Real estate properties can mean different things to different people. More than a place to call home, real estate properties have also become a form of investment for some. Properties can be profitable through owning and renting them out or buying and flipping a property.
If you have experience in some of the forms of real estate investment, you may have also heard of tax deed investing. It’s a niche venture, but one that has the potential to be seriously profitable. Before we dive into the “hows” of the matter, let’s first discuss the basics of tax deed investing.
Tax Talk
On top of mortgage and insurance, you also pay property taxes if you own a house. Every piece of real estate in the U.S. is subject to this. The government uses the funds that it collects from property taxes to build public schools, roads, and for other programs.
If a person misses out on paying for their property tax, the taxing authority will consider their taxes delinquent and charge interest on the amount owed. The tax debt will grow if the owner of the property still cannot pay their dues and eventually, a tax lien will be placed on the property.
If that still isn’t cleared, the tax authorities will put up the property for either a tax lien sale or a tax deed sale where the highest bidder becomes the new owner. Keep in mind, though, that each state has different rules regarding tax liens and deeds. Taxdeedinvestors.com has a helpful list of tax deed states for reference.
Investing in Tax Deeds
Now, here’s how you can profit off of another person’s tax delinquent property.
A county or state is primarily concerned about generating money from property taxes enough to make up for their lost tax revenue. Basically, taxing authorities do not care much about the market value of a property. This is where you can profit off the tax deeds.
Let’s say that a property is valued at $150,000 with delinquent taxes and penalties worth $10,000 at the time of foreclosure. The amount of delinquent taxes—$10,000—will usually be the state’s concern so they’re likely to start the opening bid for the property at this price. If you win the bid at, say $30,000, the $10,000 will go to the state for the owed taxes and the remaining will go to the former owner of the property.
Essentially, you’ll end up having an equity profit of $120,000. Since the deed is now yours, you’re free to use the property as you please. You can rent it out or sell it at its market price. Either way, you’re going to be gaining a huge profit off a property you bought for only $30,000.
Where to Bid
You may be wondering where to find properties you can snag that are up for foreclosure due to delinquent taxes. Many municipalities across the country still hold live, onsite auctions to sell tax deeds. Larger markets, though, have turned to online auctions. Contact the municipal or county office in the area you’re interested.