Tax Sales

Posted: 11 May 2008 | Categories: Taxes

Tax Sales

When a homeowner is delinquent on property taxes owed to the local taxing jurisdiction, the agency will enforce its right to collect the amounts due through a tax sale. A tax sale is a mechanism used to collect delinquent property taxes, so the local government can deliver the services and benefits it has promised to the citizens. This is generally accomplished through a public auction, where the local government sells either a Tax Lien or a Tax Deed.

The first process is called a Tax Deed Sale (A tax deed sale is when a county taxing authority is conducting a forced sale of the property to collect delinquent taxes owed on the real estate. If the taxes are not paid, after legal requirements are met, the property is offered for sale at public auction. The minimum bid is generally the amount of back taxes owed plus interest, as well as costs associated with selling the property.), where after legal requirements are met, the property is offered for sale at a public auction. Generally, the minimum bid will be set at the sum of accumulated back taxes plus interest plus transaction costs associated with selling the property.

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Those states that have tax deed sales generally wait a number of years before they sell the property. However, when the property is ultimately sold at auction, the sale is usually final and the owner has no right of redemption. However, there are exceptions to this rule, so it is important to perform proper due diligence in each jurisdiction. For example, the state of Texas provides a 6-month redemption period (A deed that is encumbered for a period of time during which it may be redeemed (bought back) by the delinquent property owner. Usually there is a penalty applied for redemption). where the former home owner can reclaim the property by fulfilling certain requirements. Additionally, the state of Tennessee allows a full year of redemption.

Over half of the states in the U.S. use a form of tax deed sale. Those jurisdictions that have tax deed sales will sell fewer properties at the tax deed sale than jurisdictions with tax lien sales. This is due to the fact that tax deed states usually require a much higher price for the property than you would end up paying for the same property in a tax lien state.

Tax deed sales are ideal for investors who want to own real estate. Contrary to a tax lien auction, the winning bidder at a tax deed auction purchases the deed to a piece of property, becoming the new owner and obtaining all rights to the property, clear of any mortgages, liens or deeds of trust. For most tax deed investors, the key objective in a deed sale is to buy low and sell high. As with any real estate purchase, it is critical that you research the property and understand the value of the property before submitting a bid. Without the proper analysis, you risk paying more for the property than it is worth.

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Those states that have Tax Lien Sales (A tax lien sale happens when a county taxing authority is attempting to collect delinquent taxes owed on the real estate. In a tax lien sale, the property itself is not being sold, but rather the right to collect the taxes and interest from the delinquent homeowner. In many states, if the debt is not repaid with interest within a specified time period, the purchaser of the tax lien may foreclose upon the property, and all subordinate debts are forgiven. This makes tax lien investing a very lucrative opportunity). (sales with a redemption period (A tax lien certificate is redeemed (bought back) when the owner pays the tax collector the amount of the lien plus any subsequent payments, interest, and penalties. The redemption is paid to the tax collector. The investor must send the tax lien certificate to the tax collector to receive payment). for the owner) take a different approach. Rather than waiting several years to collect delinquent taxes via tax deed sale, tax lien states sell tax lien certificates that are investment documents which are transferable to third party investors.

Similar to tax deed sales, tax lien sales are performed through a public auction. The buyer of a tax lien is buying the rights of the taxing jurisdiction to receive interest, penalties and costs. The security for this investment is that the buyer holds the right to acquire the property if he is not paid before the expiration of the redemption period. This makes the potential upside of a tax lien a very attractive investment. However, it is important to note that the national tax lien redemption rate is approximately 95%. This means that investors will usually not end up with the property, but will make a return on their investment that is quite attractive. The returns vary from state to state but can be as high as 30% and often exceed 12%.

To summarize the opportunity with tax lien sales, there are generally two ways to profit. The first opportunity being when the property owner redeems the lien and you are compensated with interest and penalties. Again, this can be very lucrative interest rate depending on the jurisdiction. The second opportunity being when the property owner does not redeem and you receive title to the property and become the new owner. The opportunity to receive title to the property can make tax lien investing a very exciting and lucrative investment.

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