What makes redeemable tax deeds a good investment?

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Answered by: Russell, An Expert in the Investing in Real Estate Category
In the United States, property tax must be paid by property owners on an annual, semiannual, or quarterly basis. Every county (or other municipality) needs and must collect property tax to fund municipal budgets/programs such as fire stations, police stations, public libraries, schools, parks, and roads.



Many property owners, especially during the economy of the last several years, are often delinquent in paying their property taxes. The counties generally try to work with the property owners as much as possible, but it doesn't change the fact that they need to collect the property taxes whether it is from the property owner or from an outside investor. To obtain that money, the counties place tax liens on delinquent properties. The process for how the tax lien is paid for and abolished varies state to state. Each state uses either tax lien certificates, tax deeds, or redeemable tax deeds as the delinquent tax collection method.

Despite the name, collection of delinquent property tax through redeemable tax deeds is more akin to tax lien certificates than standard tax deeds. When an outside investor purchases a tax deed, he is actually purchasing the rights to the property. When an outside investor purchases a tax lien certificate or a redeemable tax deed, his primary goal is to collect interest on the certificate or redeemable tax deed during the "redemption period". The redemption period starts immediately after the tax lien or redeemable tax deed sale and generally continues for six months to three years (state specific).



The interest accrual rate is fixed (cannot go up or down) during the redemption period and generally ranges from 10-24 percent. In addition to the fixed interest accrual rate, 10 states (four redeemable tax deed states and six tax lien states) assess a flat penalty on the delinquent tax amount immediately after the sale. This "penalty" is added to the delinquent tax bill and is awarded to the holder of the certificate/deed upon redemption by the property owner.

Below is an overview of the redeemable tax deed states, including the redemption period length, the interest rate accrual (per annum) during the redemption period, and flat penalties (if any). The states are listed in order of possible return on investment.

Texas: 6-month redemption period for non-homestead properties, and two-year redemption period for homestead properties; in lieu of a redemption period interest rate, a 25 percent flat penalty is applied to the tax bill immediately after the sale; for homestead properties, an additional 50 percent flat penalty is assessed on the total tax bill at the start of the second year of redemption.

Georgia: one-year redemption period, but redeemable tax deed holders have the option to extend up to four years; in lieu of a redemption period interest rate, a 20 percent flat penalty is applied to the tax bill immediately after the sale, followed by additional 10 percent flat penalties at the start of the second, third, and fourth years (if deed holder decides to extend redemption period and property remains unredeemed.

Louisiana: three-year redemption period; 12 percent per annum interest plus a 5 percent flat penalty is applied to the tax bill immediately after the sale.

North Dakota: three-year redemption period; 12 percent per annum interest.

Connecticut: one-year redemption period; 18 percent per annum interest.

South Carolina: one-year redemption period; in lieu of a redemption period interest rate, a 3 percent flat penalty is applied to the tax bill immediately after the sale, followed by additional 3 percent flat penalties at the start of the fourth, seventh, and tenth months of the redemption period.

Hawaii and Vermont: one-year redemption periods; 12 percent per annum interest.

Tennessee: one-year redemption period; 10 percent per annum interest.

District of Columbia: six-month redemption period; 18 percent per annum interest.

Delaware: 60-day redemption period; 15 percent per annum interest.

Although all of the states listed above can bring you a nice return on your investment, Texas and Georgia stand out due to the hefty flat penalty rates. A flat penalty is always better than accruing interest because it is basically an instant profit for the investor. There is no waiting for interest to accrue. A property owner in Texas could redeem her property one day after the tax sale, and you will still get a 25 percent return on your money! There's not too many investments out there with that kind of return. In addition to the flat penalties, larger counties in Texas and Georgia have tax sales on the first Tuesday of every month, so there are numerous opportunities to make money.

If redeemable tax deeds are not redeemed by the property owner within the redemption period, the deed holder has the right to start the foreclosure process and obtain the property for themselves. If this happens, all other encumbrances, including mortgages, are wiped out. You own the home free and clear. However, be warned that this does not happen often.

When it comes to tax lien and tax deed investing, there are many strategies to use. You may want to supplement your income or just find a better place to park your money and earn a nice return. You may already be a real estate investor and you want to add some tax lien certificates or tax deed properties to your portfolio. You may want to dedicate a whole lot of time to this or maybe just a few hours a week. You may have a little money to invest or a lot. It doesn't matter. Tax lien and tax deed investing can be a sound investment strategy for anyone.

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