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These days it seems all you hear about is foreclosures. For good reason: You’d have to go back to the 1930s to find a time when foreclosures were more prevalent.
But foreclosure isn’t the only way to lose a house. Another way is to fail to pay your property taxes. In both cases the process offers huge potential bargains to adventurous home buyers.
Since foreclosure investing and buying at tax deed sales involve a similar process, let’s take a quick look at each.
Foreclosure in a nutshell
When a homeowner stops paying their mortgage, the lender goes through a legal process that culminates in a public auction of the home. The bidding essentially starts at the amount owed to the lender, and the property is sold to the highest bidder. If no one bids, the lender will bid the amount of their loan, take the house back and re-sell it later. Here’s a story we recently did about buying foreclosures.
Tax deed sales
When a homeowner stops paying their property taxes, the county tax collector recoups that lost revenue by issuing a tax lien: essentially offering an investor the opportunity to earn interest by ponying up the money for the delinquent taxpayer. But after a few years of non-payment, the tax collector does the same thing a lender does in a foreclosure: they put the house up for sale in a public auction, using the proceeds to repay the tax lien-holders.
Watch this recent story we shot at an actual tax auction – it’s interesting. Then I’ll give you more details below.
So that’s what a tax deed sale looks like, but is this form of real estate investing for you? Let’s explore it a little further.
Here are the typical deal killers when it comes to investing in either foreclosures or tax deeds:
- You must have all cash, right now. In most places, these properties have to be paid for in full within 24 hours of buying them, so there’s zero opportunity for obtaining financing.
- You normally have no opportunity to do more than a drive-by inspection. More often than not, you can’t even go in the house at all until after you’ve purchased it. This is the single biggest reason these types of homes sell for 30% to 50% less than their peers: only an idiot would pay as much for a house they can’t inspect as one they can.
- You have to make sure there are no legal issues. If the house has hidden liens – other loans, an IRS lien, a contractor’s lien, etc. – it’s possible you’ll become responsible for them after purchasing it. That could instantly transform the biggest bargain you ever saw into the most costly mistake you ever made. Solution? A professional title search. But that normally entails spending $75 – $200 on a property that you might not even bid on, much less win.
If all that scared the heck out of you, good – this isn’t a game for the uninformed and it’s no free lunch. For those with the right mix of cash, knowledge and temperament, however, it is a game worth playing.
The steps to buying a property for delinquent taxes
- Step 1 – Find out how tax sales are conducted in your area. Call your county tax collection office (better yet, visit in person if you can) and ask about the procedures in your area. You’ll hopefully find someone both friendly and knowledgeable who can explain how these sales work, when they’re done, and how to get a list of properties. Ask lots of questions and learn as much as you can.
- Step 2 – Attend an auction. Get a list of the properties, look at a few, then attend an auction. Not to buy, but to observe. See how much the houses you found interesting actually go for. Talk to some of the people there – at auctions I’ve attended in the past, I found the people there to be mostly genial. Ask more questions, get more answers.
- Step 3 – Get ready for the real thing. Before the next auction, bring your new knowledge to bear. Find a title company or lawyer that will agree to issue quick, inexpensive title reports. Get the list of upcoming sales and carefully comb through it, discovering what’s available, then deciding what it’s worth and what you’re willing to pay. Visit the properties you’re interested in and do whatever inspection you can. If you don’t know what you’re doing, try to bring someone along that does. Narrow down your list, then get title reports on the final one or two.
- Step 4 – Go for it. Attend the auction, put down your deposit and bid. But don’t go over the price you planned on paying. This won’t be easy – you’ve already invested time and money in your picks and you hate to see someone else get them, but that’s the way this business works. Be patient. There’s always next time.
So there you have it – the Cliff notes on buying property for back taxes. There’s a lot more to learn, and much of it involves details specific to your area. So if you’ve got the cash, the time, and the interest, I’d encourage you to explore this way of finding deals. Definitely not the easiest thing you’ll ever do, but wherever you live, there are people making serious money at it. There’s no reason you can’t.