Deeds And Dreams: Navigating The World Of Deed Investments

Investing in deeds is a way to generate profits by purchasing properties whose owners have not paid their property taxes. This is done through a tax deed sale, which is an auction where foreclosed homes are sold to recoup the tax bill by the tax collector. A tax deed is a legal document that transfers ownership of a property when a home has gone into foreclosure.

There are some challenges and risks associated with buying a home through a tax deed sale. For example, there may be additional expenses after purchasing the property, such as clearing the title, and there may be a redemption period during which the previous owners can reclaim the property by paying their overdue taxes.

Another way to invest in deeds is through trust deeds, which are documents used in real estate transactions where financing is involved. In this case, the investor lends money to a developer working on a real estate project and collects interest on the loan. Trust deed investing can provide a high-yielding income stream and portfolio diversification but may not be suitable for novice investors due to the risks involved.

Tax deed sales

How Tax Deed Sales Work

After a tax deed sale, the title to the property must be cleared or "cured". This can be done through a title certification process using a title insurance agent or a quiet title action, which removes other claims to ownership. Once the title is cured, the new owner can start generating financial returns from the property.

Risks of Tax Deed Investing

Tax deed investing carries several risks. One of the primary risks is overpaying for the property, especially in competitive auctions with many bidders. Additionally, unexpected repairs can eat into profits, and there may be a redemption period during which the former owner can pay off the tax bill and regain ownership. Furthermore, investing in tax deeds requires knowledge of local laws, procedures, and real estate markets, making it a complex endeavour.

Trust deeds

A trust deed is a document used in real estate transactions in the US. It is an agreement between a borrower and a lender to have the property held in trust by a neutral and independent third party until the loan is paid off. The third party, known as the trustee, holds the legal title to the property until the borrower repays their debt to the lender. At this point, the title to the property is transferred to the borrower.

Investing in trust deeds can provide a high-yielding income stream. In trust deed investing, the investor lends money to a developer working on a real estate project. The investor collects interest on the loan, and when the project is finished, the principal is returned to the investor in full. This form of investment provides portfolio diversification and passive income. However, there are also certain risks and disadvantages associated with trust deed investing, such as illiquidity and the potential for legal entanglements.

• Invest with a trustee: Find a trustee company that can link you with the right investors and handle the marketing and application processes.
• Negotiate a reasonable loan-to-value (LTV) ratio: Look for investors willing to make a down payment on the loan, as they are more likely to protect their investment.
• Prioritize properties with upside potential: Lending on property with upside potential increases the chances of recouping your investment with high interest.
• Do your due diligence: Research the investor and the property to avoid lending on a property that is likely to face foreclosure.
• Protect your investment: Include rental property insurance and obtain a lender's title insurance cover from the borrower.
• Involve a loan servicing company: This can simplify the process by handling the paperwork and collecting payments.

Property tax liens

A tax lien is a legal claim made by the government against the property of an individual or business that fails to pay taxes owed. This is usually a last resort for the government when an owner gets behind on property taxes. When a property owner fails to pay their taxes, the local taxing authority can place a tax lien on the property. The lien acts as a legal claim against the property for the unpaid amount owed. Property with a lien attached cannot be sold or refinanced until the taxes are paid and the lien is removed.

When a lien is issued, a tax lien certificate is created by the municipality, reflecting the amount owed on the property, plus any interest or penalties due. These certificates are then auctioned off to the highest bidding investor. Investors can purchase tax liens for as little as a few hundred dollars for a very small property, although most cost much more.

It's important to note that about 98% of homeowners redeem the property before the foreclosure process starts, so don't invest in tax liens with the expectation that you will get a physical property out of it.

If the owner cannot pay the lien by the deadline, the investor has the authority to foreclose on the property, although this is rare. There are also other liens that may be against the property that can prevent an investor from taking possession.

There are substantial risks involved with property tax liens, so investors must do their due diligence and understand the rules and potential pitfalls. It is generally inappropriate for novice investors or those without experience in or knowledge of real estate.

Redemption periods

In tax lien states, investors purchase the tax lien on the property, giving them the right to collect payments with interest from the property owner. If the tax lien isn't paid during the redemption period, the investor may initiate foreclosure proceedings. However, it's important to note that not all states grant the investor the property after the redemption period expires.

On the other hand, tax deed states offer ownership of the property to the investor through a tax deed sale. In these states, there is typically no redemption period, and once the property is sold, the delinquent owner forfeits their right to redeem.

Some states, like Florida, offer a hybrid model where both tax liens and tax deeds are sold. In such cases, investors first purchase the tax lien, and if the property owner fails to redeem during the redemption period, they can then request a tax deed auction where the property is sold to the highest bidder.

It's important to distinguish redemption periods from challenge periods, which refer to the time frame during which a prior party of interest can challenge the validity of the tax sale. Unlike redemption periods, successfully challenging a tax sale typically requires proving an error in the process and petitioning the court to overturn the sale.

When investing in tax deeds or tax liens, it's crucial to understand the specific redemption period rules and taxpayers' rights in the relevant state. These rules can vary significantly, and failing to grasp them can result in investment losses.

Investment deed risks

Before investing in deeds, it is important to be aware of the potential risks involved. Here are some key risks associated with investing in deeds:

• Overpaying at auctions: Tax deed auctions can attract many bidders, making it easy to pay more than you intended or more than the property is worth.
• Limited property information: In some cases, tax authorities may not allow potential investors to inspect the properties before the auction. This can lead to unexpected repairs or issues that eat into profits.
• Redemption by former owners: Some states have a redemption period after the auction, during which the previous owner can pay off the tax bill and regain ownership of the property. This can be a significant risk, as it happens quite often.
• Low auction probability: Many property owners settle their tax bills before the auction, so there is a risk of investing time and energy in researching properties that never actually go to auction.
• Time and effort: Even when successful, investing in tax deeds can be time-consuming and may require significant research and effort. This can make the final returns less attractive compared to other investment options.
• Complex and risky: Tax deed investing can be complex due to varying local laws, procedures, and real estate markets. The risks involved may deter inexperienced investors.
• Poor collateral understanding: It is important to thoroughly understand the collateral (the underlying property) securing the trust deed investment. Some types of properties, such as raw land, may provide no cash flow, have a limited buyer pool, and be difficult to finance.
• Construction and development loans: Investing in construction or land development loans can be risky because their value is not fully recognized until the project is completed. If you need to foreclose on a partially built structure or undeveloped land, you may have to take on the responsibility of completing the construction or development.
• Not using a loan servicing company: Managing a trust deed investment involves more than just identifying and funding it. Collecting payments, providing statements, and handling foreclosures are all part of the loan servicing process, which can be challenging for investors to navigate on their own.
• Delayed action on non-performing loans: Trust deed investors must be proactive in taking action if the borrower stops making payments or fails to meet other loan obligations. Delays in addressing these issues can lead to problems when initiating foreclosure proceedings.
• Borrowers with poor credit history: Investing in borrowers with a history of late payments, bankruptcy, or poor credit can be risky. Borrowers often repeat their financial habits, and a history of late payments can continue into your loan.

These risks highlight the importance of conducting thorough research and due diligence before investing in deeds. It is crucial to carefully evaluate and understand the unique features and potential red flags of each investment opportunity to make informed decisions.

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