Foreclosures Tax Auctions And Tax Certificates

FinanceTax

  • Author Ted Thomas
  • Published April 2, 2007
  • Word count 3,542

Get a Good Start in the Tax Auction Game by Finding those Pre-foreclosures

Lead-in: There is more than one way to take advantage of the opportunities in the tax lien/tax deed business. Many investors are earning income by purchasing homes in pre-foreclosure state, before they ever go up at auction…

You may have heard that you can get ahead in the tax lien/tax deed game by approaching home and property owners whose properties are in the pre-foreclosure state. The question is ‘what is a pre-foreclosure?’

Pre-foreclosure is a period usually lasting about 90 days during which the lender on the property mortgage has turned in a notice of default and set a date for the sale or the foreclosure of the property so they can get their money back. During these 90 days the owner can catch up their debt and redeem the property so it doesn’t go into foreclosure or they can usually arrange to sell the property and the mortgage to someone else who is willing to take on the debt.

You can make some real money on this pre-foreclosure process because owners are often just glad to find someone who will take on their mortgage. In exchange for catching up the back payments on the property and taking on the current mortgage payments you get the property and the equity that it has accumulated over the years.

Most real estate goes up in value each year. So you will just keep earning cash on these properties if you have to hold onto them. The Real Estate business is a solid easy way to go earn regular income.

Once the paper work is signed and you’ve taken over ownership of the property and the mortgage you can do what you like, sell it, hold it or rent it out. The quickest way to make a clean break with your profits is by selling the property.

Most investors like to fix up the property a little before they sell it, giving it a neutral paint job, cleaning the carpets, replacing windows and so on. This will be a minimal cost that you can include in the price of the property when you sell it.

The key to profits when selling the property is to ask for enough that you can pay off the rest of the mortgage, the fix up costs, closing costs, transfer fees, and any other fees you may incur during the process plus your own ‘paycheck’ estimate for time and effort invested. When the property sells give yourself a pat on the back you’ve just made your first profits on a pre-foreclosure deal.

The business is not a get rich quick scheme, but once you learn how to do this you can earn an extra $5,000-$10,000 a month. You’ll earn a regular income of cash that can help you live well. Even recent retirees are taking advantage of the pre-foreclosure process to triple the value of their IRAs. You can too. You can get ahead of the others in the tax lien/tax deed business by purchasing homes about to go into foreclosure status and paying of the overdue mortgage or back taxes.

A Quick Look at Tax Certificates

Lead-in:

Tax Certificate States are different from Tax Deed States, but don’t let that lead you astray. Read on for an easy to understand explanation…

There are two types of states in the tax auction business, deed states and certificate states. You can make money in both, it’s just that in the certificate state you may end up waiting a longer period of time before you can cash in on your profits.

At a tax auction in a certificate state you bid on the right to hold the tax certificate on a certain property where owner owes back taxes. Part of your bid includes the back taxes that are owed them on the property, plus however high the bidding goes. They’re happy because they get some of their money and you are happy because you hold the tax certificate on that property. It takes a long time for a property to accrue enough back taxes before it goes up for auction so the county is happy to get it off their hands.

You must wait and hold that tax certificate a certain length of time before you can begin applying for the tax deed to that property. This is to give the owners a chance to pay up or move on. It’s usually about two year’s time. During those two years more taxes accrue and you also earn interest on the tax certificate that the owners must pay as well if they want to redeem their property.

At the end of the two years if the owners haven’t paid up yet you can begin the notice of application for tax deed. This is a period of 60-days, (it can vary from state to state) during which you attempt to track down the owner and notify them you are taking the tax deed to their property. The owner doesn’t want you to have the tax deed on their property because you can basically resell that property from under their feet for whatever price you want or can get to make your investment back plus profits.

Even if the owner does redeem their property you still make back your expenses, your initial investment, plus the interest on the tax certificate so it’s a win-win situation.

The 60-day period begins as soon as you are able to contact the owner in person or have exhausted those avenues and must post the notice in the newspaper. Once you get to the end of the 60-days you can show up in the courthouse downtown and ask for the tax deed. Then you would move as if you had just purchased a tax deed in a deed state.

Buying tax certificates in a certificate state seems complicated but it’s really just a few extra steps and can be much more secure since you will have more ways of making your initial investment back on the property. As long as you can keep track of those certificates for two years you are well on your way to success.

What Causes Foreclosures?

Lead-in:

Most real estate foreclosures in America are caused by one of four events. Read about them for a more in-depth understanding of the tax auction/tax lien business.

When using this system to create cash flow to fatten your wallet always remember this is all about real people. Foreclosures can be unfortunate events that hit anyone for any number of reasons, but here are the top four.

  1. Divorce

  2. Unemployment

  3. Medical Expense

  4. Death

The biggest reason for foreclosures is not unemployment as one would think, rather its divorce! Over fifty percent of Americans who get married, also end up getting divorced, resulting in court fees, attorneys, and a splitting of assets. The divorce is usually a drawn out process, sometimes taking years to finalize. During that time the couple will be putting most of their income into paying court and attorney fees, leaving little for household bills. After a while, that mortgage threatens to go into foreclosure.

The next biggest reason is unemployment. This happens a lot during economic slumps because they usually follow great economic periods when everyone and their dog is out getting a mortgage on property that’s way too expensive. Suddenly property owners are downsized out of their jobs and they can’t keep up with the payments.

Third on the list are medical bills and fourth are deaths in the family. These are the more unfortunate aspects of the business. Both are often unexpected and the families are under a lot of stress by the time the property enters the pre-foreclosure state.

If you approach them before the house goes up for auction, most of the time you’ll find that property owners in a pre-foreclosure state are relieved to get out from under their mortgage. If you pick up the property at a tax auction you’ll find that most of the owners are in the process of moving or have all ready left. It’s a sad thing, but you’ll soon be able to fix up that home or property and sell it to another prospective owner for a reasonable price

There are over 400,000 real estate foreclosures in America each year. That number increases during economic slumps, working to increase profits in the tax auction and tax lien business. Why? Because there are more properties being sold at auction over unpaid mortgages and back taxes. This includes cheap properties and more expensive ones in high priced areas. Often you can pick up these properties and hold on to them for as long as you like, until the next bull market if you prefer and sell them at a much higher price or just turn them over for a smaller profit in thirty days.

Remember That Golden Rule: Researching Properties

Lead-in:

It’s a mistake that many professional investors and new investors can make. Always remember this golden rule when researching properties.

Even many seasoned professionals make mistakes in the tax lien & tax auction business. The most important is neglecting to go take a look at the property they are planning on bidding on. This is essential. As soon as you get that list of properties up for auction, go to the assessor’s office or put those account numbers in the computer, find out where those properties are and go look at them and figure out if you want to buy them.

If you don’t you are liable to buy a property that you can’t unload, at least for a long while. Why? Because the assessor’s office can make mistakes when they are assessing the values of these properties. They aren’t concerned about making a profit. All they want is their taxes and hopefully expenses, so it’s up to you to go look if you want to resell that property at profit.

The Golden Rule:

Always go look at the property. Don’t ever buy anything you haven’t looked at. Even professionals get messed up on this one. Assessors make mistakes.

In one particular case the property up for auction was assessed as having a building on it making it look on paper like it was a lot more valuable. However, the building, a duplex, had actually burned down a year before. The investor, a student of the Ted Thomas System by the way, who went to look at the property found this out so he knew not to bid on the property. Unfortunately a lot of people at that auction didn’t do their research. During the tax auction many of the professionals got into a bidding war over the land, because they assumed the property was worth more than it really was. The property sold for $60,000, just a piece of land with no house and it took the proud owner about a year to finally make his money back through a deed sale.

The moral of the story, always go look at the property. This is the golden rule that will be brought up time and time again because it is so important in this business. It’s a little easier is you start with the list of properties and pick and choose which ones you want to work on, before heading out to look. This will keep you from spending a lot of time and effort driving around the county.

You can also do a lot of research with the computer. Many times you’ll be able to log into the county website and find the list of properties up for auction. There may even be some photos and plat maps online.

Hint: When out doing your research take along a Polaroid and snap reference pictures. Immediately put the account numbers on your pictures so you can easily pick out what’s up for bid when at the auction.

Advertising for Pre-Foreclosures

Lead-in:

To purchase those pre-foreclosure properties you need to get in contact with the owners. Save yourself some time and do a little advertising…

While you are probably looking into the idea of purchasing pre-foreclosure properties before they go up at auction and reselling them for a profit, you may also be wondering just how you can go about finding these pre-foreclosures or getting the owners to come to you. It can be difficult to get started in the pre-foreclosure game just because you haven’t much experience in directly contacting the home owner and may not be aware of a good way to broach the subject of purchasing their pre-foreclosure home.

The most direct way to track down pre-foreclosure homes in your area is by going down to the county courthouse and getting the list of properties that are in a pre-foreclosure status. The lists can be obtained free of charge, but you should get an ownership and encumbrances report at the local title company on properties you are interested in. Just to get the correct addresses to contact the owner. If you find that you are reluctant to go knocking on the doors of each the owners of the properties you can simply put together a mass mailing of letters and send them to each of the owners. To make it easy on yourself just create a generic letter and print out several copies to send off.

In this letter you might state that you have learned that the owner’s home is in a pre-foreclosure state, you are an investor, and you are willing to pay up the overdue mortgage payments, take over the mortgage and maybe give them a small profit so they can get a start somewhere new. Be sure to include your full contact information including email, address and phone numbers. If you plan on doing this full time you can set up a post office box and have your business related mail sent there. As well as an alternate phone line.

Here are a couple of other ways to find people whose homes are going into foreclosure:

• direct mail campaigns

• television

• telemarketing

• ads in newspapers, yellow book, etc.

This is a general mass marketing approach. By always having an advertisement on the market you won’t have to continually check the pre-foreclosure listings and this can work as a back up system in case the letters you sent to the owners of the pre-foreclosure properties get overlooked.

Television, direct mail and telemarketing are all more expensive avenues and probably best saved for later when you’ve got some success in the business. Newspaper ads and yellow book listings on the other hand can be cheap and they run for a long time.

It doesn’t hurt to think about setting up a webpage advertising your services when you get a few pre-foreclosure sales under your belt. You’d be surprised how many property owners do their research on the internet.

How do Tax Liens Work into Tax Auctions?

Lead-in: Those looking to invest should definitely know the tax deed/tax deed business in an out. So just what’s the difference between a tax lien and a tax certificate? Practically none…

Investors can find it to be valuable information indeed when they learn just how Tax Liens work into the profits that can be earned by purchasing tax certificates at auction. So far you have heard about the benefits of buying tax certificates at auction and that there are differences between tax deed auctions and tax certificate auctions, but the process may still be a little murky.

Tax liens are liens placed on property by the county, state or even the federal government for unpaid back taxes. Tax certificate states hold auctions usually once a year giving bidders the right to purchase the certificate on a property with a lien against it. So basically a tax lien sale is the same as a tax certificate sale. It just goes under a different name.

In other words the bidder pays all the back taxes and fees on the property at the state or county level depending on which auction is attended and earns the right to collect the unpaid taxes from the property owner with interest. This is profitable because tax certificate holders collect interest on the money they paid for the certificate until the owner comes forward to redeem the property. Also the purchaser of the certificate has the first rights on the actual deed to the property if there are other creditors waiting in line with liens on the property. So at the end of the certain amount of time, usually two years, the tax certificate holder has the right to begin a process to apply for the tax deed to the property if the property owner still hasn’t paid up. Lucky for the investor nearly all other liens are dissolved when the deed is transferred from the old property owner to the certificate holder.

The only tax lien that usually isn’t subordinate to the tax certificate holder’s place in line for the deed is an IRS lien. This is a lien placed on property by the federal government for unpaid income taxes. IRS Liens can be in the form of a blanket lien covering all property from the land to the car. Some investors are hesitant to get involved in properties with IRS Liens because the IRS can come and claim the deed to the property even after the tax certificate has been purchased by the investor.

This doesn’t always happen though, sometime the IRS can’t be bothered by taking the property or they don’t think it’s worth the investment of time and energy to resell. So they’ll let the lien lapse and won’t renew it after which the property is the tax certificate holder’s free and clear, except unless the property owner does catch up their unpaid debts.

Stuff you can sell on your new property

Lead-in:

There is more than one way to make a profit on a tax auction property. Read on to find out how you can cash in on multiple profits.

Once you have the tax deed to a property there are any number of ways you can earn income or profits from it. Plenty of investors fix up the house on a property and stick it on the real estate market to bring in a return on their time, effort and money. Others opt to become land lords and start renting out their properties for a long-term return on their investment. However, there are more than just these two ways to bring in a profit on property that you’ve picked up at a tax auction

The following is a list of things you can sell from your property or methods to earn money on your property:

• The trees

• Mineral rights

• Oil and gas rights

• Topsoil

• Sell the property itself

• Rent it out

• Hold onto it as it increases in value

There are a surprising number of rights to land that you can sell. Before you even think of selling the property to another owner you might want to check and see if the property still has its mineral rights, and oil and gas rights. If it does you can sell these to the highest bidder or just hold onto them for an investment.

To find out whether the rights have been sold on the property you’ll need to go down to the county clerk’s office and have them check to see if a mineral or gas and oil deed has all ready been filed with them. If not you can have them draw up a separate deed for each in your name before you sell the property. Makes a great inheritance to give to the kids and if any important minerals are ever found on the property they get money for it.

If the property has a large wooded or forested area you may be able to get a logging company interested in purchasing the trees. They’ll pay you for the right to go in and haul away the trees. Beats getting a tree trimmer. However, there are certain laws restricting logging in each state and you’ll need to check into them before proceeding.

Also you can sell the topsoil on the property. There are lots of farms and landscaping companies in need of good topsoil so you may be able to get one of them to give you a good price per truck load. Just remember removing the topsoil makes it a lot harder to grow anything on the property so you’ll have to weigh the pros and cons of this move. Topsoil can be recreated over time but it’s a lot of work.

If you find that most of those options aren’t open then you can just hold onto the property until land prices in the area increase. Investors can find that with a little creative thinking you can make even the most unprofitable property profit for you.

Ted Thomas-Creating Wealth for Over 15 Years

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