Real Estate Tax Liens and Tax Deeds
April 7, 2007 by David Cowgill
Did you know there are two different types of tax states? It’s true. About 50% of the states are tax lien states, and the other half are tax deed states. States like California and Texas are deed states while Arizona and Florida are lien states.
So what’s the difference? A tax lien state is one where lien is filed on a property by the local jurisdiction for failure to pay the property taxes. So if you’re an investor who ends up buying that lien, you do not own the property. Instead, you only have a lien on the property and you’re waiting for the owner to pay the taxes that are past due. With this you receive interest or any other penalties which can end up being a nice rate of return on your investment.
A tax deed is very different than a tax lien. If you buy a tax deed at a sale, you own the property from that day forward. Once you get the deed you can do whatever you want with the property let it be renting it out, reselling it, or even living in it. The likelihood of you purchasing a tax deed of sale on a property that’s worth buying are pretty slim. Just think, if this was your property would you let it go this far to the point where someone could just buy your tax deed and own your property outright? I don’t think so.
At most tax deed sales, you’ll find many vacant lots including a number of worthless lots containing a regular or small parcels. Because of this, it’s always imperative for you the investor to actually see the property before making a bid. Investors at the sales by such properties knowing that they will require a fair amount of work and require cash upfront for the repairs.
So how do you go about getting started in real estate tax liens? Most lien states will have an annual auction and you’ll need to contact a specific county to find out the exact date. Some of these auctions you could actually participate online such as www.bidorangecounty.com which is a good option so you can participate in the comfort of your home. I’d start by better understanding how tax liens really do work vs the comparison I just provided. Sites like www.taxliens.com are a good place to start.
Remember that you’re really buying a tax lien for rate of return and not necessarily for the actual property. However, if the lean does not redeem, you may get the property for little more than one or two years of back property taxes. Think of it as a bonus if you don’t get the rate of return you originally planned on. The situation in his very rare but it occasionally does happen. I have personally never invested in tax liens and would be interested in any stories you may have. Please comment below to share your experiences (good or bad).
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