Tax sales and scavenger sales can both be financially beneficial rather you want to make a long term or short-term investment. Just keep in mind that the names of certain types of auctions and time frames that the law provides for each varies from state to state.

If you would like more information please contact your local government.

Daniel Cobb has written the EBook Complete Guide To Investing In Real Estate Through Government Scavenger Sales.