In most states, the person willing to pay the most cash for the tax lien wins the auction. Some states, however, have a bid-down process, where investors’ bids indicate how much interest they’re willing to accept on their investment, and the lowest bidder wins. Whatever method is used, the tax collector takes the payment for the overdue taxes from the winning bid. In exchange, the purchaser gets a lien on the property.
As the winning bidder, you’d get a return on your investment in one of two ways: interest on your bid amount, or ownership of the property.
- Interest on your bid amount. If owners redeem their property by paying the overdue taxes within the time allowed under state law, you’ll get your investment capital back, plus the amount of interest allowed in your state.
“Tax lien sales are good investments because they usually have a statutory interest rate, typically between 10 and 12 percent.”
Assume Joe Smith, an Indiana homeowner, owes $500 in unpaid property taxes. Your $5,000 offer is the winning bid at the auction. If Smith redeems his property within a year, as required under Indiana law, he’ll owe the tax collector the initial $500, plus a 10 percent penalty, totaling $550. He’ll also be required to pay 10 percent interest on the amount of the bid over the initial tax bill, or $450. As the winning bidder, you’ll get your capital investment of $5,000 back, plus that 10 percent interest payment of $450.
- Ownership of the property. About 75 percent of owners redeem their property within a year. However, if owners fail to redeem their property, you’ll have to file a lawsuit seeking title to the property. That process can be complicated, costly and time-consuming, but once it’s complete, you take ownership.
Avoid the pitfalls of tax lien sales
What’s the catch? There’s no catch, but there are pitfalls to investing in tax liens. Here are four tips for avoiding them.
- Scope out the property. “Make sure there’s a house on the property and that it’s still there when you bid,” “The house could burn down or be damaged by something like a flood. If you paid $5,000 and the land is worth only $2,000 after the home burns down, you’ll lose money. That doesn’t happen very often, but it has happened.”
- Check the records. Spend time at your local tax collector’s office combing through the records
“Make sure the municipality followed all statutory procedures in placing the tax and the lien on the property,” “Look at what’s on the land records. Did the tax notice actually go out? Were there partial payments that may not have been applied?”
- Monitor your investment. If your state allows a long redemption period, protect your investment
“If there’s a two- to three-year redemption period, when next year’s taxes are due, pay them and get another lien,” “If you don’t also pay the next year’s taxes, the municipality can lien that property again, another person could buy that lien, and then you’d be in trouble.
- Be patient. “The return on your investment can be delayed for extended periods of time,” “For instance, owners could file for bankruptcy, which may allow them more time to redeem the property.” A bankruptcy could also mean a lower interest rate, since bankruptcy judges are sometimes permitted to lower debtors’ interest rates to help them get back on their feet.
If you’re interested in tax lien sales, do your legwork first.
“Go to the revenue officer charged with property tax enforcement,” “Find out when sales are held, how they’re conducted and how you’d participate. All that information is free because it’s public record.”
Vacant Land is one of the most overlooked and misunderstood real estate investments in the world.
Most real estate investors completely fail to recognize the superior benefits that come with owning land in its raw form.
It’s unfortunate, because the simplicity and stability that comes with owning the right piece of land (purchased at the right price) can far outweigh the myriad of problems that are certain to come up with any other type of real estate.
While I firmly believe that vacant land is one of the best places you can put your money, there is another side of the story that needs to be carefully considered.
As an experienced land investor, I’ve learned (sometimes the hard way) that there are a number of things that need to be evaluated before purchasing a parcel of vacant land.
Land Can Be Deceptively Complicated
On the surface, it seems like such a simple creature – but there can be A LOT of potential problems lurking beneath the surface of any piece of land. I wouldn’t necessarily say that these issues are common, but the fact is – any one of these issues could potentially be a deal killer if not addressed properly. When you take it all into consideration, it adds up to a sizable list of things that need to be investigated as part of your due diligence process
Don’t get me wrong, land is a rock-solid investment. It’s just a matter of knowing what to watch out for, and under what circumstances you should re-adjust your offer price (or walk away from the deal altogether).
What is the Zoning on the Property?
First and foremost, it is vitally important to understand what a property can be used for, and what the highest and best use of the property is. With a simple phone call to your local planning & zoning department, most offices can give you the answer to this question in a matter of seconds. Once you know the zoning classification (e.g. – residential, mixed-use, commercial, industrial, agricultural, etc.), ask them to give you some examples of what type of property would be allowed under each of these particular zoning classifications. They may even give you some ideas that you hadn’t previously thought of. Once you understand the most ideal use of the property – you can quickly determine whether it will fit your needs (or the needs of those you intend to market the property to).
What is the Topography of the Property?
Especially when I’m buying vacant land out-of-state, my first line of business is to understand the topography of the property. There are many, many places around the world that have very unpredictable elevations, cliffs, mountains, valleys, ravines and more. In many cases, the topography of the land can have a huge impact on the build-ability of a property. For the same reasons you can’t build a house on 90 degree cliff, you should be doing some preliminary research to find out where your property is located, and what the lay of the land is. One of the best ways to do this is by using Google Earth (which is free). You can download the software, search for your property (using the address or coordinates) and zoom in using your mouse buttons and the control and shift keys on your keyboard. This will also allow you to tilt the earth on its side so you can see precisely where all the hills and valleys are in your area. This software has given me a crucial perspective on hundreds of occasions.
What is the Annual Tax Obligation?
If you intend to hold onto a property for any length of time, beware of a super high tax bill relative to the actual value of the property itself. I haven’t run across this issue very often, but for various reasons there are some properties that have some ridiculously high taxes in proportion to the property’s actual value (for example, if a $10,000 property has an annual tax bill of $2,000, THIS IS TOO HIGH). In my experience, I’ve found that a reasonable annual tax bill usually falls in the range of 1% – 4% of the property’s full market value.
What Public Utilities are Available? (Water, Sewer, Electric, Gas, Phone)
If a property doesn’t have access to one or more of these staples of reasonable living, the property (for all intents and purposes) may not be considered build-able. After all, who would want to build a house where they can’t flush the toilet or get access to clean water? If a property isn’t build-able, you will lose a massive portion of the property’s usability, marketability and value. Since most people buy land with the intent building on it, you will definitely want to be aware of anything that could become an obstacle to that objective.
First, you need to understand the exact dimensions of the parcel of land you are evaluating. Next, call the local zoning department and ask them what the designated building setbacks are for the property in question (building setback requirements are very common, and are imposed as a way of giving order and consistency to the buildings in any given area). When you take these setbacks and regulations into account (relative to the size of this parcel of land), is there still enough room to build something worthwhile – or does it render the property useless? I’ve come across several properties that were designed (albeit, unintentionally) to be too small and after factoring in the setbacks – you can’t build anything on them at all, leaving them virtually worthless!
Does the Property Have Any Usage Restrictions or Zoning Requirements?
Most of the vacant land you’ll encounter will have SOME kind of zoning requirements and/or usage restrictions in place (there’s a reason you’ll never see a 100 acre pig farm next to a 100 story skyscraper, or a massive shopping mall next to a landfill… it just doesn’t make sense).
Land use every municipality in America has a plan (even if it’s a vague one) for how they want different sections of their land to be used, regardless of who owns it. As such, you should always expect your property to come with some reasonable limitations on what it can be used for.
If the property is part of a Home Owner’s Association (HOA) it will most likely have even more stringent restrictions in place to help maintain the “quality” and formality of their neighborhood. The idea is to keep any bizarre behavior OUT of the neighborhood (e.g. – cars in the front yard, lawns nobody takes care of, houses that look out-of-place or aren’t built to code).
Usage restrictions and zoning ordinances aren’t a bad thing – they usually make sense on some level. They’re designed to help maintain order and support the value of each property in the subdivision. On the same coin… if you aren’t aware of these restrictions before you purchase, they can also create some conflict with the plans you had in mind for the property. This isn’t common for most land investors (because most people have no intention of using their property for purposes that don’t jive with their surroundings), but even so – you should always make sure you understand what the rules are BEFORE you buy a parcel of vacant land. This will help you avoid owning a property that requires maintenance you don’t want to do, or that can’t be used for your intended purpose.
Is the Property Located in a Flood Zone?
In some parts of the country, parcels of land are vacant because they are literally under water. In other areas, there are many properties located within close proximity to bodies of water that is prone to flooding. In either case, if a property is at risk of flooding – you’ll want to know about this before you buy, because properties in a flood zone can be extremely expensive to insure. Land that is located near a state of federal body of water can be extremely valuable, but this close proximity to the water can also create a flurry of issues… So be sure you understand the ramifications of your particular location.
“Don’t Be The Greater Fool”
The trick with vacant land is to understand why it’s vacant in the first place. I’ve run across quite a few vacant lots that seemed attractive at first glance, but eventually I discovered that the reason nobody was using them was because you CAN’T use them. If one (or more) of the issues above are prohibiting someone from putting a property to good use, believe me – you don’t want to find out after you already own it.
When some people look at the prospect of owning land, they get wrapped up in the dream of property ownership. The idea of owning a large tract of property can seem very appealing, even if it is of no practical use to them. This kind of trap is especially easy for people to fall into with land, because it’s a low maintenance property and doesn’t seem complicated (even though there are a lot of factors to consider).
MANY people buy into the dream of property ownership – even if the investment makes absolutely no sense from a financial standpoint. If you don’t believe me, check out this guy who sells property on the moon:
Unfortunately, many parcels of land are sold to “the greater fool”. When people don’t do their homework and think things through, they can get hurt. Don’t be the greater fool. Always be sure you have done a reasonable amount of research and don’t take on a property until you thoroughly understand what you are getting into.
What is the difference between a title deed, deed of trust and deed of reconveyance?
A title deed shows ownership of the property executed between two parties: grantee (buyer) and grantor (seller). There are three types of title deeds you might encounter in a San Francisco real estate transaction. In San Francisco, deeds are recorded with the city’s office of the assessor-recorder:
1. The grant deed: This document  transfers ownership and carries with it one basic promise – that the title to the property hasn’t been given to anyone else and that the transfer is free from encumbrances other than those listed.
2. The quitclaim deed: This document transfers any ownership interest a person has in a particular property. It does not make any guarantee or representation about how much interest the person has in the subject property. Quitclaim deeds are commonly used in divorces or when there is a cloud on title.
3. The warranty deed: This document transfers ownership with an explicit promise (warranty) to the buyer that the seller has clear title to the property free of any liens or ownership claims by others. It comes with a guarantee that the seller (transferor) will compensate the buyer if their promise is false. A warranty deed can make other promises as well.
The most common title deed in a SF residential purchase is the grant deed. Title insurance is what a buyer purchases from a title company to provide themselves with protection and a means of financial compensation in the case that someone else comes forward with an ownership claim to the property, or encroachments, easements or other restrictions are discovered that restrict or decrease the value or usability of the property. When a title policy is issued, it will come with a list of exceptions to coverage. These are a list of items that the title company will not provide insurance against. Common examples of exclusions on a title report include mortgages, tax liens, utility easements, and CC&Rs (covenants, conditions, and restrictions).
THE ALPHESS 