Tax Sales and Tax Deeds - Some Basics for Your Success - Part 1 of 3
| | Wednesday, June 05, 2002 @ 02:43 PM EDT
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Contributed by: Darius Barazandeh
Darius Barazandeh Properties
Read more archived articles about Buying
We have all heard the stories and heard the claims about tax foreclosure sales. You know the stories where someone purchases a house or property for $1,000 dollars with a true market value of $50,000. They then turn around and sell it for a huge profit. In fact everywhere I turn someone is talking about the wonderful purchase opportunities that tax sales and tax liens can hold. Before I started investing in tax sales my first question was, “If this is such a great investment technique, why is it that I have not heard about it? There had to be a catch, something that no one was telling me about this technique. The truth is that you can gain a very favorable return by purchasing tax lien certificates and tax deeds, but as with everything you need to learn from other people’s knowledge, use common sense, do your research, and stay positive!
The General Tax Sale Process
Almost all states allow for a tax sale foreclosure process that allows common citizens, just like us, to purchase tax sale properties. Here’s how it happens:
If an owner of real property does not pay their taxes the county or the taxing entity will file a lawsuit to collect the
unpaid taxes, and if such taxes are not paid, the property will be sold at a public tax auction to the highest bidder.
The certificate or tax deed will be sold at a public auction and the opening bid will typically be made up of the amount of back taxes owed. This amount will usually be made up of:
- Delinquent Property Taxes
- Interest Charges
- Penalty Fees
- Legal Costs
- Administrative Charges and Fees
When a tax certificate or a tax deed is sold, the purchaser acquires the rights held by the county or taxing unit. Tax sales may be held annually, semi-annually, quarterly, or monthly. There are no restrictions for bidding in these sales (i.e., you do not have to be a real estate agent, professional investor, etc.); however you usually must be able to pay the bid amount within a short period of time.
For a specified period of time the delinquent owner has the right to buy back or “redeem” the property. This is called the right of redemption. In many cases this redemption period may be as short as 6 months or in states such as South Dakota and Wyoming, as long as 4 years. If the delinquent owner does not redeem the property during the specified time, then the successful bidder is entitled to the property regardless of the purchase price. Let me say that again: the successful bidder would be the owner of the property even if it was bought for $1,500 and it has a market value of $150,000!
That sounds great, but what happens if the delinquent owner decides to exercise their right of redemption? Do I lose my deal and all the money I spend at the action? No not at all! In that case they (the delinquent property owner) must pay you an interest penalty charge on top of what you originally paid for the property. This interest charge could be from 10% to 25% (for redemptions occurring during the first year) or up to 50% (for redemptions occurring during the second year). What this means is that you will get back the money you originally invested plus the interest charge while the delinquent owner will get their property back.
So in most cases either you purchase real property for pennies on the dollar or gain a high rate of return on the money you used to purchase the property!
In my next article I will generally discuss the redemption process and describe some of the statutory returns available in many states.
Note: The author, Darius M. Barazandeh, JD, holds both a Doctorate of Law and a Masters Degree in Finance. He is the President and founder of DMB Real Estate Enterprises, Inc. that invests in tax sales, lease-options, mobile homes and residential mid-rise construction projects. He has also author of Texas Houses for Pennies, one of the most detailed courses on Tax Liens.
Information contained within this article was not intended to be, nor should it be taken by the reader as legal, financial or tax advice. The above article was written for educational purposes only.
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