Tax Deed Investment: What It Is and How to Profit From It.
Tax deed investments offer the opportunity to acquire ownership of property, either a home or vacant land, at a deep discount. Rather than paying the full market value of the property, those who invest in tax deeds typically take ownership after only paying a sum slightly higher or equal to the value of the taxes owed on the property. In the case of property taxes owed to a local jurisdiction, the amount owed may be just a fraction of the value of the property itself, because that kind of tax usually amounts to just a few cents on the dollar compared to the property’s total appraised value.
What Exactly is a Tax Deed?
The tax deed is just a legal document that grants ownership of the property where the taxes are unpaid to whoever owns the tax deed. The government of towns, cities, and counties collect property taxes that are then used to fund the budget for public services. Those services can range from EMS and fire departments to trash pickup and public transportation. When taxes are not paid by property owners, these governments can legally charge them penalties, fees, and interest – which is considerable – on top of what they owe for the taxes. But if the tax bill still goes unpaid after a set amount of time based on state statutes, the jurisdiction may decide to auction off the tax deed to the highest bidder.
How Does Tax Deed Investment Work?
In essence, whoever buys the tax deed at auction becomes the new owner of the property. As a tax deed investor, you may become the eligible owner by just paying off the taxes and related fees and penalties – effectively buying it at a bargain basement price. However, the rules governing tax deeds vary from one jurisdiction to another. In some places, once you buy the tax deed the property belongs to you immediately. In other places, you may not be able to sell or move into a property you hold the tax deed to right away. That’s because in those states the property owner is given one last chance – a short grace period called the redemption period ─ to pay off what they owe before relinquishing ownership of the property.
Profit Despite the Redemption Period
There are many states that allow a redemption period, which may last from several weeks to several months. But that still doesn’t necessarily mean that your purchase of the tax deed wasn’t a lucrative investment. Since you now own the tax deed, you – not the government – are the one legally entitled to collect what is owed – including interest, fees, and penalties. Whereas a money market account might pay one or two percent interest, interest paid to you by the property owner to “cure” the property tax foreclosure and loss of their home may be 10 times that high. Or, the property owner would be required to pay the investor a flat penalty fee on top of the delinquencies, penalties, and fees. In that way, tax deed investment can be a lucrative alternative to other types of investment that pay lower returns and take longer (sometimes many years) for you to earn those returns. So even if you do not acquire legal ownership of the physical property itself, owning the tax deed can be an attractive investment.
An Investment Where Everyone Wins
You walk away with a sizable profit in a very short period of time, and the property owner can keep the property. The government gets money for its budget you paid for the tax deed, the property owner gets to keep their property, and you pocket the money they paid to “redeem” the property. In fact, some investors actually prefer that approach. If they pick the right properties and get paid during the redemption period, it’s possible to have multiple revenue streams coming from multiple tax deeds – in multiple towns and cities. (If you’re interested to learn more about generating those kinds of returns, check out our blog that explains tax lien investing – which is a more direct way to profit from the interest paid by delinquent taxpayers.)
Due Diligence and Tax Deed Investment
Before bidding on a tax deed, it’s always wise to do some research to learn as much as possible about the property and about the local rules relating to tax deeds. Are there other liens on the property that will need to be paid off before you can sell it? Is the title clear or do you need to take steps to ensure you have a clean title, if you wind up owning the property outright? How much interest can you earn on your investment, even in places where the property owner has a redemption period and will be able to repay what they owe? How much is owed in property taxes and other fees, which helps determine the auction price – or is there a minimum amount where the bidding starts? Armed with this kind of information, you can make educated investment decisions and buy tax deeds that have the most upside profit potential.