City and county taxes on personal property pays for police and fire protection, schools and other city/county services.  What happens when people don’t pay their taxes?  The city has to cut back services in order to save money.  City and county tax collectors use penalties and interest to motivate real estate owners to make timely tax payments so that the county can adhere to their budget.  When penalties and interest accrued doesn’t work, more aggressive collection action is taken and the property is foreclosed.  Investing in foreclosed real estate due to delinquent property taxes presents a very unique opportunity.

States deal with delinquent property taxes in basically two ways (yes, there are a few other ways, but for this blog, we will focus on the top two).  States can collect delinquent taxes by either tax lien sales or tax deed sales.  Purchasing tax liens or tax deeds is a fantastic form of real estate investing, but there are many factors to consider, points to investigate and multiple exit strategies to be successful with tax liens and deeds.  Roughly half of the states are conducting tax lien sales and the other half tax deed sales.  What are the main differences between the two?

Tax Lien States

Tax liens are legal claims by a government entity against a noncompliant taxpayer’s assets. Tax liens are a last resort to force an individual or business to pay back taxes. A tax lien is similar to a mortgage because it’s a public record of a debt and generally prevents the owner from selling or refinancing the property unless the debt is paid.  To get rid of a lien, the taxpayer must pay what he or she owes, get the debt dismissed in bankruptcy court or reach an offer in compromise with the tax authorities.

Tax lien certificates are generally sold to investors by most counties and municipalities in the United States through an auction process. Subsequent to a winning bid made by an investor for a specific tax lien certificate, a lien is placed on the property and a certificate issued to the investor detailing the outstanding taxes and penalties on the property.   The tax lien certificate therefore enables the investor to collect unpaid taxes plus the prevailing rate of interest applicable to such certificates, which can range from 8 to more than 30%, depending on the jurisdiction. The term of tax lien certificates typically ranges from one to three years.  For most Tax Lien states, after 3 years of continued tax payment delinquency, the property can then be foreclosed.

Tax Deed States

A tax deed is a legal document that grants ownership of a property to a government body when the property owner does not pay the taxes due on the property. A tax deed gives the government the authority to sell the property to collect the delinquent taxes and transfer the property to the purchaser. Such sales are called “tax deed sales” and are usually held as auctions where the minimum bid is the amount of back taxes and fees owed.  Although various factors affect the value of such an investment, the primary reason to purchase a tax deed is to acquire ownership of the property for less than its market value.

Both tax liens and tax deeds have the potential for a great ROI, as long as you know all the caveats to consider and how to avoid or work through certain scenarios.  Instead of trying to navigate the rough waters of investing in tax liens and tax deeds on your own, consider partnering with TEA Real Estate, LLC.  We have access to every tax lien and tax deed auction of the 3000+ counties nationwide and are continuously looking for potential good deals.  If you have questions, or would like more information on tax lien and tax deed real estate investments, contact us today.


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