Last week, I discussed how tax lien investing was conservative and reliable method to generate moderate income. However if you are looking for higher yields, a tax deed auction may be the solution. If a homeowner does not pay their back taxes within two years, the tax lien certificate holder can ask the county to auction off the property in a tax deed sale. In Polk County, the tax deed sale happens on the third Thursday of every month. At this auction, the property is sold to the highest bidder and the monies are used to pay off the liens in order of priority. Since tax liens have the highest priority (even higher than mortgages) and they are small relative to the auction price, they are usually paid in full. In fact, most banks will pay your property taxes off and then add it to your loan so that the property does not go to auction.
The upside to this auction is the opportunity to buy properties at a fraction of their value. Nevertheless, there are significant risks when bidding at these auctions. The most prominent risk is overpaying at the auction for the real estate. Most real estate at this auction are vacant lands without buildings. These vacant lands can be land-locked, without drainage, or just swamp. In the end they are worthless. Even if the property has a building on it, most of the time it is occupied and investors can’t go inside to see its condition before bidding on it. In the end, it is important to do diligent research on the property, its possible renovation costs, and potential value before bidding on it in the tax deed sale.
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