Apr. 15, 2008 — How do tax liens or tax deed sales work?

Hi all!

As promised last week, I said I would speak about Tax Liens this week and explain how they work. This is an avenue some investors use in hopes to acquire real estate for pennies on the dollar. Does it work? Well, that depends (hey! there’s that phrase again!).

I know many counties across the United States do things differently, and since I live in Okaloosa County, FL, I will use how they do these sales as an example. In Okaloosa, taxes on your house are due no later than March 31 for the previous year. Lenders usually have an escrow account where you pay a portion of your taxes each month, and they pay them in November (to get the discount for early payment). They want to make sure their investment is protected. Tax liens on a property take precedence over lender liens.

If someone does not pay their tax bill by March 31, then your tax bill goes up for auction usually in May or June. This is where the public can bid (all online) to pay your taxes! (Sounds Cool! Someone else paying your taxes, right? But wait, there’s more!). Well, what happens during this bidding, is that bidders compete against each other—yes they will pay this bill, but for a price. Bidding starts at 18% interest, and goes down in 1/4% interest points.

What does this mean? Say I win the bid at 14% on June 1st. I pay the tax bill, and am charging this rate for loaning you the money. Mind you, you will never meet the person who has bid/paid your taxes. Now, say you go in on August 1st to pay your overdue bill. You will owe your bill, plus the 14% interest rate to the tax assessor. Then the tax assessor pays me back plus the interest that you’ve paid.

So how does one get a property if you pay your bill? Well, some people don’t, for whatever reason, and after 3 years of holding this certificate that shows I paid your taxes, I can now foreclose on your home. But what about the 2 following years? Well, if you bought those liens as well, then there is no competition. If not, then you pay those bills plus the interest and you have those deeds.

While all of this sounds SO simple. there’s a LOT more involved. You need to do your research right from the start. I heard on the radio just a couple of weeks ago about a guy that bought a piece of property using this method for only $5000.00! He was going to build his dream home on the property. until he found out that it was a 4×100 piece of land. Yes those are the correct numbers. It was a county-owned easement. You see, he got SO excited that he had a piece of property for cheap (or so he thought), but he didn’t do his due diligence prior to bidding on it.

The Okaloosa County website is www.BidOkaloosa.com and they have great information there, a tutorial on how the auction works, as well as previous years auction results so you can peruse them and figure out how it all works. From this website, you can also see other counties that have the same format, most in Florida, and some in Arizona, as well as other states.

If you plan on trying this route for investment or finding a lot to build your dream home, just make sure you do your research before you start your bidding. The parcel ID numbers are on the list, and you can go to the property appraiser’s page to find out what kind of property this is—if there is a home on it or not—AND it will also identify whether it is a county or city-owned easement. Look at the lot size, and use the maps available to see where it is located. The research itself does take a lot of time, so be prepared for that. Also, when you do foreclose on it, you need to check to see if there are other liens on the property and if you will be responsible for those liens even if you foreclose on it to pay the taxes.

If you have further questions, feel free to ask here, or email me or call me.