Tax Lien and Tax Deed Investing: Big Deals for Small Cost

By: T.D. Thomas

A small investment can yield big returns. This is often the case in the investment world, or so it is thought. There are numerous tales of million dollar day traders spun all over cyberspace and so the myths turn into facts simply by repetition. Common knowledge prevails at this point, as the lure of making big bucks in your pajamas at the computer simply does not outweigh the risk of financial loss in the stock market.

The initial statement persists however, in the world of real estate. This isn’t common knowledge, nor is it a widely held belief. The commonly held belief regarding real estate investment goes something like this: you need lots of money to get started and the laws are stringent, plus it is very risky and time consuming!  I don’t want to be taken advantage of from one of these scams out here promising big returns… Sadly, a lot of people feel this way. How do I know people feel this way? I asked around to people who I thought might be good candidates to invest in real estate.

I did some thinking about what people had said their biggest objections to investing in real estate were. I started thinking about the deals I had done, and I realized that had I thought like that I never would have done most of those. Some deals did fall into my lap, but the ones I had to go after took some determination and some belief that I could do it.

In a real estate deal, typically, you will have to put some of your own cash down. Now, there are numerous ways to justify this so you could save up about $2000 and expect to get a loan for about $30K from a hard money lender. This makes sense in some cases, as there are deals that should be snatched up immediately, but – what if you could take that same $2000, or less even, and buy a property, or multiple properties and own them outright? You can.

Here is where I say, “Welcome to the world of tax lien investing!” but you are not there yet, unless you are already there, in which case you have already entered and so do not need welcoming. In either event, in the state of Alabama you are able to purchase what are called tax lien certificates and tax deeds. Tax lien certificates are purchased for an amount determined by the state of Alabama, as are tax deeds. The difference in ownership of the property depends on which one you purchase. Let me break down how the process goes regarding both.  

Every year you must pay taxes on any home you own in the state you live in. Sometimes, due to unfortunate circumstances, people fall behind on their tax bill or are unable to pay it at all. In these cases, the state places a lien on the home. After 3 consecutive years of unpaid back taxes the state forecloses on the home.  You are able to buy the tax lien certificate at any time, from the state, at any point between the first and third year. You are able to buy the tax deed to the property outright at and after the third year.

Once you buy the tax lien certificate, you must wait for the entire period of 3 years from initial tax foreclosure to apply for the deed to the property, so I usually recommend buying tax deeds that have already reached the 3 year mark. Once you buy the tax deed you own the property free and clear, and must go and take possession of it. Taking possession of the property could be something as simple as changing the locks on the doors to boarding up the windows or even placing a sign on the property, if it is vacant land. Buying the deed to a tax sale property is one of the cheapest and quickest ways to real estate ownership around.

If at any time the previous owner to the property were to show up in an attempt to reclaim their property, they would have to do so within the first 3 years from tax foreclosure or in the following 3 years after the tax deed has been purchased. This is no easy tax, however, and would result in a tremendous payday for you, the buyer of the tax deed. The previous owner would have to pay you compounded interest of 12% (in the state of Alabama) for every year you held the property and paid the tax bill, plus any repairs or upgrades you made to the property with interest on top of this as well. Needless to say, this does not happen often at all, and in the rare cases it does, as I said before it results in a huge payday for the tax deed buyer.

The way I look at tax lien investing is as a win-win situation all the way around. With all of that being said, at The Thomas Corporation, we are able to provide tax liens for you for very cheap! This means that you can buy condos, townhouses, single family homes, etc. from us for pennies on the dollar. Go here for a complete selection of what we have available, and keep in mind this list updates frequently.