Real estate can be one of the most exciting assets to invest in. There are so many opportunities to make money: some people buy properties, fix them up, and flip them for tens of thousands of dollars in profits; others become landlords by buying multi-unit properties and renting them out. In this blog post, we will discuss another, lesser-know strategy that savvy real estate investors have been using for years to make a killing
. Welcome to the world of tax sale properties! We briefly cover the basics in this email, but you can read more about tax sales here.
What is a real estate tax sale?
A real estate tax sale takes place when someone does not pay his or her property taxes. Real estate tax sales are held by local governments and are a way for the local government to recoup the money that is owed to it by the delinquent property owner. Here, we are specifically discussing tax deed sales—not to be confused with tax lien sales.
What’s the difference between a tax deed sale and a tax lien sale?
In a tax deed sale, the government auctions off the rights to a property. If you win the auction, you become the new owner of the property—unless, of course the former owners comes forward and pay the back taxes, effectively redeeming the property. You can read more about how that works here. In contrast, in a tax lien sale, the government auctions off the lien (the debt) that is owed it, and the investor makes money on the interest collected.
What type of property can you find at a real estate tax sale?
You will find all types of real estate, from commercial buildings to luxury single-family homes. You can also find vacant land of all types and sizes. It doesn’t really matter what kind of property it is; if someone doesn’t pay their taxes, they will eventually lose their rights to that property.
Are there any conditions to be aware of when purchasing property at a real estate tax sale?
Yes. When you purchase a real estate tax property, some properties are sold free and clear of all liens and back taxes, while others are sold free of back taxes ONLY. When looking for tax sale properties, you should try to look for those that are sold totally free and clear. When buying a property that is not free and clear, the purchaser is buying the propert subject to any liens. Often, if the owner wasn’t paying the real estate taxes on the property, he or she probably wasn’t paying the mortgage, either. Some municipalities give the former owner a certain amount of time to pay back the taxes plus interest and reclaim the property.
Is financing available for tax sale properties?
Typically, no. Once you win the auction, you will need to put down anywhere from 10%-25% of the purchase price as a deposit. Additionally, it is difficult to get any sort of mortgage on these types of properties, because they do not come with a free and clear title. Therefore, the buyer should be prepared to finance the property out of pocket.
How are real estate tax sales conducted?
Real estate tax sales are held by most local governments. You can usually find them by visiting the County Clerk’s office or digging around on the Internet. At GovernmentAuctions.org, we compile property tax sales from all over the United States, so you find them more easily.
Brining a tax sale property to auction is not a quick process. There are a number of steps that the municipality must take, like the notifying the owner and all parties that have an interest in the property, and then waiting a certain length of time, sometimes as long as three years, before bringing the property to auction.
Is it possible to find good deals at tax sale property auctions?
Yes, but you need to do your homework. First, you should familiarize yourself with the local laws: know what you are getting yourself into. For example, in some municipalities, the former owner has up to one year to pay back the taxes plus interest and reclaim the property. During this time, there is almost nothing you can do with the property, aside from maybe renting it out on a month-to-month basis. Someone who buys a property without knowing something this crucial, could end up losing a lot of money as a result.
What you need to know.
- Use the appraised value as a guide for setting your bid, but be sure to factor in the risk involved. Depending on the level of risk, you may only want to pay 25% or 50% of the appraised value of the property.
- Make sure you have some money left over for unforeseen events, repairs, etc.
- Take your time. Don’t just buy the first property that comes up for auction. Learn as much as you can about the neighborhood, local laws, condition of the property, contact title companies, etc.
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