Transcript:
Honest Comparison: Deeds, Liens & Overages
Welcome to the Tax Sale Podcast, where tax sale investing is made easy. My name is Casey Denman, I’m a tax sale veteran, the leading tax sale expert, author of The Tax Sale Playbook, founder of The Tax Sale Academy and I’m your host right here on The Tax Sale Podcast.
Thank you so much for joining me on today’s podcast episode. This is a completely free podcast and is brought to you through and because of The Tax Sale Academy. If you’re looking to learn more about investing in tax defaulted real estate, just head to TaxSaleAcademy.com. Again that’s TaxSaleAcademy.com.
So on today’s episode I want to discuss a few of the different angles involved with the tax sale business. I’ll go over them briefly, then I’ll discuss what I like about them, what I don’t like about them and WHO specifically should be interested in which angle.
We’ll be discussing tax deeds, tax liens and overage investing.
So, when I look at any investment I want to analyze the expected returns based off the money, effort and time I’ll have invested. And this is something that so many people tend to overlook. They focus solely on the money invested. But the time and effort should matter as much, if not more than the actual money. I can’t tell you how many deals, especially in my younger days, started as no brainers that required absolutely zero money out of pocket. All I had to do was put in the work – of course that work is always much more involved than you originally think. That easy thousand bucks that took you 100 hours worth of work cost you $10 per hour and potentially plenty of missed opportunities in the meantime. So as we go through each of these, we’ll be discussing the way I analyze investments, which hopefully helps you out. I’ll also be talking about these in generalizations or averages. So understand that before you think back to the one time when you knew somebody who did this or did that, which is different from what I discuss.
So let’s discuss tax liens first.
Obviously, every type of investment in the tax sale business begins when the owner fails to pay their property taxes on time. As part of the process in many states, the county steps in and sells a priority lien against the property. This lien allows the delinquent tax payer a set period of time to come in, pay off the back due taxes plus interest to the investor which would cancel the lien. In the even that the delinquent owner does not redeem the property in time, then the tax lien holder could foreclose the lien and become the owner of the property. So a lien holder would get interest on their money or the property.
Now, I’ve discuss tax lien pitfalls in episode 238 so I’m not going to discuss the negatives here. But something I did mention in that episode is that most tax liens will get redeemed – around 95% of them, in fact. This means that you will most likely make your money when you you check your mailbox one day and get a check from the county.
We must remember that the lien is backed by the real estate. So, if you purchase a lien you should likely assume that you’ll be receiving interest when it gets redeemed. BUT, if it doesn’t get redeemed then what? Well, then you can become the owner of the real estate it’s backed by. So we need to insure that that real estate is worthwhile. This means that prior to purchasing the lien, we have to research the underlying real estate just as we were if we were investing in the property itself. If a property is a 2 foot by 200 foot landlocked utility easement and we buy a lien to it that doesn’t get redeemed, then the money we invested in that lien will only be recouped IF we can sell that worthless property. So we must perform research.
Now, as mentioned most liens are redeemed. Meaning ot delinquent owner goes to the county, pays off the lien and then you’ll receive your money back plus interest. Depending on the lien, this interest could range anywhere from a negative rate for some of the more unique investors, to rates as high at 36% or even more. That’s a pretty healthy return when the cards fall in your favor.
So, tax liens will typically require the same amount of effort at the beginning as a tax deed investor, which we’ll soon discuss since you must research and understand the property, but it does not require the same effort to actually realize your return since you aren’t having to sell a property. Instead, you simply get your money transfer from the county or you cash the check the shows up in your mailbox on day. With this lower effort, there will also typically be a lower return of course.
Because of the entire process, tax liens are typically a much longer term investment, but has a lower barrier to entry from a strictly monetary standpoint. The risks are primarily associated with the property backing the lien, provided you planned strategically initially of course. As such, tax lien investing is geared more towards those looking to invest some time initially, then park their money while obtaining above typical rates all in a method backed by real estate.
Tax deed investing begins the same way where the delinquent tax payer is late paying their taxes. But instead of the county selling a lien against the property, they instead will hold the property on a delinquent list, before foreclosing themselves and then auctioning off the property. As a tax deed investor, you will typically make your money when the sell the asset.
As a tax deed investor, our concern is everything surrounding the property we’re buying. Because once we purchase it, there are no refunds and there is no way to make money with it besides renting or selling it. So it’s crucial that we spend ample time researching the real estate, including driving by the property in most situations or sending a scout to do it for us, at the very least.
While the opening bid for most properties will begin at the amount of back due taxes, interest to the county and any fees, it is a competitive auction where there could be more than one interested investor of course, which will drive the price up. At some point you’ll have to make the decision where your cut off is. All of this to say that with tax deed, you’ll typicaly be investing more more.
And then, after the investment is when your real work begins. You must clear the title, market the property, deal with buyers, negotiate a contract, all of that stuff before you even get close to realizing your return.
But, in the end, you’ll usually make more money with tax deeds than tax liens when approached correctly.
So tax deeds are an ideal investment for someone willing to put forth the extra effort to sell the property, while also understanding how important it is to be patient to wait for the right property opposed to forcing yourself into an investment. With tax liens, you might be able to make a mistake or two with the lien you purchase and hopefully the delinquent owner redeems it. With tax deeds, when you make a mistake, the only hope you have is that you didn’t lose too much money.
So, so far tax liens require less work and produce lower returns while tax deeds require higher amounts of work and produce higher returns.
Now, let’s discuss overages. So, here’s how the process works. Let’s say a delinquent tax payer owes $1,000 on a property. That same property sells at a tax sale for $8,000. This means that there is a difference of $7,000. In some states, the county or states keeps this excess. In other states, the overage goes towards any outstanding liens first, with the former owner of the property claiming the difference.
This is something that has been heavily marketed as being a way to get into real estate investing without any cash, claim huge commissions and help others out. So, technically speaking that is correct.
The idea is that you search through an overage list to find the decent sized overages that haven’t been claimed, indicating that the former owner did not known about it. Then you contact that former owner to let them know about this overage and in exchange for helping them you will get a percentage of it. The details are strategies can vary greatly, but that’s the jist of it.
The truth is that this can be a way to get into a subcategory of the tax sale business for relatively little or no money – simply a computer and some research skills. But it’s much harder than you might imagine, especially when we talk about taking time for money. I recently saw a guy discussing how successful he is with overages and when asked about his team, he said he had something like two dozen employees and a few attorneys on staff. First, that sounds expensive. Second, that sounds awfully time consuming.
The reason it requires so many people and so much effort is that you must understand it’s a numbers game. I had a property that I sold one time go through tax foreclosure and somehow I was named in the tax foreclosure action alongside the person I had previously sold it to. That’s a topic for another day, but that property had something like a $1200 surplus. I must have received 7 or 8 letters from people offering to help me claim my surplus funds – some were straight forward and to the point, others were extremely shady and almost con-artist types. That means that 7 or 8 people took the item to research the lien, located my contact information, mail me a letter and wait for a response. That is a lot of action for a lien where you might have made a few hundred bucks.
If you’re looking to create a job for yourself, you can certainly spend a lot of time and potentially make a lot of money with overages. I don’t consider it investing, but instead you’re providing a service – and being a numbers game the more hours you can put into it, the better. The most successful overage service providers have large staffs and are doing it every single day or the week. While the barrier to entry is nearly nonexistent, and the returns infinite, understand it takes strategy, commitment and lots and lots of time.
So, there it is. Tax liens produce lower returns and require less work. Tax deeds produce higher returns but require more work. And providing an overage service produces potentially infinite returns but also requires substantially more work.
Thanks so much for listening today. I truly hope that this episode has helped you out. If so, please do us a huge favor and leave some positive feedback on whatever podcasting platform you’re listening to us on.
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