Are Tax Deed Sales Lucrative?

Real Estate Investor/Syndicator · Orlando, FL · Member since 2014 · 109 posts · 22 votes

Hello all,

Recently I have been looking into tax deed sales, and a friend of mine told me if you win a tax deed auction, you get the title free and clear. Is this true? What is the process of doing so?

They hold an auction every Thursday in my area, was planning on going this week and checking it out.

From my understanding if you win a tax deed auction, there is a waiting period for other lien holders to claim that their lien is more substantial to yours.

Would I need to get a Real estate attorney involved? How much does this all usually cost?

Thanks in advance for your help!

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Matt Devincenzo

Investor · Clairemont, CA · Member since 2011 · 3k+ posts · 2k+ votes

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As others have said it can/will be state specific. I invest in FL (Orange, Seminole and Volusia) and this is based on those areas.

First you somewhat need to understand the tax lien foreclosure process. A lien holder purchases the certificate at sale, if the property owner doesn't pay the back taxes then the certificate holder can proceed to sale. They apply for tax sale and any potential parties must be notified (other lien holders, owners ect). Once that is done the property is auctioned and if it sells "you" become the owner via a tax deed.

First: FL is not a redemption state. Meaning after the sale there is no period of time in which the owner could come back and pay the back money (including any associated costs) and reclaim ownership of the property. This is true in other states, and you need to know how long that is to "plan" your course of action.

Second: You do receive a "free and clear" tax deed...sort of. While other liens are extinguished by the sale, you do not have clear title. There is always a possibility that the notification was not done properly and there is a lien holder who has rights to the property...this places a cloud on title. This is a problem in the fact that any lender will require title insurance in order to fund a loan against the property.

Two ways to clear this up. One you wait 4 years during which time no one will insure title (that I know of). You could sell the property, but anyone buying would need to be a cash buyer, and they would be buying with the same clouded title until the 4 years was up.

Second way is you pursue a "quiet title action". This is basically a legal proceeding to verify that all lien holders/owner's rights were extinguished and the property title is clear. Once that is done you would now have a marketable title again and could sell or refinance using conventional lending. This costs about $3-4000 I believe.

The big thing to understand here is "clear title" and "free and clear" (of liens and encumberances) are two vastly different things. As long as you understand the difference, and budget accordingly then you're on the right track.

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Jeremy Tillotson
Investor · Fort Wayne, IN · Member since 2014 · 1k+ posts · 515 votes
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First it depends on what state. Secondly as with most things that have potential for large returns do your homework, they exist but if it was easy they wouldnt exist. What state are you in. I did a deal for 3k last year I am listing at 18k now, no work other than waiting a year.
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Zamir Kazi
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Real Estate Investor/Syndicator · Orlando, FL · Member since 2014 · 109 posts · 22 votes
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Originally posted by @Jeremy Tillotson:

First it depends on what state. Secondly as with most things that have potential for large returns do your homework, they exist but if it was easy they wouldnt exist. What state are you in. I did a deal for 3k last year I am listing at 18k now, no work other than waiting a year.
Wow, congrats. I am in Florida, thinking Orange County.
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Stephen Hundley
Realtor · Lafayette, LA · Member since 2011 · 297 posts · 175 votes
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talk to someone local who has done it. Different laws in every state and county. Plan on keeping the house for a buy and hold bc it's almost impossible to get title insurance.
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Jeremy Tillotson
Investor · Fort Wayne, IN · Member since 2014 · 1k+ posts · 515 votes
11y
quick google says to read this
http://www.octaxcol.com/tax-certificate-sales.aspx
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Pat McGrath
Real Estate Agent · Lincoln, CA · Member since 2014 · 225 posts · 43 votes
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i talked to a title person here in placer/roseville, & she said the seller can challenge the sale up to 7 yrs later. She even had one where there was af federal lien that wasnt supposed to go with the property, but did after someone bought it
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Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
11y
@Pat McGrath
depends on the title company in CA... WE bought literally over 1k parcels at tax sale over the years and got title insurance the minute we got the deed from the tax collector.. there is no right of redemption in CA. The only way a sale can be VOIDABLE is if the person that lost the property can prove that the country messed up on the 21 day publication law.. and or never sent a letter to the last known address of the person or entity losing it.
IRS liens can stay on for 6 months then sunset... everything else is removed from title..
@Zamir Kazi
Florida is a Tax cert state and as such much more competitive and complicated than a TAx Deed sale state were the sale is just like an auction you win the bid you own the asset.
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Matt Devincenzo
Investor · Clairemont, CA · Member since 2011 · 3k+ posts · 2k+ votes
11y
As others have said it can/will be state specific. I invest in FL (Orange, Seminole and Volusia) and this is based on those areas.
First you somewhat need to understand the tax lien foreclosure process. A lien holder purchases the certificate at sale, if the property owner doesn't pay the back taxes then the certificate holder can proceed to sale. They apply for tax sale and any potential parties must be notified (other lien holders, owners ect). Once that is done the property is auctioned and if it sells "you" become the owner via a tax deed.
First: FL is not a redemption state. Meaning after the sale there is no period of time in which the owner could come back and pay the back money (including any associated costs) and reclaim ownership of the property. This is true in other states, and you need to know how long that is to "plan" your course of action.
Second: You do receive a "free and clear" tax deed...sort of. While other liens are extinguished by the sale, you do not have clear title. There is always a possibility that the notification was not done properly and there is a lien holder who has rights to the property...this places a cloud on title. This is a problem in the fact that any lender will require title insurance in order to fund a loan against the property.
Two ways to clear this up. One you wait 4 years during which time no one will insure title (that I know of). You could sell the property, but anyone buying would need to be a cash buyer, and they would be buying with the same clouded title until the 4 years was up.
Second way is you pursue a "quiet title action". This is basically a legal proceeding to verify that all lien holders/owner's rights were extinguished and the property title is clear. Once that is done you would now have a marketable title again and could sell or refinance using conventional lending. This costs about $3-4000 I believe.
The big thing to understand here is "clear title" and "free and clear" (of liens and encumberances) are two vastly different things. As long as you understand the difference, and budget accordingly then you're on the right track.
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Zamir Kazi
OP
Real Estate Investor/Syndicator · Orlando, FL · Member since 2014 · 109 posts · 22 votes
11y
@Matt Devincenzo
This is awesome thanks so much for your input. I am currently focusing on Orange, Seminole, and Osceola.
My strategy primarily is buy and hold so I wouldn't mind waiting four years to get a clear title.
How often do lien holders come back and claim their rights to the property in your experience?
Would you consider tax deed sales a better strategy for buy and hold vs. conventional ways of buying real estate (MLS, Direct marketing, etc)
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Matt Devincenzo
Investor · Clairemont, CA · Member since 2011 · 3k+ posts · 2k+ votes
11y
I can't help you on the frequency with which sales are voided. I know the process since I'm starting to invest IRA funds in tax certificates, and there's always a possibility I get the property back at auction, but I haven't purchased a tax sale property myself. Laura Richards here on BP is a local RE attorney, and can probably give you some insight into that side of it. I'd say the chances are fairly low since it's a clearly defined process for what needs to be done for notification.
I've looked at tax deed sales to purchase property, and I think it can be a nice benefit for a buy and hold type, since if you are willing to wait 4 years it's a bidding edge because you have $4000 less in costs than someone flipping the property.
What I have seen is like with a lot of FL property right now the prices are getting squeezed where the returns aren't as attractive. Doesn't mean there aren't deals, just that the active guys are more willing to work on thinner margins than I am.
I think this strategy works best on the properties that are say ARV $60-80K. They are decent rentals usually (in Sanford ect not 60K in Pine hills), but the cost of a quiet title doesn't go down based on the property price, so it's a higher % of the "rehab" costs so flippers get priced out sooner. But they are still worth enough to be able to sell OO via a traditional sale a few years down the road. That's my opinion at least after looking at some of the sale prices at the auction...the higher value properties get the margin squeezed too thin by someone willing to rehab it for a $30K payday.
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Ned CareyPro Member
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Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes
11y
@Zamir Kazi
If you know what you are doing yes. If you don't know what you are doing probably not. Of course this is no different than any area of real estate.
I do tax lien foreclosures in MD. They are rarely challenged. I don't believe we have lost a challenge made more than 30 days after the foreclosure was final.
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Jeremy Tillotson
Investor · Fort Wayne, IN · Member since 2014 · 1k+ posts · 515 votes
11y
@Matt Devincenzo
They allow you to get insurance thereby being able to sell the property. Also I guess we are bless I can do quiet title for 1600 so its a time vs money thing everytime we come across this. I have done both.
http://www.taxtitleservices.com/
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Zamir Kazi
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Real Estate Investor/Syndicator · Orlando, FL · Member since 2014 · 109 posts · 22 votes
11y
Originally posted by @Ned Carey:

@Zamir Kazi
If you know what you are doing yes. If you don't know what you are doing probably not. Of course this is no different than any area of real estate.
I do tax lien foreclosures in MD. They are rarely challenged. I don't believe we have lost a challenge made more than 30 days after the foreclosure was final.
Thanks, in your own personal experience, what has been the most challenging aspect when dealing with the tax deed auctions in MD?
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Christina R.
Investor · DMV Maryland · Member since 2013 · 867 posts · 370 votes
11y
I am wrapping up a Baltimore City tax lien foreclosure purchase that I received judgement for last month - @Ned Carey mentored me through it and @J Scott came in as a partner on it, @Terry Royce is helping us sell it. --> I say all that to illustrate the collective positive power of the BP Nation :-).
I don't know the timelines in all states but the one thing I've found you must have here in Maryland is PATIENCE. This is not anything that happens quickly. It will be about 19 months from when I purchased the lien over the counter selling it (hopefully, don't want to jinx anything). Now if you have the funds or ability to network and be involved in the process you can have liens redeeming and also getting judgments pretty much every month but that is something that I've been told by Ned that takes time - like, years - to get into a repetitive cycle.
You also need to buy right. From location to anticipating the amount of money you will outlay to get the judgement/deed. If you're not going to hold on to the property, are you going to be able to at least break even or be minimally out your investment? Will conditions change if you plan to buy and hold during the time you are waiting? (4 years is a long time, in my opinion, in real estate).
I do think it's a good learning experience for an investor to tackle at least once because by the nature of being able to be either redeemed out or taking title for whatever exit purposes you are thinking, it's a relatively safe prospect. If I had more money, I'd certainly do more of it.
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Zamir Kazi
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Real Estate Investor/Syndicator · Orlando, FL · Member since 2014 · 109 posts · 22 votes
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@Christina R. That is amazing congrats!
Also good to hear you using BiggerPockets as a networking forum to meet mentors and partners. Super cool you partnered with @J Scott to do a deal, I read his book and loved it.
I am planning on hitting the auction this week and just observing, as well as try to pick the veterans brains a bit, get some mentoring of my own.
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Steven Soto
Real Estate Agent · Orlando, FL · Member since 2013 · 49 posts · 5 votes
11y
@Zamir Kazi
You can search my company on Property Appraiser and see I bought a condo for 20k (HOA PUT A 20K LIEN ON IT AND A FIRST WAS ON IT ALSO) I'm now about to sell it for 45k, I put 7k into it. 2 weeks ago I raised 700k for a Dr. Phillips home because I was hoping to pick it up for 600k but it sold for 671k. The house is worth 1.2 mill.
You'll see 89 people in the room and maybe only 15 will bid. Everyone else comes to watch or ask people what to do. You can pick up a great deal just be prepared to have money for rehab. Also be ready to be outbid, because some of those guys in there are buddies of mine and they outbid people.
Just because they want the asset as a cash flowing property for their portfolio. Also it's just not going in there and bidding and winning, there is process to make sure the county did everything right.
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Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
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@Christina R.
what do you figure your ROI over 19 months of patience is going to be?
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Ned CareyPro Member
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Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes
11y
Originally posted by @Zamir Kazi:

Thanks, in your own personal experience, what has been the most challenging aspect when dealing with the tax deed auctions in MD?
For me it is finding enough time to inspect properties and prepare bids.
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Zamir Kazi
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Real Estate Investor/Syndicator · Orlando, FL · Member since 2014 · 109 posts · 22 votes
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@Steven Soto Cool! Congratulations on your deal! As far as the process for the county, is it just making sure all notices were sent out properly etc? Do you have the real estate attorney handle all of that? How much does the quiet title cost usually?
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Zamir Kazi
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Real Estate Investor/Syndicator · Orlando, FL · Member since 2014 · 109 posts · 22 votes
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@Ned Carey You try to inspect the properties before they come to auction? I was told many of the properties are taken off the auction block sometimes the day before because the taxes were paid?
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Steven Soto
Real Estate Agent · Orlando, FL · Member since 2013 · 49 posts · 5 votes
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Yes for the notices and 5k for quiet title which can take up 6 months if not longer with an attorney. Most importantly you want the title marketable and best way to do that is Tax Title Services.
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Ned CareyPro Member
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Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes
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@Zamir Kazi Yes where I am it is important to make sure there is actually a property still standing! Baltimore properties are often 80 to 100 years old. It is important to see the condition. While you can't see inside the properties at least you get an idea of how it has been maintained from the outside.
Yes 2/3 of the properties we inspect never make it to the sale. But the only we we can inspect enough is to start looking right away.
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Christina R.
Investor · DMV Maryland · Member since 2013 · 867 posts · 370 votes
11y
Originally posted by @Jay Hinrichs:

@Christina R.
what do you figure your ROI over 19 months of patience is going to be?
If I was going to keep it as a rental with a projected conservative Section 8 rent around $1100 a month, using the 50% rule and about 25K to get it rent-ready it would probably be around 17-18% considering what's been put in so far with the whole tax lien process. But I don't think I could get Section 8 approval here and market rent I'm not willing to even try in this area.
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Zamir Kazi
OP
Real Estate Investor/Syndicator · Orlando, FL · Member since 2014 · 109 posts · 22 votes
11y
Solid margins @Christina R.
Well done.
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Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
11y
@Christina R.
that's interesting why don't you think you can get section 8?? Many people count on section 8 rents.
And I assume market rents mean you cannot collect rents consistently over time or even over a short amount of time.. So you need to off this to a local low end landlord or some one who for some reason thinks they can make a go of it because price point is so low.
So if you wholesale it what do you think you would sell it for net to you and what do you think your ROI will be over the 20 months it has taken.. Do you think you will hit 20 to 40% cash on Cash ROI? Just curious how good the tax sales are out there or if they are more align with other hot markets were CoC is not quite that high.
Appreciate your insight. :)
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Matt Schelberg
Rental Property Investor · Baltimore, MD · Member since 2013 · 281 posts · 257 votes
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Congrats to @Christina R. on her success. After one year doing the tax lien auction in Baltimore, my experience has been good, but the returns have been lower than I expected. The 18 percent annualized return sounds good, but the absolute returns are much lower due to early redemptions and voided liens by the municipality. I purchased 14 liens with about $30,000 this year at the auction. 12 of the 14 have redeemed for total interest payments of $1,200 or 4% after six months. Considering roughly 40 hours of research time and the opportunity cost of having $30,000 tied up for a number of months...the returns have not been extraordinary. However, I have two liens that will enter the foreclosure process next week, so hopefully that will increase the return if/when that process leads to me taking the properties.
I think you really need scale to make the tax lien effort worthwhile in terms of ROI. That being said, there is also an educational benefit in doing one or two liens just to learn about this type of investment.
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