Categories
United Tax Liens Blog

A Straight Forward Guide to How to Buy Tax Deeds

A Straight Forward Guide to How to Buy Tax Deeds

Buying tax deeds is not a typical starting point for new investors, but it can be a lucrative investment strategy. This niche of real estate investing can be a great resource for buying properties at a steep discount and can be used if you fix and flip houses, own rentals, or simply want to earn a return on your money. This guide will explain what tax deeds are, how you can invest in them, and what you need to do before buying tax deeds as a real estate investment. 

What is a tax deed?

All real estate is subject to property tax. When a property owner falls behind on their real estate taxes, a tax lien is placed on the property in the form of a tax lien certificate.

Depending on the state, the owners have a few months to a few years to pay the taxes due. Eventually, if the taxes remain unpaid, the city or county will sell the property through a public auction as a means to recoup the back taxes owed to them.

In summary, a tax deed is the legal document that grants the governing body the right to list the real estate for sale through a tax deed sale to recoup the unpaid property taxes.

How can I invest in tax deeds?

Most tax deed investors like buying tax deeds because properties can often be purchased for steep discounts compared to the market value of the property, and they can be a unique way to find investment properties outside of the MLS. Once the property is purchased at the tax deed sale, the investor can:

  • Sell the property as-is (with or without owner financing).
  • Rehab the property and sell it.
  • Keep the property as a rental.

Sell the property as-is

If you bought the property for $48,910 and sold the property as-is, you would net roughly $14,000 (estimating 10% of the total sales price for Realtor fees, closing costs, and holding costs) with the entire transaction taking anywhere from one to three months.

Rehab the property

Let's say the property is in an area where fix-and-flip activity is high, and you determine the property's after repair value is $125,000. Rather than selling it as is for $70,000, you put $35,000 into the property and are able to sell it for $125,000 four months later. Your total cost into the investment is roughly $85,000 (accounting for the purchase price, holding costs, rehab, and clearing title), which nets you about $30,000 after deducting 8% of the sales price for closing costs and Realtor fees.

Fix it up and keep it as a rental

Instead of selling the property, you decide to hold it as a rental. After putting $20,000 into the property to get it in rent-ready condition, you are able to secure a tenant at $1,200 a month. After holding costs like property management fees, property taxes, insurance, and maintenance reserves, you net $800 a month. Your total investment in the property is around $70,000, giving you a 13.7% return on your initial investment.

As you can see, there are a number of ways to invest and make money when buying tax deeds — as long as you conduct thorough due diligence and don't overpay for the property.

Where to find tax deeds for sale

Every state has different laws regarding tax deeds or tax liens. Before you begin investing in tax deeds, it's best to identify one state to focus on and learn the laws for that state. From there, you can determine which county or city you want to start investing in.

If a state is tax lien only, that means there are no tax deed sales. The winning bidder at the tax sale is issued a tax lien certificate. This pays the city and county what is owed to them, and the tax lien holder earns interest on the delinquent tax amount until the tax amount is repaid in full.

Tax sales are typically held online through the county's auction software but may take place at the county courthouse in smaller or rural counties. Depending on the county or municipality, tax sales can be conducted daily, weekly, monthly, quarterly, or as rarely as once a year. Most counties advertise the sale process and how to register as a bidder on their website. Otherwise, call the tax collector directly to find out the process for buying tax liens or tax deeds. County websites also often have a list of pending tax deed sales or an auction calendar showing you the properties up for auction, when they go to auction, and the minimum bid. This list can be used to identify which properties, if any, meet your investment criteria such as location, property type, or size and what your maximum bid will be.

What you need to do before buying tax deeds

While buying tax deeds can be a profitable investment, it can also be a risky one if not done properly. There are a number of things to know about and research before bidding on a property at a tax deed sale. Below are a few important things to take care of.

Determine property value

When you buy a tax deed, in most instances you are buying a property without being able to get inside. It is possible to assess the condition of the property from the exterior, but in general, you will not be able to assess the interior condition. For this reason, many tax deed investors assume the property is in poor condition when determining the value of the property using comparable properties. If the property is in better condition than anticipated, the value will only increase.

Determine your maximum bid

It's easy to get caught up in the bidding war and pay too much for a property. Once you've established a property value, determine the maximum amount you would be willing to pay for the property, considering the possible work it needs or the rental income you could collect. You may want to use the 70% rule most flippers would use or set your maximum bid at a percentage of its as-is value.

Regardless of which method you use, if you are a savvy investor, you will go into the auction knowing your maximum bid. If the bidding exceeds that price — stop. One of the biggest mistakes you can make in tax deed investing is overpaying for a property.

Check for other liens

The process of clearing a title after a tax deed sale will wipe away certain liens, including open mortgages on the property. However, there are certain liens it will not extinguish including:

  • Municipal fines.
  • Code violations.
  • Other tax liens.

Some counties will provide a lien search prior to the sale to help bidders conduct their due diligence on the property. This information may also be available in public records, but some code violations may not be recorded yet. It’s a good idea to call the local municipality code department to find out if there are any recorded or unrecorded liens.

The opportunity is there, but buying tax deeds can be challenging

In some counties, buying tax deeds is competitive. Florida, for example, has many of the top real estate markets in the entire country, making it a competitive place to invest. While you can find opportunities at tax deed sales, properties are often overbid by novice investors, leaving very few deals available to purchase.

Don't be surprised if the property you wanted to bid on never makes it to auction. Out of the long list of properties set for sale, only a few will actually be auctioned. The taxes may be paid off just before the sale or the homeowner may have filed bankruptcy, which temporarily pauses the collection of the unpaid taxes. You can research a lot of properties to only be able to bid on one or two.

In summary, buying tax deeds can be a unique way to find off-market investment opportunities at great prices — but not every property is a deal. Before you begin investing, keep learning about the tax laws for the state and county of your choice. Look at recent tax deed sales to see what properties sold for and practice doing your own due diligence to determine whether buying tax deeds in your area will be a worthwhile endeavor.

About The Author

unitedtaxliens

United Tax Liens is a group of experienced, active investors providing everyday people with access to one of the best Real Estate Investment vehicles available today.

Write A Comment

Your email address will not be published.