Every piece of real estate in the United States is subject to property taxes that you will be expected to pay each year. If you fail to pay these taxes your property will become tax delinquent, which is a road down the slippery slope of tax foreclosure. Tax foreclosure is the seizing or repossession of the property by the county or municipality where the property is located. Every state has a unique set of standards when it comes to the tax foreclosure processes and the allotted times that they will allow taxes to be delinquent before the property is seized. On average the time frame is 2 to 5 years, so check with your state and/or Local County for specific details. It also varies by state as to whether you are purchasing a tax deed or tax lien.
Properties can be purchased for ridiculously low prices at a tax sale because you are not dealing with property owners, you are dealing with a local government agency who only want to get what they are owed. Contrary to popular belief, it's not the government's goal to get rich off property tax sales. They just want to get these properties off their books and back in the hands of someone who will pay the property taxes regularly.
So what is a tax deed?
A tax deed is the legal document that grants ownership of a property to a government body when the property owner does not pay the taxes due on the property. A tax deed gives the government the authority to sell the property to collect the delinquent taxes and transfer the property to the purchaser. Such sales are called "tax deed sales" and are usually purchased at an auction where the minimum bid is the amount of back taxes and fees owed.
In order to acquire a tax deed, the taxing authority, often a county government, must go through a series of legal steps, including notifying the property owner, applying for a tax deed, posting a notice at the property and posting a public notice. The exact steps that must be taken may vary in accordance with state and/or local municipal laws.
A tax deed sale is a public auction where property is sold to the highest bidder to recover delinquent property taxes. The clerk’s office conducts the sale via public auction. Tax deed sales are typically held several times per year. In order to participate in an auction a deposit of a set amount is required in the form of cash, cashier's check, or money order.
Deeds are sold "as is" or on a BUYER BEWARE basis making the review of a property file to determine the ownership and encumbrances report for each certificate at the clerk’s office important along with additional research conducted independently.
A successful bidder for a property at a tax deed sale is required to make a full payment, typically within 24 hours after the time of the sale. If full payment is not made within 24 hours, they buyer forfeits the deposit made at the auction.
And, a tax lien?
In a tax lien state, the county will sell a tax lien certificate to an investor as a way to recoup unpaid taxes. When someone purchases a tax lien, they are buying a lien on the property. As the owner of the tax lien, you are entitled to repayment for the amount of the tax lien, plus interest within a redemption period from the property owner. If the property owner fails to pay the lienholder, the lienholder has the right to foreclose within the specified timeframe defined by the state specific law.
The process for obtaining a tax lien is similar to that of a tax deed. The return on the investment can be anywhere from 5% to 36% annually that ranges from six months to three years in duration. Real estate laws vary between jurisdictions, so you will want to familiarize yourself with the laws where you plan to invest. Be careful how much you bid, as the property owner only owes the original tax bill and interest, even if you bid more for it.
Now it is time for you to decide whether you want to be a property owner or investor.