EARN 50% INTEREST A YEAR SAFELY WITH TAX SALE CERTIFICATES By David A. Chodack What are Tax Sale Certificates? They are something which only exists in certain states, such as Arizona, Florida, Illinois, Maryland and Michigan. Every state has property taxes and every state has a provision for seizing and selling property if those property taxes go unpaid for a certain period of time. The difference is that Tax Sale Certificate states give property owners a chance to redeem their properties, even after they have passed the deadline for paying their property taxes. In most states, once the deadline for paying the property taxes has passed, the property is put up for auction for the amount of the taxes due. It is sold to the highest bidder and that is it. The delinquent property owner is out of the picture. He can not get the property back unless the Buyer at the auction decides to sell it back to him. In Tax Sale Certificate states, however, the process is slightly different. Instead of seizing the property and auctioning it off, the state issues a Tax Sale Certificate for the amount of the taxes owed. Depending ion the state, this certificate must be redeemed within one or two years and carries interest of up to 50% per year, depending on the state. But, instead of sitting on these certificates and collecting the interest and then seizing and selling the property if the certificates are not redeemed, these states auction off the Tax Sale Certificates themselves. They are put up for bid at public auctions and the high bidders get to take the certificates and collect the interest. If the certificates are not redeemed within the deadline, then the high bidders get the properties. The way these auctions work is very simple. They are actually  reverse auctions where people bid down the interest rate as they bid up the price. For example, let's say you have a $10,000 Tax Sale Certificate which pays 50% interest or $5,000 a year. The bidding starts at $10,000 and if the Tax sale certificate actually sells for that price, then the Buyer will earn 50% interest on his money. But in this particular case, the Tax sale certificate gets bid up to $15,000. It still pays the same $5,000  a year  interest. That hasn't changed, so now the Tax Sale Certificate pays only 33% interest instead of 50% If the property owner decides to redeem the Tax sale Certificate within the prescribed period of time,  the Buyer will have received a 33% a year return on his/her money. Obviously, this is still a pretty good deal.  If the property owner does not redeem the property,  the Buyer winds up paying $15,000 for the property. Is this a good deal? It all depends on what the property is worth. Assuming that $15,000 is a god price to pay for the property, then it's a good deal. If $15,000 is too much to pay for the property, then it's not a good deal after all. Any time you bid at a Tax Sale Certificate auction, you should assume that you are bidding on the property and the owner will not redeem it. If you don't want the property, then you probably should not bid. How do you know if the owner is likely to redeem the property? You don't for sure, but there are several clues as to whether this is likely. First of all, does the owner occupy the property? If they do, there is a much better chance that they will redeem it. On the other hand, if they live out of town, or even out of state, then there is a much better chance that you are bidding on the property itself. Is it a desirable property? Is it in good condition? Is there much Equity in the property? All these things will help tell you not only whether the owner is likely to redeem the property, but whether you really want to take the property if the owner does not redeem it. You should never just assume that the owner will redeem the property, even if they do live there. If you don't want to take the property, then don't bid. Find an other Tax sale Certificate to bid on. Remember, your real security with Tax Sale certificates is the fact that they are backed by real estate and there is always the good chance that you will wind up with that real estate, instead of your money. What are you going to do with the property if the owner does not redeem the Tax Sale Certificate? Are you going to resell the property? Are you going to rent  it? Can you get a new loan against it for at least $15,000 and pull your money out? If you don't live in the state where you are bidding, is this going to make things too complicated for you? You should have the answer to all these questions before you bid. Tax Sale Certificates are an excellent, safe, high yield investment, but they are not like putting your money in CD's. You have to do a little homework and know what you are doing if you want to invest safely and profitably. First of all, contact the tax authorities in any state you are interested in. Find out if they sell Tax Sale certificates and if they do, when  and how are the auctions conducted? What interest do they pay and how long does the property owner have to redeem the property after the sale? Are there any special rules for bidding? Do you have to pay on the spot, or do you have a day or two to come up with the money if you are the successful bidder? Is the interest paid yearly, quarterly, monthly, or only when the Tax Sale certificate expires? If you do have to take the property, will you get it free and clear of liens and encumbrances? These are the questions you need to ask and the answers will help you determine which state you want to invest in and whether investing in Tax Sale Certificates is really for you at all. BACK TO BUSINESS ARTICLES PAGE HOME PAGE