Tax Sale Basics - The Wonderful World of Tax Sales

You've heard the Tax Sale stories (investors making huge profits or ending up with houses for pennies on the dollar). They are true, but we want to teach you how & why tax sales work.
 
March 14, 2011 - PRLog -- The Wonderful World of Tax Sales
In almost every state in the country investors (YOU) have the opportunity to acquire real estate for below market value. How far below market value depends on the state, but in some instances it can be for pennies on the dollar.  
The stories are legend about houses being purchased for $300 to $5,000 or commercial strip malls for $20,000 that are worth $5,000,000. These are true stories, but they are only one reason we are suggesting you get involved in tax sales. If those stories happen to you – great, but we want to teach you how to make consistent money from tax sales, year in and year out, and put you in a possible position to hit that home run.

What is a tax sale?
Seems like a simple question, but it really isn’t – it depends on where you ask the question. Every state in the country has a mechanism to collect delinquent taxes, but no two states use the exact same method – so there are 50 different answers. However the question can break down to two main answers.
1.   Tax sales that offer the owner of the property some method of saving his property and
2.   Tax sales that are final.

For the purpose of this post we will call those tax sales that offer the owner of the property some method of saving (or redeeming) his property tax lien sales and we will call those sales where the sale is final a tax deed sale.

Why are Tax Sales Important?

When the taxing jurisdiction is not able to collect the real estate taxes that are due, there are consequences for the delinquent property owner. Why? The answer is relatively simple: The taxing jurisdiction needs the money, if they don’t get it from somebody, the rest of us have to make up the shortfall.

The taxing jurisdiction protects themselves from this in a number of ways, but the most common is for them to plan for delinquencies, thus increasing tax rate to compensate for the expected delinquency. If that is done, then we all pay more to make up for those who have not paid. Since tax delinquencies on a national basis run around 2.5% to 3.5% that means your taxes could be 2.5% to 3.5% higher than they could be.

To discourage delinquency the taxing jurisdictions do a number of other things. They make it punitive to not pay your taxes. This starts with penalties and interest charges for late payments. If you still don’t pay, the taxing jurisdiction can arrange for you to lose your property to someone who will pay the taxes. This is done through the tax sale.

Those states that have tax deed sales (no redemption for the property owner) generally wait a number of years before they sell the property – but when they sell it, it’s final. Just under half of the states in the US use a form of tax deed sale. The tax deed sale is ideal for the investor who wants the real estate. You know what you are buying and you know if you are the highest bidder, you will end up with the property. In some jurisdictions you will find that the taxing jurisdiction will even finance the purchase for you, but most don’t. Those jurisdictions that have tax deed sales will sell fewer properties at the tax deed sale than the jurisdictions that have tax lien sales.

For example, the total tax deed sales in the state of California are less in number than Dade County, Florida holds in tax lien sales. Other than fewer properties for sale, the tax deed states usually require a much higher price for the property than you would end up paying for the same property in a tax lien state. This higher price comes from one of two sources.  Tax deed sales are like normal real estate auctions, they sell the land to the highest bidder.  On improved properties you would consider yourself lucky to buy the property for 80% of market value even if the starting bid is just the taxes owed.  In a number of tax deed states there is a requirement that the property be appraised before sale and that it sells at or above the appraised value. This does not mean that you can’t get good values at a tax deed sale because appraised value is often quite a bit below market value. The main thing to remember is that when you bid at a tax deed sale you are attempting to buy real estate and if you are a successful bidder you have bought real estate.   The best values at a deed sale will usually be vacant land as the improved property is quite often bid up substantially.

Those states that have tax lien sales (sales with a redemption period for the property owner) take a different approach. Instead of waiting several years to collect the delinquent taxes they sell, every year, the uncollected tax bill, including penalties and interest, to a third party investor. The buyer of the tax lien is buying the rights of the taxing jurisdiction to receive interest, penalties and costs and their security for this investment is that they have the right to acquire the property if they are not paid before the expiration of the redemption period.

In general terms, the vast majority of these tax liens will redeem. The actual redemption rate varies by state and by county within a state, but in most cases will be more than 90% on residential property but may be as low as 25% on vacant or unimproved property. So these investors will usually not end up with the property, but, instead, will make a return on their investment that is quite attractive. How attractive? Again, this varies by state and even by county within states, but it can be as high as 50% in some instances and often exceeds 12%.

If you are interested in more information about tax sales register for our upcoming FREE online workshop: http://www.taxsalelists.com/free/772/

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We are the leading resource for Tax Sale information in the country, with over 20 yrs of industry experience helping investors profit from tax sales through free workshops, training & tools including the largest tax sale list databases in the country.
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