Three Ways to Profit from a Tax Sale

A tax sale takes place when a homeowner owes taxes on his home that he cannot or will not pay. The house in question is sold, usually at auction, which can be live or in some states on the internet in an attempt to collect the money owed. Nearly always profitable, this is a great investment. There are three ways that an investor can earn.

When an investor buys a house or property at a tax sale, he usually pays significantly below market value. It is the government that has put the property up for auction, and they are interested in regaining their money. They will sell ridiculously below market value as long as they recoup what is owed or a significant portion of what is owed to them. The government is interested in the taxes; it is a separate entity from the bank that holds the mortgage, and if someone is tax delinquent, he probably is not paying the mortgage either. In this case, after an investor holds the lien, if the bank wants to foreclose, it must buy the lien from the investor, and it must buy it at full maturity. This means that the person who bought the lien at auction can be offered exponentially more than he paid for it within days of obtaining it.

Another scenario that can occur as the result of a tax sale is that the original owner can come up with money within a set statute of limitations. This time frame varies from state to state but is up to two years in some places. If the original lien holder is able to and does so within the legal amount of time, he can buy back his lien for the amount of excise originally owed plus interest—and interest on liens is very high. Though it took a little more time than the bank foreclosure example, the investor has again made a noteworthy gain.

Lastly, and often the case, an investor will buy a lien on a property at auction at an under market price, and it will not foreclose. If it does not foreclose, and the statute of limitations passes during which the original lien holder could buy back the deed, the investor now owns the property free and clear. He can resale it for profit as it, he can live in it, or he can rent it. A very popular investing strategy these days is “the flip.” With such a small amount invested in the property, the investor can put some cash into remodeling and upgrades and then flip it, or he can wait out the housing market for a good time to sell—also a kind of flip.

In economies when interest rates are low on investments such as IRAs, or when the stock market is at an all time low, this is an almost always a good investment. Even if the investor waits out the statute of limitations, he still makes a profit incredibly faster than by traditional watch and wait investments.