Tax sale jargon can be extremely confusing. There are tax lien sales and tax deed sales. As if that wasn't confusing enough, there are also hybrid sales called redeemable deed sales. Once you understand the differences, you can wade through this goldmine and make huge profits!
Tax liens are simply a lien on the property. From the homeowner's perspective, you are simply a creditor, much like the mortgage company. Mortgages and liens are in what are called "positions." The big loan that you got when you bought your house is the first mortgage, and usually has a very low interest rate. If you did an equity line or borrowed additional funds, then you also have a second mortgage. Second mortgages are always at a higher rate than the first mortgage because the lender takes more risk. In the event of foreclosure, the lienholders are paid off in the order of position, which means that the first mortgage holder is paid before the second mortgage holder.
So, what does this have to do with tax liens? The position of tax liens is even higher than mortgages. If the homeowner refinances, the tax lien must be paid. If the homeowner sells, the tax lien must be paid.
If you foreclose on your tax lien and the mortgage company does not pay off your lien, then you could wipe out the mortgage and own the property free and clear! Isn't that great! On top of that, you are making an interest rate that is much higher (as much as 24%) than what the mortgage company is collecting.
Now that you understand the basics of tax liens, let's review tax deeds. In the case of the tax deed, the county simply holds the lien for several years and does its own foreclosure. Then, they hold an auction and you buy the property. It's very similar to a traditional mortgage foreclosure auction.
The third type of tax sale is called a redeemable deed sale. The most notorious redeemable deed state is Texas. In Texas, the investor buys the property at the tax sale, but the homeowner has a specified period of time (six months to two years, depending on the type of property) to buy back, or "redeem" their property. In the meantime, the investor can take possession of the property and even rent it out. In the event of a redemption, the investor gets a very nice 25% annual rate on their investment in Texas.
As you can see, tax liens and deeds vary greatly by state. Before making any kind of investment like this, proper research of state and local regulations is essential. With the proper tools, a massive goldmine awaits. |
