When you purchase a tax lien, you buy a legal instrument that entitles you to interest, fees, etc. With a tax deed, you buy a piece of property.
There’s a world of difference between the two. Because tax deed investing is a little more involved than tax lien investing, you might have some remaining questions…
I hope to answer some of them today.
The more traditional ways of purchasing property — contacting a real estate agent, checking MLS listings, viewing properties and obtaining traditional financing — are probably already quite familiar to you. Going the more traditional route is just fine if that’s your investing strategy.
However, acquiring tax deed properties at auction is (I think) a superior way of getting properties at a much lower cost.
The result is the same — tax deed sales offer you the potential to buy properties at a significant discount, which can put more money in your pocket. Your options are limitless: You can flip tax deed properties you purchase at the sale, utilize a buy-and-hold strategy or even sell on a contract or a lease option.
It’s your choice, because once you’ve purchased the property it becomes yours to do with as you please (once the redemption period passes and ownership has transferred to you).
Tax deed sales offer you significant profit potential for a variety of reasons, but one of the biggest reasons is due to a lack of competition.
Thousands of real estate investors flood the conventional housing market (MLS listings, short sales, REOs, probate properties and foreclosures — among others) trying valiantly to shoulder their way to the front of the success line.
Tax deeds aren’t as sexy as other investing strategies, in part because not nearly as many people know about them.
Because of this, tax deed investing is (in comparison) a largely untapped market. In fact, in some cases, the competition is nonexistent. This dramatically increases your opportunity to turn a large profit.
There is a certain element of risk involved in tax deed investing, so do your homework. Only bid on properties you strongly believe will generate a great return on your investment.
Otherwise, you’ll invert sound investing principles — and wind up bidding high and selling low. The real estate investing road is littered with the wreckage of investors who failed to heed this advice.
Redemption Deed States
In a redemption deed state, there is a different process in place when a property owner fails to make their annual property tax payments.
First, redemption deed states are considerably more forgiving of late property taxes, sometimes allowing the property owner to go years without paying property taxes. This goes on for a period, but eventually the state’s patience will wear out.
When it does, the county tax authority won’t sell a tax lien on the property. Because redemption deed states are actually a hybrid of tax liens and tax deeds, the county will sell the property deed at a tax deed sale. If you purchase the deed, you do not receive the deed.
Instead, the county will issue you a tax lien that gives the property owner an extended period of time to redeem. As in the cases of tax liens and tax deeds, a property owner redeeming in a redemption deed state retains ownership of their property.
However, if for any reason they don’t settle up during the redemption period, you will probably become the owner of the property.
Note that during the redemption period (after you purchase the redemption deed), you won’t receive interest as you would in a typical tax lien state. Because instead of calculating interest on a monthly basis, redemption deed states have established a unique penalty-based system.
Let’s look at an example in one of the better redemption deed states — Texas.
First, since Texas is also a homestead exemption state, special rules apply to the assessment of delinquent property taxes.
The state legislature has granted a special exemption — a homestead exemption — to homeowners who use the property as their primary residence. While the homeowner can still lose their property to foreclosure if they don’t pay their property taxes, they won’t lose it as a result of bankruptcy, judgments or creditors.
Now, in Texas the penalty rate is 25%. If the property owner redeems at any point during the first year, the most you’ll receive is 25%.
In the event that redemption doesn’t occur during the first 12 months, beginning on the first day after 12 months, a 50% penalty will kick in (25% per year).
There’s a countdown clock ticking loudly on the property owner’s right to redeem. If redemption doesn’t happen within 24 months of the day you buy the redemption deed, the property will become yours.
Because Texas’ penalty-based system costs property owners so much, the overwhelming majority of homeowners will find the money for property taxes somewhere — in a cookie jar, renting out their kids’ labor — anything to get their property taxes paid.
However, most of the deeds in Texas are for nonhomestead or investment properties. In this case, the rules are slightly different. Instead of having a full two years to redeem, these property owners will have only six months to redeem — at a 25% penalty.
In either case, once the redemption period passes, you’ll become the owner of the property after you foreclose. The county will do most of the work for you, although you might have to do a few things yourself:
- Run an ad in your local newspaper for 10 consecutive days notifying the property owner of your intent to foreclose.
- Send certified letters to all lien holders letting them know of your intention to foreclose.
- Evict the property owner (or tenant) from the property, although the county may do this for you.
This is the basic process in place in redemption deed states. While the process may vary slightly, the end result is the same: You’ll either receive a very good return on your investment or you could wind up with the actual deed to the property.
If this happens, it’s yours to do with as you please.
Expect the best,
Mark R. Walter
P.S. Want to learn more about tax deeds, redemption deeds, tax liens and how you can make money with them? Mark’s course is the best resource out there — which is why we teamed up with him in the first place. See what I mean here.