Regardless of what you may have heard about Tax Sales. There are no secrets when it comes to buying property and making money. Everything is dictated by state law and statute and conducted in full public view. If you don’t know what they are, it’s because you don’t know where to look. While there may be no secrets. There certainly are tips and techniques that you can use to turn a relatively mundane 15% annual return on your investment to a truly spectacular return in the 1000 % range.
First, you need a basic understanding of the process’ and definitions of what’s involved when it comes to dealing with Tax Liens and Deeds. I’ve been investing in Tax Lien Certificates (TLC’s) for so long it’s not hard for me to forget just how foreign some of the terminology actually sounded when I just started out. Back then, I read everything I could put my hands on and remember well how I depended on my Black’s law dictionary. I still do at times. Rest assured, I can get you more than enough information to put you well on your way to realizing just what a great wealth building investment Tax Lien Certificates truly are.
Shall We Begin……? Some Quick Explanations
State, County (in Louisiana… Parish) and Local governments all need money to provide the basic and sometimes not so basic services we as citizens have come to expect. Of the many taxes that are used to fund government services, the most common is assessed against real property, known as a Property Tax. The amount that the property owner owes is usually (there may be other factors which I won’t go into now) based/assessed on the value of the land and improvements and collected by the county sheriff/ tax collector in which the property is located. Many times and for a lot of different reasons a property owner may not pay his property tax. When this happens the property is auctioned or sold at a Tax Sale. In the United States there are two methods of doing this; Tax lien Certificate Sales and Tax Deed Sales. The method employed depends upon the State in which property is located. What you need to understand now is the differences.
At a Tax Lien Certificate (TLC) Auction a lien is placed on the tax debtor’s property. This lien acts as security for the repayment of the money expended to satisfy the taxes plus interest. This lien is placed first and superior to all other encumbrances or obligations against the property and stipulates a fixed period of time in which the taxes and interest can be repaid (the redemption period). If the tax debtor does not redeem, the purchaser of the lien can bring an action to prefect his/her title to the property. In Louisiana you bring a suit to Quiet Title or an action in Monition.
At a Tax Deed Auction a deed is issued to the purchaser. Once you tender payment you acquire ownership of the property. In most states you own the property free and clear of any encumbrances or obligations.
SIDEBAR…… Go Figure
The Internal Revenue service places a lien on a tax debtor’s property and conducts a Tax Deed Auction that has a Redemption Period.
And it is becoming more common for tax lien states to also conduct Tax Deed Auctions on properties that didn’t sell to 3rd party purchasers at the Tax Lien Certificate Sale(in Louisiana these revert to the parishand are known as adjuciated properties) after the redemption period lapses.
Back on track….
This friend is Tax Sale investing taken to the lowest level: Government needs money to provide services, taxing property is one method of raising the money needed. If the owner of the property doesn’t pay, the government will sell your property. Simple and effective isn’t it. Now consider there are 50 states, of which 48 have operational county governments. Alaskans call their counties Boroughs and Louisianans use Parishes. Connecticut and Rhode Island have geographic counties but not functioning governments. There are 3,033 counties and another 33 city-county governments. Now throw on all the city governments that use a property tax to fund services. Each and everyone conduct their sales different so it’s not hard to get confused! But it sure looks like there are more than enough opportunities for everyone to get involved in investing in Tax Sales.
You may say to yourself why is this blog focused on investing in Tax Liens and not Tax Deeds.
The answer is really quite simple.
1; Louisiana is a Tax Lien State. Although my activities have taken me to other states my area of expertise is Tax liens and in particular Louisiana Tax liens.
2; On top of that I view real estate as so much more than just buying a property low and selling high or the cash flow that can be generated from owning. The thing I love most when it comes to investing is LEVERAGE.
Let me explain…. It’s not hard to go to a Tax deed auction and purchase a $ 150,000 property for $130,000 and see an immediate $20,000 equity. Not bad for a day’s work, Right? Let’s scratch just a little deeper at this scenario. If I wanted to sell the property tomorrow a real estate agent is going to charge me 6% on the $150,000 sale price or $9,000. Now my profit just dropped to $11,000. There are going to be seller’s costs associated with selling the property of about $2,000. Now I am at $9,000 profit for one day’s work, still a very nice return on the money. If I hold the property for 3 years and see an appreciation of 10% I will have a $165,000 property that an agent will charge me $9,900 (6% of 165k) to sell + $2,000 in closing costs, leaving me a profit of $23,100 or a return of 17.769% on my $130,000.
Now let’s take the $130,000 to a Tax Lien Auction in Louisiana. I buy a $150,000 house for $1,500 which isn’t a hard thing to do. But now I can purchase 86 houses (Tax Lien Certificates) ($130,000 /$1,500 I’ve rounded down from 86.67 houses) and since Louisiana allows a 5% Penalty and 1% per month interest. My one day return is $7,800. I have no agent commissions or closing costs as the Parish Sheriff can handle all the details for me. Not bad but not as good as our Tax Deed scenario.
I am using the 5% interest and 1% interest because this is the figure most tax sale Guru’s use. While this is correct, if you thoroughly read and understand Louisiana’s Tax Sale Laws you would understand there is so much more that the law allows than Interest and Penalties. Rest assured we will explore these areas in depth.
RETURN TO YOUR SEAT…
But wait, we are in a superior lien position on $13,000,500.00 worth of real estate (86.67 houses at $150,000 apiece)
Let’s look at our return 3 years out. With a 10% appreciation the properties are now worth $14,300,550.
We have agent commissions to sell the properties of $858,033.00 (6% of 14,300,550) + $172,340 (86.67 closings @ $2,000 apiece) in closing cost to sell + we also incur an additional cost to prefect the titles of $260,010 (86.67 actions to clear title @ $3,000 apiece) for a total of $1,290,383 in expenses. Subtract out our $130,000 Tax lien investment and our 3 year profit is $12,880,167 or a return 990.79%.
Leverage my friend is the NUMBER ONE reason I concentrate on and invest in Tax Lien Certificates.
Now, let’s back up and look at the 3 year Tax Deed return again ($23,100 or a return of 17.769% on $130,000.) That 17.769% isn’t an annual return, that’s the 3 year return.
Louisiana allows an investor a return of at least 1% per month plus 5% penalty. In a 3 year Tax Debtor's redemption scenario that equals 41% or a return of $53,300 on our $130,000 investment. Now that 17.769% really starts to look weak in comparison.
Considering I didn’t have to take possession of the property. Wash it, clean it, promote it, sell it, and negotiate with a realtor, a buyer, a title attorney. I didn’t have to do anything but go to the Tax Sale buy the property and let the sheriff send me my checks.
How easy do you want it to get.
I am not trying to dog Tax Deed sales. They can be great investments. And there are Tips and Techniques that you can use to make them a great deal better. I’ve bought them and continue to own them and will do so in the future. But in my humble opinion they can’t hold a candle to a Tax Lien certificate.
Today’s CD (Certificate of Deposit) APR is 2.65 on a 1 year CD and an APR of 3.25% on a 3 year CD. Why am I going to put money here? I won’t.
IT”S TIME FOR YOU TO TAKE ACTION.
Get on the phone and call your county Tax collector/ Sheriff or Assessor/Treasures and ask them
1. When is the next Tax Sale? How often are they held?
2. Where is it held? On the court house steps? In the Council chambers? Where? Get a Time when the sale begins and location.
3. Where or how do I get a copy of the rules that they use to conduct the Sale. What method of payment is accepted? Do they take credit cards, etc? Do I need a form of Identification to register? Do I even need to register to bid?
4. Where can I get a list of the properties that will be sold? Most of the time the advertisements are listed in some obscure little legal journal. Sometimes the Tax collector may offer a list and with the advent and popularity of the internet it is becoming more common to find a county list on line.
5. What happens to properties that aren’t sold to 3rd party purchasers? Let me be clear on this. There are always at least 2 parties to a tax sale. The tax debtor (the person or entity) that owes the taxes and the government (who the taxes are owed to). Anyone else that purchase at a tax sale is a 3rd party purchaser. You would probably be surprised at the number of properties that don’t get purchased or go unsold at a Tax Sale. The Question is what happens to these properties? In Louisiana they are acquired by the parish and usually offered for sale at a different time and in a different manner. ASK!
6. Hopefully you live in a Tax Lien State. Ask what’s the interest rate and how is it calculate. What’s the redemption period and how does a tax debtor redeem?
7. Most Important of all. Get the information you need. If the person on the other end isn’t helpful ask to speak with someone else. When you have located a helpful person remember them, Write their name down and ask for them when you have other questions. Introduce yourself to them when you attend the sale. I can’t stress enough, how helpful people in the tax collectors office can be.
You now have more information than I had 25+ years ago when I attended my first Tax Sale in Louisiana. Remember Tax Lien Investing Is extreamly Profitable but when it comes to Tax sale Secrets ...... There are no Secrets!