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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Matt Devincenzo
Investor · Clairemont, CA · Member since 2011 · 3k+ posts · 2k+ votes
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Thanks @Jeremy Tillotson I'll definitely check that out. Next time I'm in town I'll have to connect and go to the auction with you @Steven Soto
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Steven Soto
Real Estate Agent · Orlando, FL · Member since 2013 · 49 posts · 5 votes
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@Matt Devincenzo
Sounds like a plan if you would like we can always JV on something or my company can manage the asset for you and the rehab. I'm not greedy about making the profit. In my eyes I rather make money and expand my company at the benefit of others than to be doing no business. So when you're ready just let me know how you wanna proceed.
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J ScottPro Member
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Investor · Sarasota, FL · Member since 2008 · 18k+ posts · 17k+ votes
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Originally posted by @Jay Hinrichs:

@Christina R.
what do you figure your ROI over 19 months of patience is going to be?
It's just one deal, so it's necessarily representative of anything...but, if the verbal offer we have now ends up coming through with a contract and closing, it will be over 100% return...
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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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@J Scott 100%, not too shabby. Congrats!
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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
How many deals do you guys do monthly?
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Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
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@J Scott
100% over 20 months or annualized? Nice numbers,,, so if you can scale it as in there is enough inventory to buy to do 10 to 30 a month it could be a nice cash cow with systems in place...
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Wendell De Guzman
Investor · Chicago, IL · Member since 2013 · 2k+ posts · 1k+ votes
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Originally posted by @Zamir Kazi:

@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)
Matt answered it very well. Tax deeds can be lucrative if you know what you're doing. If you're a newbie though, my advice is to stay away from it until you get some experience. Tax deeds are harder to sell because you don't get clear title just a certificate of title. You need action to quiet title. Yes, tax deeds are better for buy-and-hold but not for wholesaling or for retailing (although we routinely do this but only because we know what we're doing).
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J ScottPro Member
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Investor · Sarasota, FL · Member since 2008 · 18k+ posts · 17k+ votes
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Originally posted by @Jay Hinrichs:
@J Scott
100% over 20 months or annualized? Nice numbers,,, so if you can scale it as in there is enough inventory to buy to do 10 to 30 a month it could be a nice cash cow with systems in place...
We're all in for under $7K and have an offer for $16K...so, that's about 130% return in 20 months, or about 80% annualized.
But, that's actually not really accurate -- given that the only cost was the lien (about $1000) for the first 16 months and that most of the money has gone in over the past 2 months (foreclosure costs, trash out, closing costs at sale, etc), our IRR would be closer to 300%:
So, for this deal at least, the numbers are great...
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Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
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@J Scott
well I would be happy to provide as much capital as needed :) and I would be very happy to only take 1/3 of the profits LOL....
seriously is there any real big money attacking these things or is it mom and pop... Is it like Florida tax sales or AZ tax sales ?
Can one put 7 figures up and just dominate ? settle for 100% return instead of 297% but buy everything that comes up?
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J ScottPro Member
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Investor · Sarasota, FL · Member since 2008 · 18k+ posts · 17k+ votes
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Originally posted by @Jay Hinrichs:

@J Scott
well I would be happy to provide as much capital as needed :) and I would be very happy to only take 1/3 of the profits LOL....
seriously is there any real big money attacking these things or is it mom and pop... Is it like Florida tax sales or AZ tax sales ?
Can one put 7 figures up and just dominate ? settle for 100% return instead of 297% but buy everything that comes up?
Here's why it won't work exactly like that (at least not in Maryland):
- First and foremost, most liens (I've heard 90-95%) will be redeemed by the homeowners prior to foreclosure. For those, you'll get 18% interest plus any legal fees you've incurred. Not bad, but a far cry from 100% returns.
- The properties that don't get redeemed are more likely to be the ones with less equity or those that are in worse condition (those clearly not always).
- Because you can't see the interior of the property, it's somewhat of a crap shoot whether you're buying a good deal or not.
- Even if the interior is in good shape when you buy it, it's generally 12-16 months before you can legally foreclose and take control of the property -- a lot can happen to a property in a year, even if you do a good job of securing it.
In the end, you'll have a mix of great deals, good deals, break-even deals and losers. So, your returns will be based on both skill and luck.
Now, you can tip the odds in your favor by being conservative in what deals you do (only newer properties, only in nicer areas, etc), but then you run the risk of not being able to find enough properties to scale your system to the point where you can generate the total profits you seek.
That said, I know Ned Carey works with private investors, so he's probably much better suited to address the actual returns you'll see across a portfolio of liens -- not sure if he wants to go into those details here though... :-)
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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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@J Scott Have you had any experience with FL tax deed auctions?
What if I skipped buying the tax lien and bought the tax deed instead?
Would it be more lucrative? Or should I start with the lien and then also bid for the deed?
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Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
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@J Scott
yes the danger of BP sharing the wealth creating a new wave of competition at the Baltimore tax sales.
I hear what your saying in many tax cert states the big boys come in and bid down the rates of return into the 5 to 8% range.. you have newer players thinking they are going to get this easy 18%... It can happen but in popular areas there is already some major players that are happy with lower but almost guaranteed returns.
Now for me the one time I tried TAX certs it was an eye opener.. I think I brought 50k to buy some spent less than 10 and left and I don't think any redeemed I just wrote it off was not worth my time to chase them down.
I would think if one had a little army this could play well in small rural counties were the competition would not be so stiff.... Maybe hire a RE broker like you do for BPO's have them bid for you for a fee something like that and cover all 200 counties in a state.
Just an idea.
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J ScottPro Member
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Investor · Sarasota, FL · Member since 2008 · 18k+ posts · 17k+ votes
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Originally posted by @Zamir Kazi:

@J Scott Have you had any experience with FL tax deed auctions?
What if I skipped buying the tax lien and bought the tax deed instead?
Would it be more lucrative? Or should I start with the lien and then also bid for the deed?
Sorry, I have no knowledge of how tax sales work outside of Maryland (and even my Maryland experience is limited to this one deal)...
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Bruce Olsen
Lender · Pasadena, CA · Member since 2013 · 74 posts · 11 votes
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@J Scott
Isn't there some creative way to keep the property occupied?
I don't fully understand the legal status during the waiting period, but if you can access the property to secure it you must have some rights.
If so, perhaps you could offer it (say) as a studio space for artists. Zoning issues would need to be considered, but I've visited a couple of artist galleries in the SF Bay Area that were in residential areas.
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Matt Schelberg
Rental Property Investor · Baltimore, MD · Member since 2013 · 281 posts · 257 votes
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Originally posted by @Jay Hinrichs:

@J Scott
seriously is there any real big money attacking these things or is it mom and pop... Is it like Florida tax sales or AZ tax sales ?
Can one put 7 figures up and just dominate ? settle for 100% return instead of 297% but buy everything that comes up?
It is the big money that is dominating the tax lien auctions -- this is especially true for liens in nicer areas. Looking at the Baltimore results from this year, there was major action by what appears to be private equity or hedge funds. With interest rates low and the stock market fully valued, investors are chasing yield. For many investors an annualized yield of 4-6% with tax liens is very attractive compared to what they are getting elsewhere. So the interest rates are getting bid down to very low levels. And according to @Ned Carey many of the big money funds overbid this year. So they are getting low interest rates, and they also risk losing some of their principal.
You are right that there are more new investors at the auctions, but our impact on prices is negligible. New investors are a drop in the bucket compared to private equity.
There are opportunities in the lower income areas, but there are also significant risks. I wouldn't travel to the location of @J Scott 's lien (or my own) without a rape whistle and a can of pepper spray. And I agree 100% that in the 18 months it takes to foreclose, a lot can happen to a vacant property in a bad area.
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Christina R.
Investor · DMV Maryland · Member since 2013 · 867 posts · 370 votes
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Thanks to @J Scott for providing all the financials -- math has never been my strongest suit, lol. As far as rape whistles and pepper spray, this property is actually not in that-bad-of-an-area. I wouldn't take my kids out on the street for an afternoon of kickball but I have been out there by myself and never felt in danger but I always stay at a heightened state of awareness.. That's what being a teacher nowadays can, sadly, teach you..
Problem is the area is . . . sparse. And unfortunately Section 8 is very, very picky about renting next to board ups (of which this block has a few, and one right next to this one.. other side is occupied). Some Baltimore residents actually LOVE being in this solitary kind of environment. For me, It's just not worth it trying to make this particular rowhome into something. This was a learning experience of the tax lien auction process.
However, it ain't over until we leave the closing table so I'm going to shut up before the whole thing is jinxed.
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J ScottPro Member
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Investor · Sarasota, FL · Member since 2008 · 18k+ posts · 17k+ votes
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Originally posted by @Christina R.:

As far as rape whistles and pepper spray, this property is actually not in that-bad-of-an-area. I wouldn't take my kids out on the street for an afternoon of kickball but I have been out there by myself and never felt in danger but I always stay at a heightened state of awareness..
Agreed. The one time I visited, I was with my wife and kids, and was perfectly comfortable leaving them in the car when I went into the house...
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Matt Schelberg
Rental Property Investor · Baltimore, MD · Member since 2013 · 281 posts · 257 votes
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Just to be clear, I have never been to the foreclosure owned by @Christina R. @J Scott and my comment about pepper spray was a joke in response to other comments suggesting that the property be converted to an art studio. I buy in low-income parts of Baltimore City, too and rentals there can be cash machines.
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J ScottPro Member
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Investor · Sarasota, FL · Member since 2008 · 18k+ posts · 17k+ votes
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Originally posted by @Bruce Olsen:

@J Scott
Isn't there some creative way to keep the property occupied?
I don't fully understand the legal status during the waiting period, but if you can access the property to secure it you must have some rights.
If so, perhaps you could offer it (say) as a studio space for artists. Zoning issues would need to be considered, but I've visited a couple of artist galleries in the SF Bay Area that were in residential areas.
Legally, the purchaser of the lien doesn't own the property until after the foreclosure is completed, which is generally 12-16 months after the lien is purchased. So, technically it's not legal to secure a property (or do anything else to it).
But, from what I've heard, if the property appears vacant, many times the lien holder will take the chance and secure the property -- assuming the owner doesn't come back, there's not much risk. Now, if the lien holder actually put a tenant in there (without having ownership), that seems a lot more risky to me... :-)
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Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
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@J Scott I would think you could secure it... you just won;t get paid back
Just like banks secure properties that are in foreclosure they don't own them but they send in reps that winterize and relock... I think on abandoned properties the risk is low to non existent.. I would not rehab them but secure them I would feel OK doing that. I mean what damages could you have caused?
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J ScottPro Member
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Investor · Sarasota, FL · Member since 2008 · 18k+ posts · 17k+ votes
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Originally posted by @Jay Hinrichs:
I mean what damages could you have caused?
Agreed...I think the risk is low...
The only risk I see is if the homeowner returns, is locked out of their house and can prove that you trespassed on their property and changed their locks (which in theory might be construed as vandalism or something) and brings suit against you or calls the police.
Not likely, but also not technically legal...
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Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
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@J Scott I hear ya but anyone who has been in this bizz long enough has certainly done far worse to protect their investments..
what we have going on right now in Oregon since it went from TD sale state to judicial is people winning at judicial and rehabbing prior to the right of redemption.. Me personally I have done that before but it was a risk reward.. never got caught in a redemption. But now with this redemption rights out there in the main stream it would be far to risky
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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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Originally posted by @Bruce Olsen:

@J Scott
Isn't there some creative way to keep the property occupied?
I don't fully understand the legal status during the waiting period, but if you can access the property to secure it you must have some rights.
Bruce, The problem is you don't have legal access to the property in the waiting period. With lead paint and these properties being on poor condition and not meeting current housing codes, Trying to capitalize on people being in them would be a legal liability nightmare.
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Bruce Olsen
Lender · Pasadena, CA · Member since 2013 · 74 posts · 11 votes
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@Ned Carey
Thanks. The concept seems a little bizarre.
I'd sure hate to learn that the hard way.
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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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@Jay Hinrichs
That actually might be about what I am giving away.
Yes there is big money going after Baltimore sales. The 3-4 biggest bidders spend about $10 million each the day of the sale. I am probably the biggest of the second tier players. i spent about $1 million but I had $1.5 Million to invest. I couldn't buy enough at the prices I needed to.
Yes and no. You can bring 7 figures and dominate as far as the amount of liens you buy. However to do that you may not get the kind of returns that someone like you expects.
In MD you are both bidding down the interest rate you get as well as bidding up the price you ultimately pay, if you get the property through foreclosure. The average interest rate came to about 7% this year. It was much less on nicer properties. Lots of people walk away from the foreclosed properties because they are not worth what they bid. This is true both on nicer properties and lower end properties.
Every year there are lots of newbies that clearly don't know what they are doing. But also there is always someone of a decent size who comes in and bids too much. They don't realize their mistake until a couple of years later when they realize the losses.
I helped @Matt Schelberg learn how to do this an he outbid me on a bunch of stuff. My attorney got mad. he said stop teaching other people to do this! LOL
For those of you reading along this far, it takes a LOT of work to be successful at this. We inspected and evaluated 5,000 properties before the sale. @Christina R. and @J Scott were extremely lucky and their return is not at all typical.
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