There is not a lot of information out there about how to make money with tax foreclosures, tax deed sales and tax lien certificates for good reason. Those who do make good money in this field would rather not share their secrets with the rest of us. Instead we have to study, research and search until we can find the tax foreclosure investment methods on our own. But buying foreclosures is not a simple thing to do. You need to be able to take risks to be an investor and entrepreneur. Not everybody is capable to that. You also need a little bit of money to invest in tax foreclosure properties or tax certificates. But a lot of people that are looking to make money in real estate miss this concept and fail miserably. For those that have the entrepreneurial spirit and money to invest buying tax foreclosure properties is a decision that will change their financial career forever.

There are many ways to skin a cat as they say. So too are there many ways to gain wealth through tax foreclosures. There are always tax lien certificates that are a safer investment. But those who are looking to make the most on foreclosures do so either for themselves or to flip the properties at a much higher return than you can get with tax lien certificates.

At tax deed sales, properties can be bought for as little as pennies on the dollar and real estate investor than flip these homes for their values and can make up to 300% Return on investment.

Want to make money on tax foreclosure properties?

Buyer Beware!

As with purchasing any real estate property or investment it is always best to research the tax foreclosure properties that want to buy. Many times the property is just land for sale and doesn’t have a property even on it. That doesn’t mean that you cant make money on land. It only means that not everything that glitters is gold so you must do your research first. Also properties that are under foreclosure usually run the risk of not being up kept. Their can be serious mainetnace issues with the properties, so even if you buy them for pennies on the dollar in  many cases you will have to invest money to bring the property up to code or livable conditions. There are still many deals out there on tax foreclosure properties that can be bought at tax deed auctions where you don’t have to put any money into them, but in order to be sure about what you are getting involved in you must research the property first. Sometimes their will be an inspection period either before or during the tax deed sale. This is a great time to either have someone who knows about property  maintenance and construction come with you to the inspection or if you know these thing yourself than this is the best time to see what is involved with the property that your are interested in buying.

Another way that people invest in tax foreclosure properties  is through tax lien certificates. A tax lien sale is a sold by the taxing agency to the highest bidder similar to a tax deed. The major difference is instead of buying rights to the deed and property, you are buying the debt from the tax authority. This is usually a less risky investment but is a little bit more complicate in nature. If you buy the tax lien certificate than the property owner who is delinquent in taxes now owes you the tax money plus interest. Therefore tax lien investing can be profitable even without owning the property since the back taxes get paid with interest usually between 12-25% depending on which state. So if the tax that is owed is $1000, and you buy the tax lien certificate than you can make $250 in profit, as an example. The security behind these investments are if the delinquent tax payer does not pay you the back taxes, than you can move to foreclose on the property and keep it for yourself or sell it to the highest bidder at tax deed sale or auction.

Tax foreclosures are foreclosures on a property where the property owner has failed to pay local, state or federal taxes for personal property such as real estate taxes or federal income tax. Tax foreclosure proceeding vary from state to state and county to county but are similar to bank foreclosures in many ways.  Federal Government tax foreclosures are tax foreclosure properties where the property owner failed to pay income tax on the property and the federal government imposed a tax lien against the property. Real Estate owners are required to pay property taxes to their local taxing authority. In the event that the property owner fails to pay their property taxes than the local authority can move to redeem the delinquent taxes; by way of a tax foreclosure sale is one of those ways.

Tax foreclosures are in general a more strict foreclosing mechanism than bank foreclosures.  Each state varies on their tax foreclosure law so it is best to consult with an experiences tax foreclosure professional in the specific geographical area that you may be interested in pursuing tax foreclosures.  Tax liens are superior to mortgage liens and the mortgage holders value in the property could be lost if the property is foreclosed on due to back taxes. This is an advantage that tax foreclosures have over bank foreclosures. Where in bank foreclosures if you inherit the property at a foreclosure sale than you will likely inherit the back taxes as well, whatever they may be. On the other hand those that inherit a tax foreclosure property will generally be free and clear of any mortgage liens or debts since the tax lien supersedes them.

Difference Between Tax Liens and Tax Deeds

Each state has different laws regarding tax lien sales, tax deed sales and tax foreclosure laws. In general tax liens are liens that are put on a property by the local taxing authority. The property owner than pays their property tax, usually either monthly or quarterly to the taxing agency or to their mortgage company (with their mortgage) who than pays the tax authority. In the event that property owner fails to pay their property taxes than a notice is sent to both the mortgage lender and to the mortgage borrower. The mortgage company will usually pay the back taxes since they do not want to lose their interest in the property and than demand the money back from the property owner. In the event that these taxes are not paid, and the taxing authority has made repeated attempts in order to recoup the back taxes, than one of two methods usually occur:  The property end up foreclosed on and sold which is called a tax deed sale, or the governing tax agency that is owed the back taxes to sells the tax lien in what is called a tax lien certificate.

Now within this scenario there are many ways that one can purchase this property for a percentage of what today’s value is. The first way is called a Short Sale. Short Sale buying happens before a pre-foreclosure takes place. It begins when the borrower decides that they can no longer make their mortgage payments and informs the bank that they will be defaulting some time in the future but want to sell the property before it gets to that stage so that the bank wont begin a foreclosure action on the property and the homeowner wont have to go through the ordeal of having a foreclosure brought against them. Furthermore, the bank allows the sale of the property for less than is owed on the loan.  So in the above example if the remainder of the loan is $125,000 and the bank approves a short sale the purchaser could end up with a home bought for $100,000 that is worth $300,000.

After the initial foreclosure filing is done, properties can still be bought in pre-foreclosure status. That is when the buyer goes directly to the borrower that is in default and offers to pay him the entire amount of the loan and sometimes a little extra. There is not a lot of time with buying pre-foreclosures since once the legal action is brought against the default mortgager than the time table starts ticking before the foreclosure property auction. Buying a pre-foreclosure will benefit the bank since they won’t have to pay all of the legal fees to continue with the foreclosure, benefit the borrower seller, since they usually won’t have the negative mark of a foreclosure on their credit record, and will benefit the buyer since they will pick up a property at a discount.

If the borrower in default has not paid the delinquent mortgage payments or sold the property either as a short sale or in pre-foreclosure status than a foreclosure is evident and an auction will take place. At the foreclosure auction which can take place at either the town or county courthouse or at the foreclosed properties themselves, bidders arrive early in many cases to inspect the condition of the property. The highest bidder will win the auction and take ownership of the property being foreclosed on. If in the event that the there is nobody that will bid up to the amount owed on the loan than the bank will take ownership of the property. This is called REO or “Real Estate Owned.”

Buying REO properties is another way that investors and home owners can get a huge discount on foreclosure properties. The banks are not in the property management business so they would rather not have the headache of up keeping the property, paying the taxes, insurance utility bills etc. Therefore they usually look to get rid of the REO properties quickly and inexpensively.

What is a foreclosure?

A foreclosure is legal proceeding usually followed by a court order which allows the lender, mortgagee or lien holder to redeem the property from the property owner.  Foreclosures are most commonly used by banks or financial institutions to repossess properties whose owners default on their mortgage obligations.

Steps to foreclose on a home

Pre-foreclosure Period – This is when the lender files with the town records a Notice of Default  (NOD) or Lis Pendens (LIS) usually after 2-6 months of non-payment. After this filing the property owner than has a certain timeframe to correct the default and get brought up to date with their mortgage or face being foreclosed on. If the borrower still does not come clean with their delinquent mortgage payments than a notice of sale is issues and a foreclosure auction is scheduled.

Auctions – Depending on the state and county a foreclosure property sale can take place at the county courthouse or at the foreclosed properties themselves. At the public auction the lien holder will be present as well as other investors or home buyers that are interested in buying the property. The bank is most concerned in recouping the mortgage amount that they laid down on the property and any legal expenses and fees that they have incurred through the foreclosure process. They are not in real estate business so they would much rather get their money back than the foreclosed properties at the auctions. But they still will not lose the value of their mortgage completely so bidders will usually have to come close to what they are owed. At foreclosure auctions the property is sold to the highest bidder, weather it be the bank, investor or home buyer.

Bank Owned, REO – If the bank does not got an expectable bid at the foreclosure auction than they repossess the foreclosed properties. This is known as REO properties or “Real Estate Owned”.

The United States is being faced with one of the worst economic periods of it’s history. Many economists agree that the state of the US economy is the worst that that it has ever been next to the Great Depression of the 1930′s. Many factors led up the current recession but none more potently ignited the current crisis as did the Sub-prime Mortgage crisis that began in 2007.

Sub-prime Mortgages are loans given by banks and other financial institutions to borrowers with riskier credit scores and credit histories than the norm. Because these loans are riskier for the banks the yields or returns on loans to the banks are greater. John Lonski the chief economist for Moody’s investment services said that 21% of all US mortgages where sub-prime in 2006, that number up from 9% eight years earlier in 1994.

Since the banks were giving loans more and more heavily in the sub-prime market leading up to 2006, their risk increased. And soon, when many borrowers became unable to pay their mortgages the bubble began to burst and the domino effect that crashed the housing market, destroyed some of the greatest financial institutions of all time, and sparked the global recession of which we are still feeling the effects today.

Economic Crisis

Once the snowball started rolling, catastrophic occurrences became evident. The default rates and foreclosure filings started piling up in late 2006 into 2007. Sub-Prime Mortgagees could not make their monthly mortgage payments which in turn meant that banks stopped making money. Hundreds of banks worldwide closed their doors in the months and years to follow. When Bear Sterns and Lehman Brothers, two of the largest US financial institutions on record, closed their doors panic was felt throughout the world. The New York Stock Exchange (NYSE) crashed in September 2008. Investors throughout the world started pulling their money out of US banks and selling their US stocks and assets. The dollar shrank in value and many though the end of the world was near.

Foreclosure Domino Effect

Another factor which is credited in aiding the housing market crash and most recent economic downturn is the housing market bubble itself.  Since the early part of the millennium banks started lending more liberally in both the prime and sub-prime markets. With this large influx of cash home buyers and investors took to the market and began

buying real estate properties in mass.  The flood of money and buyers imploded the prices in the housing market to levels that were unaffordable. As soon as the borrowers were unable to pay their mortgage banks began the foreclosure process to regain possession of the asset. Since banks are obviously not in the property management or real estate business so to speak, the more foreclosures that they took back, the worse it became for everybody. Banks were stuck with homes and need to sell them so that they can cut their losses and not be out totally hundreds of thousands of dollars or whatever the previous selling price was. Therefore they needed to drop the prices drastically so that they can move the built up inventory of foreclosed properties of the shelves. Since the foreclosure  inventory piled up, and the list prices were sometimes up to 80% off of the previous sale prices the overall average estimated house values tumbled nation wide. For the average American their home is their biggest investment so when values dropped so did consumer confidence and consumer spending. The retail markets where hit hard and the ripples made their way into the job markets, and unemployment rates skyrocketed nation wide.  No jobs and no money became the second wave of foreclosures that plagued main street America and the cycle had made its way full course.

Buying tax foreclosures is one of the fastest growing ways to make money in real estate investing today. There is not a lot of free information out there about this extremely profitable method of buying foreclosed properties for good reason, since those that are making money in it would probably not want to give out this information for free. There are many different on-line classes, books, CD’s & DVD’s, lists, and so on that you can buy for relatively cheap, that will teach you all of the tricks of the trade of buying tax foreclosed properties. If you follow the advice and guidance of seasoned tax deed foreclosure professionals, than you to can be on your way to making money through buying tax foreclosures.

There are many laws and regulations around buying tax foreclosures, therefore it is important that you check the laws in the state that you live in or are interested in investing. Some of these online services will give you basic legal information that you need to get started before buying tax foreclosures. Like in most real estate transactions, and especially if you intend on making this your career, it is always recommended to consult a real estate attorney before finalizing any transaction.

Similar to any real estate buy it is important to do your due diligence behind each piece of property that you are interested in purchasing before going to the tax deed sale or tax foreclosure auction. When going to the tax deed sale, in most states you will need to have cash on hand to purchase the deed. If you are the highest bidder than the title of the property gets transferred to you.

Many people have purchased their homes through buying tax deed foreclosed properties for pennies on the dollar. Many real estate investors are making up to a 200% return on investment by going to tax deed sales and buying property for cheap, than flipping the properties for a lot higher value. Normal everyday people that have come across this method of buying foreclosed tax properties have quit their day jobs and started their own companies doing the same as entrepreneurs.

In this economy there is more inventory of foreclosed homes than there are buyers. There is no better time to get started in making money with tax foreclosed properties than today!

Home owners and property owners are required to pay some form of property tax to their local municipality or county government office. It is through these property taxes that local and small governments are able to meet their annual budgets. If the property owners become delinquent on their property taxes, the government entity can push for a foreclosure. Instead of owning the property right out, the tax collectors will have a tax foreclosure auction where the starting bid is the delinquent tax plus any fees and interest. This is known as tax deed sale. Not to be confused with a tax lien.

The winning bidder received possession of the property and the deed. They pay off the taxes and won the property. This way of purchasing real estate is not as well known to most common investors. The return on investment or ROI in buying tax deed foreclosure properties can be enormous if you know what you are doing.

Tax liens are liens that are put on real property by a municipality or county for failure to make the required tax payments. Taxes are imposed on properties and provide a major source of income for city and local governments. Failure to pay property taxes will result in heavy penalties on the homeowner and if the delinquency becomes too high than a tax lien and possible foreclosure will ensue.

Many states allow that when a property owner is behind in their taxes, a tax lien can be put on the property. These tax liens become precedent above other liens like mortgage and mechanics liens. Some states will allow the municipality to put the tax lien up for auction and sell the debt to the highest bidder. Sometimes the taxes owed on properties are a lot less than the house is worth, and the municipality will even sell the tax lien for less than what is owed. Purchase of the tax lien than becomes a tax lien certificate.

After the highest bidder purchases the tax lien certificate they are in position to do one of two things. First since they own the tax lien, the homeowner is required to make the tax payments to them, with interest. If the property owner fails to make these payments than real estate title is given to the holder of the tax certificate.

Tax liens are becoming increasingly attractive as real estate investors and entrepreneurs see these types of purchases carry lower risk with higher returns than ordinary foreclosures or real estate properties.