Unlocking High Returns with Tax Certificates and Tax Deeds

Is your money sitting in the bank making less than 2%? Meanwhile, savvy investors are achieving returns of 18-50% through government-backed tax certificates. These certificates represent a first position lien on real estate for delinquent taxes. If those taxes remain unpaid, the property can go to a tax deed auction. Personally, I favor the tax deed sale, a strategy I’ve been successfully employing since 2004. Both tax certificates and tax deeds offer excellent investment opportunities, especially for those with self-directed IRAs. Here are some steps that helped me net a fantastic return on my very first tax deed:

Step 1: Determine Your State's Status – Tax Deed or Tax Lien

First, ascertain whether your state is a tax deed or tax lien state. Tax deed states auction off real estate when property owners fall behind on taxes. In tax lien states, tax certificates are sold to investors when homeowners become delinquent. Once the homeowner pays the overdue taxes, the investor receives their investment plus interest. For example, Alabama operates as a tax lien state. I purchased my first tax lien in Alabama, acquiring a vacant commercial lot valued at $40,000 for just $5,000. The funds came from my self-directed IRA account.

Step 2: Contact the Relevant Authority

In 2019, I organized a small group and we drove to Mohave County, Arizona to buy tax liens. Before taking the 90-minute drive, I contacted the tax collector's office and requested a list of over-the-counter properties. For 2 weeks, we researched parcels on the list. A good place to start learning about tax liens is to contact your local county authority to understand their auction process and inquire about properties that go unsold. Always conduct thorough due diligence before making any purchase.

Step 3: Investigate the Property’s File

Examine the property’s file meticulously. You may find a title search within the tax deed file, which could reveal other outstanding liens. While mortgages are typically wiped out at auction, other liens, like code enforcement, may remain attached to the property. Additionally, make sure to visit the property in person.

Step 4: Proceed with Confidence

Once you are comfortable with the information you have gathered, you can proceed with the purchase. The county will provide a final payoff amount. Often, you will be buying at 20-50% of the market value.

Step 5: Attend Auctions and Follow the Rules

Identify the date of the next auction, obtain a list of properties up for auction, and perform due diligence. Understand the auction rules, as most auctions require payment within 24 hours in certified funds. Do assume anything. If you have a question, call the office for information and clarification.

Step 6: Market Your Property

To obtain title insurance, you may need to undertake a legal process known as a quiet title. In my case, we waited until we had a buyer before starting the quiet title process.

Now that you’ve learned about these alternative investment vehicles, you’re one step closer to achieving better returns on your money. By exploring tax certificates and tax deeds through a self-directed IRA, you can potentially unlock significant financial gains.