Transcript:
Hey there, it’s Casey Denman here with Tax Saleacademy.com. In our weekly question segment we’ll be answering Charles question. He says, instead of going to tax deed states, wouldn’t it just be easier and less competitive to buy tax liens and then wait until you can get the property?
Charles, first off, thanks so much for your question. So, I’ll address the question momentarily but one thing you mentioned is the competition factor when applied to tax deed sales. I do want to note that there are many ways to limit competition, beat competition and to work around competition. So don’t let that scare you one bit, don’t let it hold you back. We discuss a few of those ways if you search the channel here and obviously we discuss it in the academy.
Alright, so buying tax liens to get the property. Charles, I know you understand this, but for everyone else that’s watching, let’s quickly recap the tax lien system.
So in the tax lien system, you have a piece of real estate where the owner fails to pay the taxes timely. Those delinquent taxes are then sold as a lien against the property. So an investor will pay those taxes and, in exchange, they’ll earn interest and fees on their invesments when the delinquent tax payer comes back to pay the taxes after the fact. Now, that tax lien is backed by the parcel of real estate it’s attached to. So IF that delinquent tax payer fails to pay those taxes within the redemption period, which varies from state to state but is usually around 2-3 years, the tax lien holder, that’s the investor, can foreclose that tax lien and they’ll become the owner of the property.
This varies from a tax deed state, where the county basically holds that lien for a couple of years, and then they actually sell the property instead of just the lien.
So, back to tax liens. Charles was considering purchasing liens, then waiting out the redemption period as sort of a back door way to get the properties. This can certainly look good on paper, up front especially considering that many liens can be picked up extremely cheap. So simply pay one year worth of taxes on a property, wait a couple of years and become the owner.
Unfortunately, it isn’t quite that simple. First all, in order to foreclose that lien you’d likely have to pay all of the past due taxes which will include the year you purchased your lien for and all taxes since. Secondly, the tax lien foreclosure process can take quite a bit of time and money depending on where you’re at and the specifics of their system. So that $100 lien could turn into $2100 after you pay an attorney. That’s worst case type scenario stuff, but you get the picture.
Now, you might say it’s still not that big of a deal to pay a few years worth of taxes plus pay and wait through the tax lien foreclosure process. And for the properties that make it that far, provided you did proper research, it usually isn’t that big of a deal since you’ll have incredible returns most of the time.
But therein lies the problem. The majority of properties actually won’t make it that far. We have to remember that the person who failed to pay the taxes on time really might not be all that late just yet. In Florida, for example, they’re only a couple months late, actually less than that when the tax lien is filed. It’s not like they are years and years late before this process takes place – it could be something like an oversight that causes them to be a little late. Then they still have a couple of years to come in and pay them off. So there is usually plenty of time to redeem the property and cancel the lien so that the tax lien holder doesn’t have the opportunity to foreclose the tax lien.
The nationwide statistics say that 95% of all tax liens will get redeemed. That means only 5% will go to the point where the tax lien holder has the ability to foreclose on them and get the property. And you also have to think that the “best” properties, the ones that have the multimillion dollar mansions, the properties that have the $30, $50m shopping centers, that kind of stuff will most likely be redeemed. So if you randomly purchase 100 liens, you’ll likely have around 5 that will get to the point where you can foreclose, and of those five, it will probably be the ones that are the least desirable. Not always of course, I have seen multimillion dollars properties sell at tax sales, but usually it will be the lower dollar properties, which can certainly still make you a tremendous amount of money.
So, with all of this said you need to clarify your true intentions. When you invest in tax liens, your primary investment should be to earn interest and a return on your money. That return is backed by real estate and will nearly always beat the markets if you do it correctly. Again, liens are for a return on your money, backed by real estate.
If you’re looking to acquire real estate, go the tax deed route. Find a tax deed state that suits you best and start buying real estate. There are many ways to work around competition, so don’t let that slow you down.
And of course there are a few states that have kind of a mix between the two using hybrid systems or redeemable deed systems, so be sure to check those out too. And there’s a link in today’s show notes that will take you to our state guide that can really help out quite a bit.
So Charles, I truly hope that this has helped answer your question. If you have a followup question or anyone else watching this has a question, feel free to leave it believe this video or any of our other videos and we’ll definitely answer it and we might just shoot a video response like this one.
If you’re looking to learn more about Tax Sale Investing, be sure to head to taxsaleacademy.com and there are also a whole bunch of extremely helpful links in the show notes.