tax deeds course
DESCRIPTION
Investing tax deedsTRANSCRIPT
TABLE OF CONTENTS TAX DEED/LIEN INVESTING COURSE
MODULE A
INTRODUCTION
Two Types Tax Foreclosures in Georgia
The Procedure
Entity with Authority to Sell
When and Where Tax Sales are Held
How Delinquent Property Owners May Stop Sale
TAX LIENS AND TAX DEEDS AND HOW THEY DIFFER
Tax Liens
Tax Deeds
Hybrids – Tax Lien/Tax Deed Combinations
How Tax Liens and Tax Deeds Differ
MODULE A SELF TEST
MODULE B: PRE-PURCHASE PROCESS AND CONSIDERATIONS
DUE DILIGENCE - HOW TO RESEARCH TAX DEEDS/LIENS IN
PREPARATION FOR AUCTION
Research Procedures
WHERE TO FIND LISTINGS OF TAX SALE PROPERTIES
PURCHASE STRATEGY
Determine Categories of Investment to Concentrate On
o Land speculation
o Single family homes
o Multi-family properties
o Retail properties
o Commercial and industrial properties
Geographical Concentration
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Exit Strategy
o Flipping
o Renovate and sell
o Renovate and sell/Lease with Option to Purchase
o Renovate and sell/Contract for Deed
o Renovate and rent
o Land lording tips
o Assignment of Tax Deeds and Liens
IV DETERMINING VALUE OF UNDERLYING PROPERTY
Market Value Approach
Income Approach
N.O.I. Calculations
Capitalization Rate
Cash Flow Analysis
Return on Investment
Assessing Sinking fund
Assessing Downside Risk
Determining “After Repair Value”
o Comparables
o Estimating repairs and renovations
MODULE B SELF TEST
MODULE C - PURCHASING PROCESS AND CONSIDERATIONS
DELINQUENT TAX SALE PROCEDURES
Tax Lien Procedures
Tax Deed Procedures
The Auction/Bidding Procedure
Method of Bidding
Authority to Void Sale
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PROPERTY REDEMPTION
Redemption Period
Persons Entitled to Redeem the Property
Amount Payable For Redemption
o How Rate of Return is affected by when property is redeemed
o Redemption Formula
Legal Effect of Redemption
Redemption Period Issues
o Taxes that become due after the sale
o Entitlement to rents and profits after the sale and repairs
Foreclosure of Right to Redeem
o Notice requirements
o After Right of Redemption is foreclosed
Alternative to Foreclosure of Right to Redeem
o Ripening of Tax Deeds by Prescription
LEGAL CONSIDERATIONS AND PITFALLS
Actions to Cancel Tax Deeds
Quiet Title Action
o Conventional Quiet Title
o Georgia Land Registration Act of 1917
o Quiet Title Against All The World
FINANCING YOUR PURCHASE
Credit Cards
Home Equity Line of Credit
Joint Venture with Others
Private lenders
Investing in Tax Deeds using your IRA
1. Traditional IRA
2. ROTH IRA
3. Truly Self Directed IRA
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Hard Money Lenders
MODULE C SELF TEST
MODULE D – POST- PURCHASE CONSIDERATIONS
POST-REDEMPTION PROPERTY INSPECTION
Renovation Guidelines
Estimating Costs
DEALING WITH CONTRACTORS
Deciding on a Contractor
Agreements with Contractors
RENOVATION SCHEDULING
MARKETING AND ADVERTISING
OTHER IMPORTANT POST REDEMPTION CONSIDERATIONS
Risk Reduction
Beware of Subsequent Taxes
How to get rid of occupants after the right to redeem has foreclosed
o Dispossessory proceedings
o Other methods
MODULE E – HOW TO START A TAX DEED INVESTING BUSINESS
PRE-FORMATION CONSIDERATIONS
Determine your business concept
Determine your products and Services
Decide how you will finance your start-up
Decide on business form
Determine who your associates and team members will be
Complete business plan
FORMATION CONSIDERATIONS
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MODULE F- REALISTIC SIMULATION OF ENTIRE PROCESS AND
PROCEDURE
CERTIFICATE TEST
MODULE-A
INTRODUCTION
Two Types of Tax Foreclosures in Georgia
1) Non-Judicial Tax Sales take place without court intervention, where the foreclosure
requirements are established by state statutes. The majority of tax sales in Georgia are
non-judicial, and all information of this course pertains to non-judicial sales, except
information specifically noted below as pertaining to Judicial In Rem Tax Sales.
2) Judicial In-Rem Tax Foreclosures are processed through the courts, which commences
with a creditor filing a complaint with the court. The complaint states the reason why the
court should allow the creditor to foreclose. The property owner is served and has the
opportunity to be heard before the court. A judgment is entered, and a writ is issued by
the court authorizing a Sheriff’s sale at public auction. “In Rem” is latin for “in a thing”.
Hence, in an In Rem lawsuit, the action is directed toward a specific piece of property,
rather than being a claim for monetary damages against a person, for example.
Pursuant to this type of tax sale, the owner (no other person), has the right to redeem the
property within sixty (60) days. If not redeemed within 60 days, the owner is
automatically barred from redeeming the property and loses all right, title and interest to
the property. Unlike non-judicial sales, there is no redemption premium.
Property taxes become delinquent when they are not paid on time. The amount of time
before they become delinquent varies. Generally, when property taxes are delinquent,
they accrue interest on the unpaid balance.
The Procedure
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The procedure for collecting delinquent taxes is typically mandated by state law.
However, local county tax commissioners typically handle the process of collecting
delinquent taxes for the municipalities within the county, and the state. In Georgia
delinquent tax collection and tax sale procedures are embodied in the Official Code of
Georgia Annotated (O.C.G.A.), Title 48.
Lien filed against delinquent property
Notice of intent to file a lien against the property is usually required. The Tax
Commissioner is generally required to notify the taxpayer in writing that the taxes are
delinquent, and if not paid within thirty (30) days, a FIFA will be issued.
A lien then attaches to the delinquent property. In other words, the property tax lien is
secured by the real property upon which the taxes were levied. In Georgia, a lien is
referred to as a FIFA. FIFA is short for fieri facias, Latin for “cause it to be done”. FIFAs
authorize the taxing authorities to satisfy delinquent taxes by levying on and selling the
delinquent taxpayer’s property. The term FIFA is synonymous with and used
interchangeably with “Tax Execution” or “Execution”. In most states these lien
documents are recorded on the docket (General Execution Docket in GA) of the Clerk of
Superior Court, and filed in the deed records for the delinquent property.
Notice prior to sale
Before the property is advertised for sale, the “levy” officer (who is usually an Ex-Officio
Deputy Sheriff) must give a 20 day written notice to the owner, any tenants, mortgagee,
IRS, EPA, and any other agencies with a recorded interest (if applicable).
Advertisement and notice of sale requirement
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All properties to be sold at public auction for delinquent taxes must be advertised for four
(4) consecutive weeks prior to the first Tuesday of the month. These advertisements must
be published in the “legal organ” newspaper of the county in which the property to be
sold is located. The advertisements typically must show the owner’s name, a description
of the property to be sold at the tax sale, and the amount of taxes due.
At least 10 days before the tax sale, the state statute requires another written notice to be
sent by certified mail informing the owner of the impending sale.
Entity with Authority to Sale
In Georgia, the Tax Commissioner, usually serves as Ex-Officio Sheriff and has
authority to advertise and sell the delinquent property at auction to the highest bidder to
satisfy the delinquent taxes due the state and the county, and in some cases a
municipality.
When and Where Tax Sales are Held
In Georgia, most tax sales are held on the first Tuesday of each month, and usually
between the hours of 10:00 am and 4:00 pm. The sale typically takes place on the
Superior Court building steps in the county where the property is located.
How Delinquent Property Owners May Stop Sale
The selling of the property for delinquent taxes at public auction is also referred to as
“foreclosure of property for delinquent taxes”. A delinquent property owner may stop the
foreclosure sale by paying the delinquent taxes, plus any accrued interest, penalties and
fees through the date of the tax sale. Another way the property owner may stop the sale
is by filing a bankruptcy petition and giving notice to the Ex Officio Sheriff prior to sale
of the property.
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TAX LIENS AND TAX DEEDS AND HOW THEY DIFFER
Tax Liens
Tax lien certificates, which are sold to investors, represent the debt due on the delinquent
property. Tax Deeds represent actual ownership in the delinquent property. Tax lien
certificates typically pay the investor (purchaser) an interest rate. Tax deeds typically do
not pay an interest rate. However, after a period of time (redemption period) investors,
generally receive title to the property if the property is not redeemed. In hybrid states like
Georgia, an investor can make a high rate of interest or receive the property after the
redemption period.
Once a lien attaches, some states allow a third party to purchase the tax liens. Generally
lien purchasers do not have property rights, such as, evicting tenants. Lien holders only
have the right to receive payments to satisfy liens in the same manner as the tax
commissioner or tax collector would have.
Essentially, when an investor invests in tax liens, he is purchasing the property owner’s
delinquent tax debt. Moreover, if delinquent property owner’s fail to pay their back taxes
plus interest, they can subsequently lose their property. Property taxes due the state and
county are not only against the owner of the property, but are also against the property,
regardless of judgments, mortgages, sales, or encumbrances. In other words, a tax lien
generally has the highest lien holder position. This priority position remains in tact even
after the lien is sold to a private party. Hence, the purchaser holds the same interest
previously held by the county. Consequently, the lien holds a first position on the title,
and foreclosure of the tax lien in most cases, clears other liens from the title. Therefore,
the purchaser generally receives a property interest free and clear of all liens. There are a
few exceptions, depending on the state. For example, some state tax liens have equal
priority with property tax liens. Some federal income tax liens may also share priority,
and will subsequently survive the foreclosure sale.
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Tax liens are secured by the property. When tax liens are sold at tax sale, they usually are
sold as “tax certificates”. The face amount of tax certificates generally consist of the
following: amount of unpaid taxes; interest owed on the delinquent amount; the tax
collector’s commission, and; sales and other costs.
The tax certificate generally does not convey property rights. It is simply the purchase of
a debt, carrying an interest rate. A “certificate holder” (investor that purchased tax lien),
is generally prohibited from contacting the owner of the underlying property.
In Georgia, tax certificates are no longer sold to the public, but are sold to institutional
investors. Once a lien has been sold or transferred to a purchaser, the Tax Commissioner
has no further involvement in the collection process. When the liens are not satisfied by
paying off the debt, the lien purchaser has the right to have the Sheriff levy and foreclose
on the property. Tax liens or certificates generally, are transferable, and can be re-sold.
Tax Deeds
Generally, what an investor is bidding on is a tax deed or the title to the property. In a
“tax deed” state, title to the property is conveyed to the purchaser. The successful bidder
at the auction receives a tax deed to the property, oftentimes subject to a right of
redemption. Georgia, for instance is a “Tax Deed” state. A tax deed is purchased at the
tax sale.
Hybrids – Tax Lien/Tax Deed Combinations
In tax deed states such as Georgia, a tax deed only conveys a “defeasible” title, which
does not vest in the purchaser until the redemption period has expired, and the purchaser
has “foreclosed on the right to redeem”. A right to redeem the property means the person
whose property was sold at the tax sale has a certain period of time in which to “buy
his/her own property back. See sample Georgia Tax Deed in Appendix.
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In Georgia, a tax deed purchaser can profit in one of two ways:
1. If the delinquent tax property owner “redeems” the property, the tax deed purchaser
receives a high rate of interest on the total sales price (20% the first year and 10% in
subsequent years), regardless when during the year the owner redeems the property.
2. If the delinquent tax property owner does not redeem his or her property prior to the
foreclosure of the right to redeem, the purchaser at the tax sale obtains full title to the
property, and can take possession, re-sale it for a profit or hold for long term gain,
(and rent it out while holding).
If the owner redeems (buys back) the property, they must pay the amount that you paid
for the property, plus a 20% premium. Furthermore, there is a 10% premium each
subsequent year the property is not redeemed. On receiving the full purchase price at any
sale, the tax collector executes a deed to the purchaser. Some states like Massachusetts do
not have a redemption period after the tax deed sale
Generally, the tax deed conveys title to the purchaser free of all encumbrances except:
1. Any lien for installments of taxes and special assessments which became payable
after the time of the sale
2. Liens and assessments of taxing agencies that did not consent to the sale, or were
otherwise left out of the redemption amount; easements, water rights, and restrictions
of record; certain federal Internal Revenue Service liens.
Although the tax sale purchaser receives a tax deed to the property, the purchaser cannot
take immediate possession of the property, make any improvements to the property, evict
any tenants, or occupy the property, until the “right of redemption” has been foreclosed
on or the title has been “Ripened by Prescription”. ? (Check for accuracy)
How Tax Liens and Tax Deeds Differ
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Delinquent taxes that result in a tax sale of the real property, for which the taxes are due,
are either “tax lien certificate” sales or “tax deed” sales. At these public sales or public
“auctions”, investors bid on either tax lien certificates or tax deeds. The types of sale
allowed are typically mandated by state statute, as well. Some states are “Tax Lien”
states and some state are “Tax Deed” states, and some states are both. In a ‘tax lien” state,
only the right to collect the delinquent taxes, plus interest is conveyed to the purchaser at
the tax sale. In a “tax deed” state, title to the property is conveyed to the purchaser.
In deciding whether tax lien investing or tax deed investing is better for you, depends on
the State you intend to invest in and what your investment objective is. For instance, if
you are interested in acquiring properties at below market prices, then tax deed investing
is for you. If you are interested in just receiving high rates of return and do not want to
end up owning the property, then purchasing tax liens is for you (in states where you do
not end up with the property by default). If you are interested in both scenarios, then
investing in “redeemable” deeds are for you. See index of tax lien states and tax deed
states in Appendix.
Generally, if you do your homework and purchase tax liens on good properties, the
chances of foreclosure are slim. Moreover, in some states, even if the lien is not
redeemed, you may not be able to obtain the property. In Florida for example, if you
purchase a tax lien and it is not redeemed, the property then goes to a tax deed sale in
order to satisfy your lien. At this point if you wanted the property, you would have to bid
against other investors at the tax deed sale. If you are interested in either getting a good
return on your investment or owning the property, then you should invest in “redeemable
tax deeds”. Redeemable tax deeds are a hybrid of a tax lien and tax deed where you get
the best of both worlds, as in Georgia.
MODULE A SELF TEST
True False
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1. In-Rem tax foreclosure is the most common type of tax foreclosure procedure in
Georgia.
2. The redemption period for non-judicial tax sales in Georgia is 60 days.
3. FIFA is a type of lien.
4. It is not necessary for a FIFA to be filed before a property can be sold at a
delinquent tax sale.
5. FIFAs are recorded in the deed records of the county where the delinquent
property is located.
6. It is not necessary to give written notice to tenants of delinquent property, prior to
advertising the delinquent property for sale at the tax sale.
7. A delinquent property owner may stop the sale of his/her delinquent property by
filing a bankruptcy petition.
8. In Georgia tax liens are sold to non-institutional investors.
9. A Tax Deed extinguishes any mortgages on the property.
10. After the one year redemption period has ended, but before the Right to Redeem
has been foreclosed, a tax sale purchaser may occupy the property.
11. In a tax deed state, title to the property is conveyed to the purchaser.
12. Investing in “redeemable” deeds is for investors who are interested in either
receiving high rates of interest or owning the property.
13. All federal IRS tax liens take priority over property tax liens.
Multiple Choice
1. Which of the following entities is typically responsible for collecting delinquent
property taxes in Georgia?
a) County Tax Commissioner
b) State Department of Revenue
c) County Attorney
d) All of the above
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2. When property taxes are delinquent, before a FIFA is issued, the delinquent
taxpayer must be given how many days notice?
a) 10 days
b) 15 days
c) 30 days
d) No notice
3. All properties to be sold at tax sale must be advertised for how many weeks prior
to the sale?
a) One week
b) Eight weeks
c) Two weeks
d) Four weeks
4. In Georgia, tax sales are usually held:
a) The first Tuesday of the month, between 8 a.m. and 2 p.m.
b) The first Tuesday of the month between 10 a.m. and 4 p.m.
c) The last Tuesday of the month between 10 a.m. and 2 p.m.
d) The last Tuesday of the month between 8 a.m. and 2 p.m.
5. When a purchaser at a tax sale purchases a tax lien or tax lien certificate, he/she is
purchasing:
a) The property with a lien on it
b) The property without a lien on it
c) An unsecured debt
d) A secured debt
6. As a tax lien purchaser, you are likely receiving:
a) Taxes
b) Interest payments
c) A Tax Deed
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d) Nothing
7. At a delinquent tax sale in Georgia, a successful bidder receives:
a) A defeasible title
b) A tax Deed
c) A Tax Deed subject to a Right of Redemption
d) All of the above
8. In Georgia, a tax sale purchaser may immediately after the sale:
a) Take possession of the property
b) Evict tenants in the property
c) Make improvements to the property
d) None of the above
MODULE B: PRE-PURCHASE PROCESS AND CONSIDERATIONS
DUE DILIGENCE - HOW TO RESEARCH TAX DEEDS/ LIENS IN
PREPARATION FOR AUCTION
While tax lien/deed investing offers great investment opportunities, because of their high
profit potentials, the process involved in determining which property to safely buy is
tedious and extremely time consuming. Although tax lien/deed investing is generally low
risk, you must really know what you are doing.
Research Procedures
Research procedures will vary from state to state. Property research is important before
purchasing tax liens or tax deeds because you may be ultimately buying the property
which secures the tax lien or tax deed. Research typically includes, but is not limited to
physically viewing the property. Other research includes, but is not limited to, valuing
the property based on market sales or comparables.
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1. Research the State statutes for the State(s) you’re going to invest in. See Georgia
State Statute in Appendix.
2. Determine which counties in your target state you which to invest in. You will also
need to research the county or other local rules, regulations and policies for respective
delinquent tax sales. See complete list of Georgia counties in Appendix.
3. Determine the legal newspaper where the delinquent properties are listed that is due
to go to the tax sale. Most tax sales take place on the first Tuesday of each month. All
properties to be auctioned for delinquent taxes must generally be advertised in a legal
newspaper for four consecutive weeks before the tax sale. Listings of delinquent
properties going to tax sale are typically listed in the county legal paper where the
sale is to be held. The county tax collector, which in some cases is the Sheriff’s
department, will also have lists online. Each listing shows the delinquent owner’s
name, a description of the property to be sold and the amount of taxes owed. See legal
newspapers by county in Georgia in Appendix.
4. Screen the tax sale listings, including checking out the type property underlying the
tax deed, i.e. residential, vacant lot, commercial.
5. After screening the lists, make a shortlist of properties you’re interested in (which
might be based on amount or based on location), you can check whether it is a
building or a lot online. See shortlist form in Appendix.
6. Check tax assessed values and more importantly market “comparables” for the
properties. You should also make note of the amount of taxes that are payable, in the
event you ultimately acquire the property. See sample tax assessor printouts in
Appendix. See also list of sites for “comparables” in Appendix.
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7. Check the plat records for location and size of lot. You can even check the size of the
lot or property online, usually through the tax assessors’ office. See sample plat map
in Appendix. (This will also be demonstrated online in class)
8. Check for any liens that might survive the tax sale. (This will be demonstrated online
in class) See website for checking deed records in Georgia.
9. Construct a short list of properties to physically view. Physically viewing properties
is extremely important, as you can determine whether you are bidding on the property
you think you are bidding on. Moreover, you can determine the condition the
property is in. For example, if there is a gaping hole in the roof, that will ultimately
need repairing if and when you acquire the property. See Property Condition checklist
in Appendix. You may also preview most properties online.
10. Check the “final list” the day before the auction, as delinquent homeowners are able
to pay up the delinquent taxes before the sale and stop the sale.
11. Check for, and make sure you understand the payment procedure for payment if you
are the successful bidder.
WHERE TO FIND LISTINGS OF TAX SALE PROPERTIES
Lists of available tax liens and tax deeds going up for auction are sometimes available
online in county web sites. You may also be able to get the list by contacting the county
office and request the list be mailed or faxed to you. An easier way of accessing the list is
to obtain a “legal” newspaper where public notices of the tax sale are required to be
published. Generally, the published list will give you the amount of taxes owed, the
owners, the property address, and when the property is due to go to sale at public auction.
Many legal newspapers also publish these lists online. Many legal newspapers are
published on a county basis. However, some cover multiple small counties. See list of
county legal newspapers in Appendix.
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PURCHASE STRATEGY
It is extremely important to be strategy-oriented. In conjunction with deciding whether
you want to invest in tax liens, deeds, or hybrids. You will need to make some strategy-
oriented determinations. You clearly want to avoid purchasing tax liens and or deeds in
an unfocused manner. From the onset, if you don’t want to possibly end up with the
property, invest exclusively in tax liens in states where this is possible. In Georgia, which
is a hybrid state, you could either end up with the property or not. Because of the
possibility of ending up with the property, you want to bid at prices that will ensure you
take possession of property at the deepest discount.
Determine Investment Concentration Type
Central to making a strategy determination, you will need to determine which category or
categories of real estate investment you wish to concentrate on if there is a possibility of
acquiring the property. The five categories are: land speculation; single family homes;
multifamily residential; retail; commercial and industrial.
o Land speculation
Land speculation involves buying vacant or raw land, in hopes that the value will
appreciate either short term or long term, being mindful of the carrying costs. Generally
speaking you cannot gain income from land speculation, so you will have to be in a
position financially to carry and hold the property until you can sell it for a profit.
Considerations include whether the land is in an up and coming area or in a pattern of
growth as opposed to declining values for the area. If your goal is to hold the property for
long term appreciation, this becomes less of a factor. More importantly, you need to
make sure you can pay the carrying costs, such as taxes. Zoning or re-zoning potential is
another consideration. How is it currently zoned, and what are the chances of getting it
re-zoned, and will re-zoning have a significant impact on it value. Normally rezoning
from residential to some higher use such as, commercial will increase values. When it
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comes to farmland or raw land, there are a myriad of factors to consider. i) Raw land is
unimproved property, and is generally without utilities, sewers, or streets; ii) You
typically have a negative cash flow while holding; iii) It is difficult to obtain traditional
financing or re-financing; iv) Land cannot be depreciated; v) Long term investing in land
can also be tricky and unpredictable. For example, taxes may increase substantially, the
local governmental agency may impose building restrictions, and/or special assessments
may be imposed.
o Single family homes
If you acquire a single family home, through the purchase of a tax deed, if the property is
not redeemed, you have essentially four investment options. i. Wholesale Flip (buy, and
sell immediately); ii. Retail Flip (buy, fix up and sell immediately); iii. Buy, fix up and
rent; iv. Buy live in, fix up over time and then sell. Again, a main consideration is to
make sure the property is not in a declining area (unless this fits in your strategy),
evaluate taxes, insurance and any other costs, i.e. if condo, HOA fees). Be sure to factor
in any financing costs, improvements, including major improvements. It is advisable to
complete a worst case scenario spreadsheet. (See spreadsheet template in Appendix). The
primary downside to buying single family homes for rental, is the maintenance and tenant
problems. A good reason to purchase a single family home and rent it is to help in
holding the property while the market improves.
o Multifamily residential
This scenario requires compilation of an income statement, culminating with a net
operating income or projected net operating income. Typically, a development with four
or more units is considered “multi-family”. The primary key to acquiring multifamily
income property is the type of financing used. If you’re using cash, half the battle is won.
After purchasing, you have to be sure to have enough cash left to carry the properties. In
this case, rental values become extremely significant. In other words, what are
comparable units renting for. Secondarily, what is the average vacancy rate in the area.
Again these factors will need to be incorporated into the Operating Statement. It is
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generally recommended that novice investors start with land or single family residences,
before jumping into multi-family projects. You will also need to determine what income
level tenants you wish to attract. This in part will be determined by the character and
demographics of the area.
o Retail
Retail is centered around shops, i.e. strip and shopping centers, or stand alone shop space.
Few of these actually make it to tax sale, however, rare it may happen. Ownership of
retail property involves complex issues and is not for the novice investor.
o Commercial and industrial Properties
Commercial and industrial properties are income producing and include office buildings,
warehouses, and industrial properties and complexes. Few of these make it to tax sale, as
well. When it does happen, its usually a single tenant building. Ownership of commercial
and industrial buildings is also not for the novice investor.
Geographical Concentration
Another consideration in forming an investment strategy is where you will invest. The
best place to begin is a geographic area that is convenient to where you currently live or
work. This becomes less important when purchasing tax liens. Become an expert in the
geographic area in which you intend to invest. Learn street and subdivision names; price
ranges by street and subdivisions; rental rates; future plans for the area; school districts.
Exit Strategy
As an investor in tax deeds, you should always make an investment with an exit strategy
in mind. Know exactly how you will exit the property before investing. Moreover, have
a backup plan or two, in case things change and the first plan is no longer viable. Before
you decide to sell, rent, or other, be cognizant of the economy (national, regional, and
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local), unemployment figures, interest rates, and other economic and real estate market
indicators, as these factors can affect your profit.
Secondly, you should plan what you will do if and when real estate values decline, while
you’re in possession of your investment property. A rule of thumb to keep in mind is, it is
harder to find bargains in good markets, conversely, in a down market, bargains are in
large supply. Another rule of thumb is, if a market continues to rise, the likelihood of
selling the property quickly for large profits increases. Fortunately, when purchasing tax
deeds, if you buy right, you will buy at greatly discounted prices, hence, you are
generally assured of making a profit, even if a small one.
You will also need to determine if you are buying for the long-term or the short-term. If
you are buying for the long term, any drop in the market will not be detrimental to you,
particularly if you buy below market. When you’re investing for the long term, “dollar
cost averaging” applies. Dollar cost averaging refers to the concept, that no matter when
you but in the cycle, in the end it always goes up.
The following are exit strategy options:
o Flipping
“Flipping” refers to purchasing a property and reselling it immediately or as quickly as
possible. There are a few variations of flipping:
Flip “As Is” – Purchasing the property and reselling it without any or very
little repair or re-hab work. The purchaser probably intends to re-hab it and
re-sell it. In this case you really need to acquire the property at a deep discount
to be able to flip it at a below market price. This method is often referred to as
selling “wholesale”.
Re-hab and Flip – Purchasing the property, rehabbing it, and then selling it
retail. This method usually involves using a real estate agent to re-sell the
property.
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Although tax deed investing can yield extraordinary deals, if you intend to flip in a down
market, you must nonetheless proceed with caution. If you purchase the property at a
low enough price, you are assured an eventual profit, even if the market continues to fall.
An example of how a flipper makes money even in a down market, is when he purchases
a tax deed (underlying property) for 30 cents on the dollar and sells it for 40 cents on the
dollar.
o Rehab and sale
In deciding whether to rehab and sale, you should also assess whether the market is up or
down, and whether the trend in the immediate future is up or down. Furthermore, assess
what the average length of time properties are sitting on the market in your target
geographical area.
o Rehab and sell on Lease with Option to Purchase
In a down market, a good option is to enter into a Lease with Option to Purchase
agreement with a potential purchaser. This is a contract consisting of a Lease and an
“option to purchase”. The “lease” creates a landlord/tenant relationship, and is not
technically a sale. The Option to Purchase, is an unilateral contract, which binds the
owner (known as Optioner). In this agreement the owner typically agrees to give the
Optionee (which is also the tenant) an exclusive right to purchase the property (which he
is renting) at a fixed price for a certain period of time. The tenant has the right to
exercise this option, or not, before the option period expires. Generally, a Lease with
Option to Purchase is not a sale, however, under certain circumstances, courts have held
them to be a sale. The benefits of a Lease with Option to Purchase, include: i) You retain
legal ownership and control of the property; ii) you may claim the depreciation, and; iii)
you may defer capital gains treatment if applicable.
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Although terms vary, typically, an Optionee pays a price for the Option, and this amount
is normally non-refundable if the Optionee does not exercise his right to purchase. If the
purchaser exercises his Option to Purchase, the price of the Option is generally credited
towards the purchase price.
Like a real estate purchase agreement, or a lease, an option is assignable (you can sell it),
if there is not an express prohibition against it in the Option Agreement.
Having a court determine that a Lease Purchase with Option to Buy is an “installment
sale” or “equitable mortgage” is good for a purchaser, but bad for a seller. In the case
where a tenant defaults on the contract, it can be difficult to evict them if they argue and
win that they are not tenants, but have an equitable interest in the property. Ways to avoid
this trap is to, i) Require a security deposit, even if a small one; ii) Do not give more than
a one year lease option at a time. If the Optionee insists on a longer period, give him a
one year term with additional one year rights to renew, and use a new agreement each
time he renews; iii) Do not combine the Lease and Option to Purchase Agreement in one
document ( use two separate agreements and make sure the lease does not refer to the
Option); iv) Don’t give large credits toward the purchase price from the rent payments, as
this may lean toward it being a sale with the Tenant/Optionee having an “equitable
interest”, and; v) Don’t allow the Tenant/Optionee to pay the taxes and insurance, this
may also make the agreement look like a sale.
o Rehab and sell on Contract for Deed
A Contract for Deed, also known as a Land Contract, is a sale of a property wherein, the
Purchaser makes installment payments on the property until its paid in full. It is a form of
owner financing, whereby, the owner does not transfer title to the property until the
purchase price (debt) is paid in full. In this case, the owner retains “legal” title to the
property and the purchase gets “equitable” title. Equitable title gives the purchaser the
right to enjoy all the benefits of ownership, except, in most cases to use it as collateral for
a loan. The purchaser, generally, is entitled to the tax benefits of ownership, since the IRS
typically treats a Contract for Deed as a sale. Therefore, the interest payments are
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deductible. Generally, if the purchaser defaults, it is treated as a foreclosure. Most states
have a specific statute dealing with foreclose on a Contract for Deed.
The benefits to a seller in a Contract for Deed includes: i) Generally, can get a larger
down payment; ii) Gets additional income from the interest, and ; iii) Purchaser is
responsible for repairs and maintenance and typically takes better care of property, than
renter.
o Rehab and rent
You may choose to be a part time landlord or a full time career landlord. The obvious
benefits to owning rental property are, the income stream, favorable tax treatment, and
the ability to hold the property while it appreciates. On the other hand the downside
includes vacancies, evictions, slow pays, and major repairs.
o Land lording tips:
Buy well below market, in order to maximize cash flow.
Learn landlord tenant laws - As a landlord, you need to be knowledgeable of
landlord tenant laws in your area, particularly the eviction laws. See Georgia
Department of Community Affairs booklet, “Questions Frequently Asked by
Tenants and Landlords” in Appendix.
Select the right tenant – There really is no “right” way to screen tenants. Many
landlords think that a prospective tenant with a good credit score is the best
tenant. Not always so. In our experience as landlords, whether they have a job
is the most important. If they have a job, they will tend to pay on time, and are
more than likely not drug dealers, for example.
Make sure important clauses are in your lease to avoid landlord nightmares,
particularly those that refer to breach of the lease.
To reduce your risks and limit your personal liability, make sure your property
is insured at all times. At the very least you should have, Property and
Casualty and General Liability insurance.
Require tenants to have renter’s insurance.
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Form an LLC or Sub Chapter S Corporation to hold title to your property to
reduce personal liability.
Have succinct, written rules, and enforce them.
Don’t give much leeway in accepting late rental payments. Be prepared to file
a dispossessory immediately after the grace period ends.
Take care of maintenance problems, immediately, while they are small
problems.
o Assignment of Tax Deeds and Tax Liens
You may assign your tax deed or lien for money. In other words you sell your legal rights
under the Tax Deed or lien to another party, subject to any redemption rights. Assignment
is the law of transfer of rights held by one party to another party. The party who
originally has the rights is referred to as the Assignor, and the party to whom the original
owner of the rights is transferring to is referred to as the Assignee. A Tax Deed for
example can be assigned at any time. Assignments are generally permitted, unless there is
an express prohibition against it. Generally, there are no laws prohibiting the assignment
or transfer of Tax Deeds or Liens. Moreover, it is not necessary to get permission from
the delinquent taxpayer. However, the delinquent taxpayer does have to be given notice
of any such assignment where the Tax Deed or Lien is still in the redemption period.
Assignments of interests in real estate must be in writing. Hence, an assignment of a Tax
Deed or Lien must be in writing.
DETERMINING VALUE OF UNDERLYING PROPERTY
Market Value Approach
The Market Value Approach to real estate involves a comparative analysis of a particular
property against other “comparable” properties that have recently sold in the designated
area. This can be done in several ways.
1. Review sold listings from the local real estate board of realtors
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2. check deed transfer information from the property deed records
3. use a commercial comparable service such as “Zillow”
When doing a market analysis it is very important to look at data of similar properties. In
other words, compare apple to apples. Only if there are no records of recently sold
properties, look at listing prices to get an idea of market values. In conducting market
analysis, it is helpful to get a professional’s view point as to where the market is headed.
Are values going up or down? In a down market, has it bottomed out? Tax assessments
can be used as a quickie, thumbnail view of market value. Tax assessment values are not
necessarily market value and, usually are not. However, once you know your market, you
can use a formula. For example, in Fulton County Georgia, we use a forty percent
formula. In other words, the amount of the assessment is generally forty percent of the
market value. The comparable sales method is the most commonly used method, and
probably the most accurate to determine the value of single family homes, condominiums
and rental apartments up to four units. Many factors are relevant in assessing a residential
property’s value using comparables. The three main factors are:
1. Location – The typical radius for comparing properties is a one mile radius or
less.
2. Square footage – Compare homes of comparable square footage.
3. Number of bedrooms and bathrooms – The number of bedrooms and bathrooms
tends to be more significant than the square footage. For example, a 3 bedroom
1,800 square foot house will have more value than a two bedroom 1,800 square
foot house.
Income Approach
The income Approach to Valuation of real estate is typically used to value commercial
and investment properties. It is the most widely used method of valuation for income
producing properties. This approach capitalizes an income stream into a value indicator.
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This is accomplished by using revenue multipliers called “Capitalization Rates”, applied
to the Net Operating Income (NOI)
Net Operating Income (NOI) calculations
The Net Operating Income (NOI) is basically, Gross Potential Income (sometimes
referred to as Gross Revenue), less vacancy and collection losses, which equals Effective
Gross Income, less Operating Expenses (but excluding debt service, income taxes and
depreciation). Gross Revenue is the total amount of all revenue produced by an income
producing property. Gross Potential Income is the projected amount of all revenue
produced by an income producing property.
Example:
Potential Gross Income $ 600,000
Less 5% vacancy rate $ (30,000)
Less 1% collection costs $ (6,000)
Effective Gross Income $564,000
Less Operating Expenses $ (300,000)
Net Operating Income $264,000
Determining Capitalization Rate
Capitalization Rate or “Cap Rate”, is the percentage number used to determine the
current value of a property based on operating income or estimated future operating
income. For example, if you multiply the capitalization rate by the Net Operating Income,
this would give you the estimated current value of the property. The Capitalization Rate
26
would be determined based on an appraisal and/or Cap Rates of comparable properties
that have sold recently. For example, you could look at the NOI and divide the NOI by
the sold price to get the Cap Rate. You could also determine what return you expect or
want to get from your investment, and use that projected return as your cap rate. Use this
formula, only as a ball park, cursory projection. This is not the only method for
calculating income property values, only one tool to be used with other methods and
formulas.
Cash Flow analysis
Cash Flow is determined by deducting the actual or projected debt service from the net
operating income. Debt service is the amount of money expended to repay borrowed
funds, including principal. In other words, it is the accounting for money actually taken
in, less monies actually paid out.
Return on Investment
Return on Investment (ROI) is a widely used metric, which attempts to measure the
profitability of an investment. The basic formula for calculating Return on Investment is
the gain from Investment minus the cost of the investment, divided by the cost of the
investment.
ROI = gain from investment – cost of investment
Cost of investment
The result is expressed as a percentage or a ratio
For example, you bought a house for $100,000. You sold the house for $150,000,
therefore your ROI = 50%
The formula for determining ROI is just a ballpark, guide, as there are many different
inputs that can be used to determine ROI. Because of this, ROI calculations can be easily
manipulated to suit the user’s purpose. Therefore, make sure you understand the inputs
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that were used to determine a particular ROI. In the example above, the calculation is
based on paying cash for a property. You can calculate ROI, by factoring in financing
variables.
Assessing Sinking Fund
Sinking fund accounting entails setting aside funds, usually in a bank account, that are
used to pay for anticipated and unanticipated future expenses and capital improvements.
Therefore, in calculating your NOI or cash flow analysis, be sure to include a sinking
fund deduction for items such as new roof, painting, replacement of equipment.
Assessing Downside Risk
In estimating downside risk, you are looking at the worst- case scenario. If the value of
property bought at a tax sale is above the price paid for the property, then the downside
risk is minimized, but not eliminated. Other factors must be taken into consideration,
such as carry costs for a period longer than expected, or not being able to exit when you
need to. Downside risks are highly relative to individual circumstances. Part of assessing
downside risk is recognizing “alligators”, which are non-income producing properties
that do not counterbalance the cost to maintain the “alligator”. The question is, when will
the value increase considerably more than the cost to feed the “alligator”, and how long
can you handle the negative cash situation?
Determining “After Repair Value” (ARV)
After Repair Value (ARV), involves a calculation to determine what a house is worth
after it has been renovated. Hence, it is used to determine whether it is a good deal to
invest in. It will also assist in determining what the maximum bid at auction should be.
Before you bid on a property, you need to know what you can sell it to an investor for, or
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what you can sell it to a consumer for after it has been renovated. As the vast majority of
properties sold at tax sale are in need of repair or complete renovation, you need to know
your numbers before you go to auction. After Repair Value, is basically the same as Fair
Market Value (FMV).
In determining ARV, you need to be conservative in your estimate. Generally, you
estimate ARV by following the following steps.
Use recent comparable sales for the particular location. A good rule of thumb is to
use 3-6 comparable homes that sold in the last 6 months, and within a 1 mile
radius. The more recent a sale the better. The closer the sale to the subject
property, the better. Do not use listing prices. Alternatively, you may use a real
estate broker to do a “Comparative Market Analysis”, or an Appraiser to do a
“desk” appraisal.
Once you know what your ARV is you can estimate what your profit will be, if sold.
ARV − sales price − renovation or repair cost = profit
o Estimating repairs and renovations
Unfortunately, with tax sale properties, you cannot do a walk through to determine what
repairs and what extent the repairs must be done. This is where physically looking at the
property is important. You will first need to determine if the property is vacant. If it is
vacant you will be able to look through windows to see what condition the property is in.
You will also be able to determine if windows are missing or there is a gaping hole in the
roof. Otherwise you will need to make certain assumptions and estimate repairs based on
the worst case scenario. You can also assume the property is livable, if it appears to be
occupied. You will need to determine what the maximum amount you should pay for the
property, after factoring in the cost of repairs and other costs.
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If you are able to gain entry, then you should make a thorough inspection. This is shaky
ground, as this may be considered trespassing. If there is a no trespassing sign, it is
advisable to stay off the property. Safety concerns should also be taken into
consideration. When viewing properties, it is advisable to have at least one other person
accompany you.
Exterior repairs to check:
Sinking and cracks in the foundation, and in driveways;
Pooled water in the yard may be an indication of drainage problems, or perhaps
even a broken water main.
Assess whether a patio or pool and needs to be demolished, replaced, or repaired.
Condition of any out buildings like a garage.
Look for any trees that may have to be cut down.
Signs of water seepage on the foundation or into the basement;
Examine roofing, check flashing around chimney and vents, check for different
colored shingles (which means roof has been repaired), check if ridge of roof is
sagging
Condition of siding or if any shingles are missing, also check for signs of
carpenter bee or ant infestation;
Windows, doors and trim for signs of rot or other deterioration and determine if
doors or windows will need to be replaced;
Examine porch for stability and soundness, also check where any wood is in
contact with soil for signs of deterioration;
Structural termite damage;
Examine fascias and soffits for rot;
Missing or damaged gutters and downspouts;
Interior repairs to check:
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Condition of floors, check for stability, soundness, and note whether floors are
level. Check if hardwoods are present and condition;
Condition of walls and ceilings and whether they are plaster or drywall; check for
signs of water damage, which would indicate an exterior leak;
In kitchen check for condition of utility connections such as plumbing and
electrical;
Inspect for water damage or leaks in attic;
Check basement walls for signs of bowing, cracks and separation, check for
moisture problems such as mold and mildew. Look for signs of flooding, also
check any wood trim for signs of rot or insect infestation;
Check for water heater and condition, look for signs of leakage or rust; take not of
any sewage smells, as this normally indicates a damaged or deteriorated vent pipe,
in addition look for signs of burst pipes;
Check for presence or absence of heating apparatus; note the type of heating
system; with properties that have been vacant for a while, you can usually
conclude that it will need a new heating system;
Check for presence or absence of air conditioning unit, if present, look for signs
of rust or deterioration;
Check for signs of mold contamination;
Look for signs of water and water intrusion;
Check for electrical, fire and safety hazards;
Look for signs of environmental contamination;
Determine if water is supplied by septic tank or sewer.
Use the Repair Estimate Guideline, only as general guidelines and ball park figures to be
modified.
Repair Estimate Guide: Interior
Demolition
Windows $300 per window
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Carpeting $3 per sq yard (replacement)
(clean)
Hard wood floors $ (replace)
(refinish)
Walls
Framing
Sheetrock repairs
Sheetrock replacement
Wallpaper removal
Insulation
Ceilings
Repair
Replacement
Kitchen
Cabinets
Repair, refinish, upgrade
Replace
Countertop refinish
Countertop replacement
Framing
Bathroom
Vanity
Repair, refinish, upgrade
Replace
Toilet replace
Tub replace
Shower replace
Sink replace
Faucet replace
Tile replace
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Framing
Ventilation
Attic
Insulation
Ventilation
Basement
Waterproofing
Sump pump installation
Framing
Drywall
Painting
Water heater replacement
Furnace replacement
Air conditioning replacement
Appliance replacement
Electrical
Replace breaker box
Installation of receptacles and switches
Exterior
Roof
Repair
Replace
Foundation
Repair
Septic system
Repair
Replace
Landscaping
Clean up mow and trim
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Tree removal
Lawn re sodded
Deck/Porch
Repair & refinish
Build
Patio
Repair & resurface
Build
Garage
Demolition
Roof repair
Roof replace
Framing
Door
Gutters
Windows
Driveway
Repair & refinish
Replace/new
Siding
Power wash
Re-side
Repair
Gutters
Replace
Additions $80-150 sq ft
Use rehab estimates from at least 2 contractors;
Use material estimates from retailers like Lowes and Home Depot.
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See Property Inspection and Repair checklist in Appendix.
MODULE B SELF TEST
True False
1. An “Exit Strategy” is determined after you have exited an investment.
2. As a general rule, it is easier to find bargains in good (up) markets, rather than
down markets.
3. “Flipping” during a down market is risky.
4. An “Option to Purchase” is an unilateral contract.
5. In a down market, Leases with Option to Purchase is generally a better option
than selling outright.
6. Tax deeds may not be assigned for money (sold).
7. “Comparables” are associated with the Income Approach of Valuation.
8. The “Income Approach” is typically used with commercial and investment
property.
9. Tax assessment and market value are usually the same value.
10. Net Operating Income (NOI) is a method of calculating the present value of
residential property.
11. NOI is arrived at by subtracting expenses from gross income.
12. “Dollar Cost Averaging” is a long term investment concept, that essentially
means, what goes down must eventually go up.
13. If you sell your Tax Deed to another party, the original owner still has a right to
redeem the property from the party you sold the Tax Deed to.
14. Cash flow analysis is the accounting for money actually taken in, less monies
actually paid out
15. A “Sinking Fund” refers to a declining bank account
16. ARV is another way of determining whether a property is a good deal to invest in.
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Multiple Choice
1. Which is a true statement:
a) If a market continues to rise, the likelihood of selling a property quickly
for large profits increases.
b) In a down market, bargains are in large supply.
c) It is harder to find bargains in good (up) markets.
d) All of the above.
2. As the Optionee/Tenant in a Lease with Option to Purchase, you:
a) May claim the depreciation of the property.
b) Are the legal titleholder.
c) May defer capital gains treatment on the property.
d) None of the above.
3. A Contract for Deed:
a) Is the same as a Land Contract.
b) Does not transfer title until the purchase price is paid in full.
c) Gives the purchaser tax benefits of ownership.
d) All of the above.
4. Assignment of Tax Deeds:
a) Is prohibited by state statute.
b) Can only be done during the redemption period.
c) Must be in writing.
d) All of the above.
5. Included in the three main factors in assessing a residential property’s value,
using comparables is:
a) Number of bedrooms and baths.
b) Location.
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c) Square footage.
d) All of the above.
6. Which is not true of “flipping”:
a) Flipping is illegal.
b) A short term exit strategy.
c) Flipping “as is” is essentially “wholesaling” a property.
d) All of the above.
7. Where a purchaser make installment payments and doesn’t receive title on a
property until it is paid in full is a:
a) Purchase and Sale Agreement.
b) Contract for Deed.
c) Lease with Option to Purchase.
d) None of the above.
8. Selling your rights under a Tax Deed to another party is:
a) An Option.
b) An Assignment.
c) Illegal.
d) None of the above.
9. Which is true of an “Assignment” of a Tax Deed:
a) The delinquent taxpayer doesn’t have to be given notice of the assignment,
while the property is in the redemption period.
b) You cannot assign your Tax Deed for money.
c) It is not necessary to get permission from the delinquent taxpayer.
d) None of the above
10. Which is a true statement regarding market values:
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a) The comparable sales method is the most commonly used and most
accurate to determine value of single family homes and condos
b) The main source for comparables are real estate agents listing prices
c) The typical radius for comparables is ten (10) miles or less
d) All of the above
11. Which is not true of the “Income Approach”:
a) It is typically used to value commercial and investment properties
b) It capitalizes an income stream into a value indicator
c) It is the most widely used method to value single family rental property
d) All of the above
12. Which is true about “Capitalization Rate”:
a) It should be used as a ball park projection of value
b) It is not the only method for calculating income property values
c) It is used to determine current value of property based on operating
income or projected future operating income
d) All of the above
13. Which is true of “ARV”:
a) ARV is basically the same as FMV (Fair Market Value)
b) Has nothing to do with what you should bid on a property at tax sale
c) Has nothing to do with comparable sales
d) None of the above
MODULE C PURCHASING PROCESS AND CONSIDERATIONS
DELINQUENT TAX SALE PROCEDURES
Tax Lien Procedures
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Tax liens are not sold to the public in Georgia. In states where tax liens are sold, such as,
Florida, tax certificates are sold to the public, after advertisements are made once a week
for three consecutive weeks. In Florida, bids are offered with the tax certificate going to
the bidder willing to take the lowest interest rate. The winning bidder receives simple
interest which accrues on a monthly basis. When the owner pays the delinquent taxes, the
interest is calculated and a check is sent out to the certificate holder. If the owner does not
pay the delinquent taxes, within a certain period, the tax certificate holder can request a
tax deed application. The property then goes to tax sale, with the highest bidder becoming
the owner of the property.
Tax Deed Procedures
Listings of properties up for tax foreclosure sale are typically made available to the
public. For some tax sales, you have to register to bid at the sale. Different areas have
different rules and procedures for bidding at the sale. Generally, bidding by phone, mail
or fax is not allowed, as in Georgia. The opening bid is generally based on the total of
the amount of tax due, plus penalties, interest, lien (Fi Fa) costs, levy costs,
administrative, mail, advertising, and other costs such as, deed preparation. Payment at a
tax sale is generally required in full upon conclusion of the tax sale, in the form of cash,
certified check, cashier’s check or money order.
We will use Fulton County Georgia as our model for tax deed procedures, as procedures
may vary from county to county. In Fulton County, Georgia:
A final list of properties going to tax sale with the starting bid prices are available
in the Tax Commissioner’s Office on the day of the auction;
You do not need to pre-register to bid at the tax auction;
You must be personally present for the auction, as bids by phone, fax, or mail are
not accepted;
The property is sold to the highest bidder;
39
Payment is required immediately following the conclusion of the sale in the form
of cash, cashiers check, or money order;
You will be required to fill out a short form at the time you tender the cashier’s
check, which basically is information used by the Sheriff’s Department to draft
the tax deed;
After approximately three to four weeks, you can pick up or have the tax deed
mailed to you;
Upon receipt of the tax deed, it is your responsibility to record the deed and a
form PT61 (Real Estate Transfer Tax form);
As a tax sale purchaser, you cannot take immediate possession of the property,
make any improvements, evict tenants, or occupy the property until the right to
redeem the property has been foreclosed on, or the title has “ripened by
prescription.”
The Auction and Bidding Procedure
Properties sold at delinquent tax sales are usually sold under the legal principle “Caveat
Emptor”, which means “buyer beware”. This is why you must do thorough research.
Some buyers end up buying a different property other than the one they intended, because
some official listed the wrong address. Some buyers think they are buying a house and
find out they only purchased a small lot, too small to develop.
The main principle to remember is that once you tender a bid at the public auction, you
become personally liable and responsible for the bid. Hence, you cannot back out,
without serious repercussions. Moreover, in some states, the consequence of not
tendering payment after making a winning bid carries criminal consequences. According
to Georgia Statute, O.C.G.A. sect 9-13-170, “Any person who becomes the Purchaser of
any Real or Personal Property at any sale made at public outcry who fails or refuses to
comply with the terms of the sale when requested to do so, shall be liable for the amount
of the purchase money. It shall be the Tax Commissioner’s option either to proceed
against the purchaser for the full amount of the purchase money or to resell the real or
40
personal property and then proceed against the first purchaser for any deficiency arising
from the sale”.
There are two types of bidding procedures, “bid up” and “bid down”. Tax deed sales are
generally, “bid up”, and some tax lien sales are “bid down”.
1. “Bid up”: The price is increased based on competitive bidding. In this case, the price
paid for the tax lien or tax deed, is based on the highest bid, and the interest rate
earned by the tax lien or tax deed is fixed by statute. Georgia is a “bid up” state.
2. “Bid down”: In this scenario, the interest rate is “bid down”. In other words, the
winning bidder is the person who makes the bid for the lowest interest rate payable on
the lien.
Bidding Method
In Fulton county, right before the tax sale you can get a final list of properties being
auctioned. You may use this list to follow the outcries and determine which property is
being sold. You can recognize the properties you have decided to bid on by their
addresses. Generally, you make a bid by shouting out your bid. It may also be a good idea
to raise your hand as you shout out, to get attention. If you are the winning bid, the
Sheriff will ask your name, then you proceed to a table to show your ID. Then you may
resume bidding on other properties. When you arrive at the tax sale it is important to have
a list of properties you intend to bid on, with the maximum amount you intend to bid. It is
easy to get caught up in the moment and go over your intended bid amount.
Authority to Void Sale
Georgia statute gives local taxing authorities the right to void any tax sale that is later
determined to have errors that result in the tax sale being invalid.
PROPERTY REDEMPTION
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A right to redeem the property means the person whose property was sold at the tax sale
has a certain period of time in which to “buy his/her own property back. Most states have
a right of redemption and a few do not. (See Redemption Rights by State in Appendix).
In tax deed states such as Georgia, a tax deed only conveys a “defeasible” title, which
does not vest in the purchaser until the redemption period has expired, and the purchaser
has “foreclosed on the right to redeem”. The purchaser of a property at a tax sale in
Georgia is responsible for collecting the redemption money and the proper processing of
documents concerning the right of redemption. However, most states with rights of
redemption, tax collectors usually handle the collection of the redemption money.
Redemption Period
The length of the redemption period also varies from state to state. In Georgia, The
statutory period is within 12 months following the tax sale. However, it may be redeemed
at anytime, up until the “the right to redeem is foreclosed on”, but not later than when the
title “ripens by prescription” (see below). The 12 month limit does not begin to run,
however, until the Tax Purchaser pays the amount that he or she bid. This is why it is
important to remember to get a receipt, signed and dated by the tax commissioner. At the
Tax Purchaser’s option, he/she may consent to redemption after the statutory period has
expired. So, a Tax Purchaser does not have to accept the redemption money, but may
accept the redemption money after the redemption period has been foreclosed on.
( O.C.G.A. sect 48-4-40)
Persons Entitled to Redeem the Property
In most localities, when delinquent property is sold at tax sale, it varies, as to who can
redeem the property, however, creditors are usually allowed to redeem the property from
the purchaser of the tax deed. In Georgia, the owner (defendant in Fi Fa), creditor, or any
other person having any right, title, or interest in the property may redeem the property.
(O.C.G.A. sect 48-4-40). Generally, in Georgia, for a creditor to be authorized to redeem
42
the property, the creditor must have a recorded lien on the property. However, the
exception is embodied in O.C.G.A. sect 48-4-41, Redemption of Creditor Without Lien.
This section provides, if a property is redeemed by a creditor of the defendant in fifa who
has no lien, the creditor shall have a claim against the property for the amount advanced
by him in order to redeem the property if:
1. There is any sale of the property after the redemption under a judgment in favor of the
creditor; and
2. The Quitclaim Deed is recorded as required by law.
Amount Payable for Redemption
Redemption involves reimbursing the purchaser at the tax sale, the amount paid for the
property at the tax sale, plus interest or premium, plus other costs. In Georgia, pursuant
to O.C.G.A. sect 48-4-42, the redemption price is the amount the purchaser paid for the
property, plus a 20% premium for the first year or fraction thereof, plus any taxes paid on
the property by the purchaser after the tax sale, plus any special assessment. A 10%
premium is also payable in subsequent years, up until the right to foreclose on the
redemption period is effected. Therefore, 20% during the first year, add 10% after a year
and a day, equals 30% plus expenses, return if redeemed. If redemption is not made
within 30 days after the notice terminating the right to redeem has been properly issued
and advertised, there must be added to the redemption price the Sheriff’s cost of serving
and publishing notice O.G.C.A. sect 48-4-45.
How Return on Investment is affected by when the owner Redeems the Property
The following breakdown is based on $20,000 investment which is redeemed in the first
year:
Month redeemed Redemption amount Return on Investment
Month 1 $24,000 240%
Month 2 $24,000 220%
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Month 3 $24,000 200%
Month 4 $24,000 180%
Month 5 $24,000 160%
Month 6 $24,000 140%
Month 7 $24,000 120%
Month 8 $24,000 100%
Month 9 $24,000 80%
Month 10 $24,000 60%
Month 11 $24,000 40%
Month 12 $24,000 20%
o Redemption Formula:
REDEMPTION FORMULA
AMOUNT paid at tax sale $20,000.00
+ taxes paid on property by purchaser after sale $1,000.00
+ any special assessments paid on the property $500.00
+20% premium 1st year (or fraction thereof) $4,000.00
+10% premium 2nd year (or fraction thereof) $2,000.00
+Sheriff’s cost in connection with serving the notice $25.00
+cost of publication $80.00
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TOTAL REDEMPTION AMOUNT $27,605.00
Legal Effect of Redemption
Redeeming the property sold at the tax sale has the effect of putting the title conveyed by
the tax deed back to the original owner (defendant in FIFA), subject to all liens that
existed at the time of the sale.
If co-tenant redeemed property by payment of redemption money to purchaser at tax sale,
such redemption does not divest other cotenant of title to his interest in the property. The
effect of the redemption would be to restore title to the same owners who held it before
the tax sale.
If the redemption funds are paid by any authorized creditor or other interested party on
behalf of the owner (defendant in FIFA), the amount paid to redeem the property shall act
as a first lien on the property, and if the required Redemption Quitclaim Deed is recorded
properly, the lien evidenced by the Redemption Quit Claim Deed shall be repaid prior to
any other claims upon the property.
Note that the person paying to redeem the property does not receive title to the property.
The title reverts back to the owner (defendant in FIFA), irrespective of who pays the
redemption price.
Redemption Period Issues
Taxes that become due after the sale
Although a Purchaser at a Tax Sale only has a defeasible title before the redemption period expires, the Purchaser is liable for any taxes that become due on it;
Repairs and entitlement to rents and profits after the sale
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Although a Tax Sale Purchaser is not entitled to rents and profits from the property, or make improvements during the redemption period, a Tax Sale Purchaser may obtain a court order to be able to make improvements upon the property, if the improvement will preserve the value of the property (i.e. a leaking roof that may cause water damage to the property).
The Purchaser of a Tax Sale property may sell the property before the redemption period has expired. However, the purchaser buying the property from the Purchaser from Tax Sale, is purchasing the property subject to the Right of Redemption.
Foreclosure of Right to RedeemMoreover, in Georgia, after a one year redemption period, the purchaser at the tax sale must “foreclose on the right of redemption”, in order to obtain full title to the property. This foreclosure of the right to redeem bars the owner who lost the property at the tax sale from reclaiming the property. Alternatively, a title shall “Ripen by Prescription” after a period of four years from the date of execution of the Tax Deed. In other words, if such property “Ripens by Prescription”, Notice of foreclosure of the Right to Redeem is not required, in order to bar redemption and gain full title.
O.G.C.A. Sections 48-4-40 through 48-4-48 provide the complete Foreclosure of Right to Redeem process.
Notice requirements
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After the redemption period has expired, in order to bar the right of redemption, the Tax Sale Purchaser must draft an original notice in accordance with a form included in the Georgia Statute aforementioned, and provide a copy for each person to be served ( see sample in Appendix).
Persons who must be given notice
Under sect. 48-4-45, O.C.G.A., notice of the Foreclosure of Right to Redeem, must be served upon all of the following persons:
1) The owner (defendant in Fi Fa);2) Any occupants of the property; and3) All persons with any recorded right, title, or interest in, or lien
upon the property.The heirs of any deceased owner must also be served.Note – Notice is not required to be served upon any person whose right, title, interest in, or lien upon the property is not recorded in the county in which the property is located.
Notice must be given to lienholders who exist at the time of any attempted foreclosure of the right to redeem. Therefore, lienholders who acquired their interest subsequent to the tax sale are entitled to notice.
Method of Service of Notice
Persons who are entitled to notice, that live in the county, must be served notice by the Sheriff (or Deputy). The Sheriff may leave a copy with any person at the residence. Service of notice may be waived in writing by any person entitled to notice.
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Persons who are entitled to notice, that do not reside in the county where the property is located may be served by registered or certified mail or statutory overnight delivery (if the address is reasonably ascertainable).
The Purchaser must deliver the original and copies of these notices, together with a list of persons to be served, to the Sheriff, not less than 45 days before the date set in the notice for termination of the Right of Redemption;
Within 15 days, the Sheriff must serve a copy of the notice upon all persons on the list residing in the county and make an entry of such service on the original notice. Leaving a copy of the notice at the residence of any person required to be served is considered sufficient service;
If the Sheriff makes an entry that he or she has been unable to serve the notice on any person, the Purchaser must immediately have it published in the official county legal newspaper, once a week for two consecutive weeks. Alternatively, Purchaser may go ahead and publish the notice from the onset, contemporaneously with service. In this case, the notice must be advertised in the county legal newspaper where the property is located, once a week for four consecutive weeks in the six month period immediately prior to the week of the redemption deadline date specified in the notice. O.C.G.A. sect 48-4-45
After paying the Sheriff’s cost, the original notice is returned to the Tax Sale Purchaser. The original notice with entries should be recorded in
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the deed records of the Clerk of the Superior Court in the county where the subject property is located.
Post notice requirements
If the property is redeemed, whether by the original property owner or other interested parties, such as, Motgagees and lienholders, the Tax Deed Purchaser is required to execute a Quitclaim to the original owner. The Quitclaim Deed must not be granted to the Mortgagee or lienholder. The redemption of the property gives back to the original delinquent owner the title conveyed to the Purchaser at the Tax Sale, subject to all liens existing at the time of the tax sale.
If the redemption money is paid by a Mortgagee or lienholder, or other person having an interest in the property, and it is properly drafted and recorded in the Clerk of the Superior Court, then the amount paid shall constitute a first lien on the property, and must be paid before any other liens on the property.
NOTICE OUTLINE
TAX SALE DATE
12 MONTHS AFTER THE TAX SALE DATE BUT NOT PRIOR TO 6 MONTHS IMMEDIATELY PRECEDING FORECLOSURE DATE IN NOTICE – PUBLISH NOTICE OF INTENT TO FORECLOSE IN COUNTY LEGAL PAPER FOR 4 CONSECUTIVE WEEKS
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12 MONTHS AFTER THE TAX SALE DATE BUT NOT LESS THAN 45 DAYS BEFORE THE DATE SET IN NOTICE FOR THE EXPIRATION OF THE RIGHT TO REDEEM DELIVER NOTICE TO SHERIFF FOR SERVICE OF NOTICE OF INTENT TO FORECLOSE ON COUNTY RESIDENTS AND SEND NOTICE BY MAIL TO OUT OF COUNTY RESIDENTS.
WITHIN 15 DAYS AFTER DELIVERY TO SHERIFF, SHERIFF WILL SERVE NOTICE (OR ATTEMPT SERVICE) ON PERSONS INCLUDED IN YOUR LIST.
After Right of Redemption is Foreclosed
Following the statutory notice requirements, if the property is not redeemed within the period designated in the notice, the effect is that the right to redeem the property is terminated, foreclosed, divested, and forever barred. (Unless the purchaser extends the right by grace)
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A tax lien generally takes a priority position on the property (with limited exceptions – see below). All other liens, such as, mortgages take a subordinate position on the property. After the tax sale and generally after the right of redemption is foreclosed, all subordinate liens are extinguished, and the purchaser of the tax deed receives a “free and clear” title to the property.
Federal tax liens
A federal tax lien imposed by the IRS, arises against the property of a taxpayer for failure to pay taxes owed to the United States government. As a general rule, under federal law, an IRS lien has priority if it is filed first. However, there are a few exceptions, such as, purchase money mortgages, and real estate taxes. The exception for the real estate tax liens are conditional. In the case of non-judicial sales, the tax lien will not divest or eliminate a junior federal tax lien unless written notice is given to the District Director of the IRS by certified mail not less than twenty-five days before the sale, (or unless the IRS consents to the sale free and clear of its lien) if the tax lien was filed more than thirty (30) days prior to such tax sale. The IRS may redeem the property from tax sale, subject to the state redemption period or 120 days whichever is longer.
Alternative to Foreclosure of Right to Redeem – Ripening of Tax Deed by Prescription
A title given under a tax deed at a valid and legal sale shall “Ripen by Prescription” after a period of four years from the recordation of that deed in the deed records in the county where the subject property is located. This means, that a fee simple title to the property, shall vest absolutely in the purchaser of the tax deed (or heirs or assigns).
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Moreover, notice of the right to redeem the property is not required, if the title ripens by prescription.
TAX LIEN/DEED INVESTMENT DIAGRAM
INVESTOR
RESEARCH AND DUE DILIGENCE
BID AT AUCTION
PURCHASE REDEEMABLE TAX DEED AT AUCTIONFOR $10,000
OWNER REDEEMS FIRST YR MO 4 OWNER DOES NOT REDEEM$12,000 TO PURCHASER PURCHASER FORECLOSES RTRETURN ON INVESTMENT PURCHASER TAKES POSSESSION
OF PROPERTYOWNER REDEEMS SECOND YR MO 2 MARKET VALUE = $50.000$13,000 TO PURCHASER LESS $10.000 COSTRETURN ON INVESTMENT $40.000 EQUITY
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RETURN ON INVESTMENT
III LEGAL CONSIDERATIONS AND PITFALLS
Actions to Cancel Tax Deeds
After notice to foreclose the right of redemption has been given, the owner and any interested parties are prohibited from filing any action for the purpose of setting aside, canceling, or in any way invalidating the subject tax deed, unless and until the plaintiff in the lawsuit pays the purchaser (or successors) of the tax deed the full amount of the redemption price. The exception to this requirement is, the tax or special assessment which the delinquent taxes were based, was not due at the time of the sale, or service or notice was not given as required in the statute.
Quiet Title Action
Quiet Title actions, generally, are utilized for the purpose of removing clouds to land titles. In Georgia there are basically three statutory methods to removing clouds to land titles: 1) Conventional Quiet Title; 2) Georgia Land Registration Act of 1917, and; 3) Quiet Title Against All the World. The Quiet Title Against All the World is the most commonly used method for removing clouds to titles in Georgia. Moreover, it is the primary means of acquiring “marketable title” on properties sold at tax sale. Conventional Quiet Title
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An equitable proceeding where the Petitioner must specifically identify the instrument which is creating the cloud to the title. It is limited in scope as to what constitutes a cloud to title (See O.C.G.A. sect 23-3-42).
Georgia Land Registration Act of 1917
A procedure for judicial title registration, and an action “In Rem”, This procedure is “against all the world” unlike the conventional Quiet Title Action, and like the “Quiet Title Against All the World” action. An order under this system has the effect of vesting the title to the land in the Petitioner, whereby the clerk of the Superior Court issues a certificate of registration which is binding and final against all parties. (See O,C.G.A. sect 44-2-40)
Quiet Title Against All the World
Mandated by the Quiet Title Act of 1966, the purpose, which is to: “create a procedure for removing any cloud upon the title to land, including the equity of redemption by owners of land sold at tax sales, and for readily and conclusively establishing that certain named persons are the owners of all the interests in land defined by a decree entered in such proceedings, so that there shall be no occasion for land in this state to be unmarketable because of any uncertainty as to the owner of every interest therein. O.C.G.A. sect 23-3-60. A judgment for Quiet Title Action Against All the World, binds “all the world” against any and all clouds to a land title. See the sample petition for Quiet Title Against All the World in Appendix.
In the context of tax sale property, the Quiet Title Action Against All the World, essentially confirms that the procedures carried out by the
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Tax Collector and/or Ex-Officio Sheriff were carried out in accordance with state statutes. By law, when property is sold at tax sale, any claims that the prior owner, his successors, and any lien holders may have had are extinguished (except for certain limited liens like Special Assessments). However, the purchaser of the tax deed does not get “marketable title” unless a Quiet Title Against All the World is completed and a court order issued to that effect. Marketable title refers to a title that can be transferred to a new owner without the likelihood that claims will be made on it by another party. Title insurance companies, generally will only insure marketable titles.
As the purchaser of a tax deed, you do not necessarily have to worry about marketable title if you do not intend to sell the property, retail, or if you don’t intend to get financing on the property or intend to sell to someone who intends to get financing. Otherwise, you can convey the property through a Quit Claim Deed or Special or Limited Warranty Deed. (See definitions in Glossary).
As the Quiet Title Against all the World Action is the most widely used to remove any real or prospective clouds from titles of properties bought at tax sale, we have included the process and procedure involved below.
Primary procedural steps to bring a Quiet Title Against All the World action:
A verified Petition must include:
1) A full legal description of the property;2) A statement regarding the Petitioner’s interest in the
property;
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3) A statement specifying whether the interest in question is based on a written instrument or adverse possession or both;
4) Description of all adverse claims of which Petitioner has actual or constructive notice;
5) The names and addresses of any possible adverse claimants; and,
6) If the proceeding is brought to remove a particular cloud or clouds, a statement as to the grounds upon which the cloud or clouds are sought to be removed.
The following must also be filed:
1) A survey of the property;2) A copy of the immediate instrument or instruments of
record or otherwise known to Petitioner,( i.e. Tax Deed), upon which Petitioner’s interest is based
3) A copy of the immediate instrument or instruments of record or otherwise known to Petitioner, if any, upon which any person might base an interest in the property adverse to the Petitioner (O.C.G.A. sect 23-3-62);
4) A Notice of Lis Pendens must be filed by the Petitioner when he files his Petition (see definition in Glossary).
Procedure:1) The court, upon receipt of the Petition, forwards the
Petition to a “Special Master”;2) The Special Master causes process to be served personally
on all persons entitled to be notice and to all persons whom the action may concern. If process cannot be served personally, then the Special Master has to request
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the Court to issue an order allowing service of notice by publication. This notice must be published in the legal newspaper in the county where the action is brought;
3) The Special Master then determines the extent of the Petitioner’s title and reports his findings to the Superior court;
4) The Superior Court issues a final decree which must be recorded in the Clerk’s office (prior to the issuing of the decree, any party has aright to demand a trial by jury);
5) Any party not previously a party to the action has a right to intervene within within thirty (30) days from the issuance of the final decree.
Requirements to file Petition
1) Any person, including corporations, partnerships, or other associations, may file a Quiet Title Against All the World action;
2) The Petitioner must claim a Freehold Estate or an Estate for Years (of which 5 years remain);
3) The claimed interest in the property must be specific legal right, not an expectancy;
4) The action may may be brought against all claimants known or unknown to the Petitioner;
5) Venue is proper in the county in which the property is located.
See sample Special Master’s Report in Appendix.
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IV FINANCING YOUR PURCHASE
Financing options are limited, as tax liens and deeds typically must be paid for in cash at the time of purchase. However there are alternative options as outlined below.
Credit Cards
Credit cards are not generally accepted for payment at a tax sale. Because you can generally get started in this business with very little capital, and the returns are so high, you could afford to use your credit card (cash advance) to finance your first purchase. However, you must have a sound plan for paying off the credit card because of the high rates of interest. Moreover, cash advances are even more costly. It is a good idea, for example, to use your credit card to pay for example, your mortgage, and use your cash to make a purchase at the tax sale.
Home Equity Line of Credit
A home equity line of credit (“HALOC”), is like a line of credit, secured by your home. Typically it represents a second lien on your property. It usually has a high interest rate, therefore, it should only be used on a short term basis. It is recommended, only if needed to purchase a super deal and you have a way to re-pay the funds within a few months.
Joint Venture with others
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A Joint Venture is a contractual agreement between two or more parties, whereby a legal entity is formed for a specific business purpose. It is similar to a partnership, as the joint venture partners, share the risk and profits of the enterprise. A Joint Venture can be formed between individuals, corporations, limited liability companies, partnerships, etc. It is commonly referred to as an equity transaction, as opposed to a debt transaction. Generally, with debt transactions, one party(ies) loans money to another party(ies), and regardless of how the enterprise performs, the debtor is liable to pay the creditor back with interest. On the other hand, with an equity transaction, if there is a profit, then all parties to the joint venture share according to their joint venture agreement. If the enterprise fails, the loss is also shared according to the joint venture agreement. It is not uncommon to form a joint venture, where one party(ies) provide the capital for the joint venture project, and the other party(ies), provide the expertise, and labor. In a typical joint venture, the money party will receive a percentage of ownership in the project. In others, the money party will receive a percentage of ownership in the project and interest.
Borrowing from Private Individuals
In the tax lien/deed business, you have to move fast, and in cash. Some of the other advantages of using private money includes, no credit check, more flexibility over bank loans, and you are able to structure quick exit strategies. You could approach private individuals and offer them a Promissory Note for the funds to invest in tax deeds. This simply entails a promise to pay the funds back with a certain amount of interest for a certain period of time.
Investing in Tax Deeds using your IRA
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There are two main types of IRAs, a traditional IRA and a ROTH IRA. With a traditional IRA, earnings are deferred until you retire. However, earnings in a Roth IRA are tax free.
Traditional IRAA traditional IRA (Investment Retirement Account) is a contribution based investment account, where all contributions made by an individual are tax deductible, with taxes on earnings deferred. This means that earnings within an IRA account are not taxed until later, when the contributor has retired. When funds in an IRA account are withdrawn after a traditional IRA matures, both the initial contributions and earnings are subject to federal income tax.
Annual contribution limits are generally, $5,000 if you are 49 years old or younger, and $6,000 if you are 50 years old or older. Contributions do not accrue, in other words, cannot be carried forward. You lose the right to make contributions for past years if not made.
Any withdrawals from a traditional IRA are considered taxable income, and if participant is less than 59 ½ years old, then a 10% tax will also apply.
You can use your traditional IRA funds to buy tax liens and tax deeds without distribution taxes or penalties. Self directed IRAs are individual retirement accounts that you control.
ROTH IRAThe ROTH IRA is a tax-free vehicle. Although the contributions to the ROTH IRA are taxed when you make them, any income made from the contribution will be tax-free forever. ROTH IRAs are only available to individuals with annual income of up to $110,000 ($160,000 if married)
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<ck this figure still accurate>. If you are under 50 years old, generally, you can make yearly contributions up to $5,000. If you are over 50 years old, generally, you may make contributions up to $6,000. (contribution limits may vary, depending on income range). All ROTH IRA contributions must be used by April 15th of the following tax year. This means that any contributions made between January 1st and April 15th of any current year can be designated in either the previous year or the current year. Therefore, you have a choice, as to which tax year to apply the contribution to.
You may set up a new ROTH IRA, or you may convert a traditional IRA or 401 (K) to a ROTH IRA. If so, you pay the tax on the value of the assets when you convert, and any income after conversion is tax free. It is generally a good idea to convert leveraged real estate, because valuation is on a net basis. Your income must not exceed $100,000 in the year you make your conversion.
You can use your traditional ROTH IRA funds to buy tax liens and tax deeds without distribution taxes or penalties. Self directed ROTH IRAs are individual retirement accounts that you control.
Truly Self Directed IRATruly self directed IRAs allow you to invest in real estate, tax liens and tax deeds, and certain other types of investments as well. Depending on your circumstances, you may either roll over an existing IRA or ROTH IRA to a Truly Self Directed IRA or ROTH IRA, or you may set up a new Truly Self Directed IRA.
There is a significant difference between a “Self Directed IRA” and a “Truly Self Directed IRA. The main difference, is that, you control the
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checkbook. Unlike a “Self Directed IRA”, you sign the checks. This allows you to invest the moment you are ready, without the red tape involved with the “Self Directed IRA”.
Truly Self-Directed Retirement Accounts give you a great deal of flexibility in use of funds to make investments. For example, you do not have to call or get approval from your custodian. You may simply transfer funds or write a check. This is why, using a truly self directed retirement account is ideal for investing in tax deeds. Firstly, you need to identify a truly self-directed custodian or administrator. Secondly, you need to set up a Limited Liability Company. Thirdly, you need to set up a bank account(s). Fourthly, you need to transfer or roll over funds from your existing retirement plans. With a Truly Self Directed IRA, you are not taking a taxable distribution from your IRA, instead, you are making an investment within your IRA. All retirement scenarios give you the opportunity to fund your future with profits from investments on a tax-free or tax-deferred basis. However, a Truly Self-Directed IRA allows you to benefit from a variety of investment options, as long as the assets are not on the IRS’ prohibited list. There are a myriad of rules mandated by the IRS, so it is important to use a professional “facilitator” to set up the account or rollover an account into a Truly Self Directed Retirement Account.
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Hard Money Lenders
“Hard Money” refers to loans by private investors or from non-traditional lenders. The loan is secured by the property. Hard money lenders generally charge higher interest rates than conventional lenders (range 9% - 16%, depending on conventional rates). Credit is generally not an issue with most, as they look more at the ARV of the property and your experience as a rehabber. In addition to the interest over the term of the loan (usually doesn’t exceed 2 years), they charge “points”. Points equal 1% of the loan amount, and must be paid upfront, or they are rolled into the loan. Points charges range from 1-5. Generally, hard money lenders do not lend to purchase properties from tax sale. However, after you have bought a property from tax sale, and the Right to Foreclose on Redemption has been made, it is possible to borrow the re-hab funds from a hard money lender. Residential Hard Money lender generally loan up to 70% of the ARV and are easier to work with than banks. Keep in mind that hard money is temporary, and you need a means of financing out of the loan. One way to finance out, of course, is to sell the property. The other is to refinance the property with a conventional loan. See list of Hard Money Lenders in Appendix.
MODULE C SELF TEST
True False
1. A prospective purchaser at the tax sale must register for the sale at least 5 days in advance
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2. Credit cards are an accepted form of payment for tax sale purchases in Georgia
3. Tax Deed sales are generally “bid up” sales
4. Bidding at Fulton County Georgia tax sales is by silent auction
5. In Georgia, Tax Commissioners collect the redemption money
6. A purchaser of a Tax Deed may agree, but is not obligated to allow an owner to redeem a property, after the Right to Redeem has been foreclosed
7. When an owner redeems a property, the property is conveyed back to him/her subject to all liens that existed on the property at the time of the sale
8. If a creditor redeems property, the creditor will receive the title to the property, subject to all other liens
9. Notice is a pre-requisite to Foreclosure of Right to Redeem
10. In the case of non-judicial tax sales, a federal tax lien will not survive a tax sale if notice requirements are met
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11. Notice is not required if the title Ripens by Prescription
Multiple Choice
1. The opening bid at a tax sale includes the following amounts:a) Total amount of taxes dueb) Penalty, interest, levy and lien costsc) Administrative costsd) All of the above
2. Which is an acceptable form of payment in Fulton County Georgia for tax sale purchase:
a) Credit cardb) Business checkc) Money orderd) All of the above
3. Who drafts the Tax Deed in Fulton County:a) Ex-officio Sheriffb) Tax Commissionerc) Purchaserd) None of the above
4. Whose responsibility is it to record the Tax Deed and real estate transfer form:
a) Ex-officio Sheriffb) Tax Commissionerc) Purchaserd) None of the above
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5. As purchaser of a Tax Deed, when can you take possession of the property, make improvements, and evict tenants:
a) Immediately after the saleb) After the right to redeem the property has been foreclosedc) After the title has Ripened by Prescriptiond) B and C above
6. Which is true in Georgia regarding Tax Deeds:
a) Title vests immediatelyb) Title vests in the purchaser after the purchaser has
foreclosed on the right to redeemc) Title vests in the purchaser as soon as the redemption
period expiresd) None of the above
7. Which is true regarding redemption of a tax sale property:a) The purchaser of property at tax sale is responsible for
preparing a Quit Claim Deed to the owner upon receipt of redemption monies
b) The owner of property sold at tax sale has two years to redeem the property
c) Only the owner of the property can redeem the propertyd) All of the above
8. Which is not true regarding redemption of tax sale property:a) An owner may not redeem the property after the right to
redeem has been foreclosedb) An owner may not redeem the property after the title
Ripens by Prescription
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c) An owner may redeem property up until a judgment for Quiet Title is entered
d) None of the above
9. Who has a right to redeem property in Georgia:a) Lienholdersb) The ownerc) An heir of a deceased ownerd) All of the above
10. If a property sold at tax sale for $30,000, 3 months after the sale, what is the correct redemption amount
a) $34,500b) $36,000c) $37,500d) None of the above
11. If a property sold at tax sale for $40,000, 14 month after the sale, and owner paid $500 in property taxes, what is the correct redemption amount:
a) $8,000b) $8,500c) $12,500d) None
12. Which is true, before the right to redeem has been foreclosed:
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a) The tax sale purchaser is not entitled to collect rents from the property
b) The tax sale purchaser may not make improvements to property, unless a court order is obtained
c) The tax sale purchaser may sell the propertyd) All of the above
13. Which is true of foreclosure of right to redeem:
a) Persons entitled to notice, residing outside of the county where the property is located, may be served by registered, certified, or statutory over night delivery
b) Notice must be published in the legal newspaper in the county where the property is located
c) Interested parties living in the county where the property is located must be served personally
d) All of the above
14. The most commonly used method for removing clouds on titles and to acquire marketable title on property sold at tax sale in Georgia:
a) Quiet Title Against All the Worldb) Conventional Quiet Titlec) Georgia Land Registration Act of 1917d) None of the above
MODULE D POST PURCHASE CONSIDERATIONS
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I POST REDEMPTION PROPERTY INSPECTION
After you have taken possession of the property, you must do an in- depth property inspection. The inspection process must be thorough and comprehensive, covering roof, foundation, structural integrity, plumbing, heating, electrical, and all other interior and exterior elements. You will need to get estimates from contractors in certain areas.
Renovation Guidelines
House renovation or “re-hab” is complex. It is extremely important to plan ahead, then priortize within your budget. Keep in mind the most important areas to increase value: 1) Kitchen; 2) Bathroom; 3) Re-siding; 4) Master Suite addition; and 5) Attic conversions to bedrooms. Figuring out what your renovation costs will be is very difficult. Renovation cost represents an estimate of materials, labor, and local market conditions. The estimates below are based on our experience in investment property. Because there are so many factors that can affect the final cost, we will only set out broad very ball park estimates. See the Estimate Guideline in Module A.
Estimating Costs
At this point, you need to get a minimum of two estimates for each area of work (three is better). Get detailed estimates, so you will be able to make intelligent prioritizing decisions. Once you decide on which estimate is probably the one you will go with, or after averaging the estimates, add another 30% to cover changes, unexpected
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occurances or items. Although the actual cost will vary, you still need to establish a budget. Costs vary based on the following factors:
Extent of renovation Quality of materials used Resources used Type and quality of finishes Cost of demolition Cost of clean up Day labor costs Cost of permits Time of year Extent of work you do yourself
See the Renovation Worksheet in Appendix
II DEALING WITH CONTRACTORS
Deciding on a Contractor(s)
The following are some questions you can ask a contractor to determine suitability:
Whether or not they are licensed (although may not be requirement);
How long been in business; What kinds of projects specialize in; Can you see his/her work; Does he/she have worker’s compensation; How do they normally keep owner abreast of work; How handle change orders;
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What are typical clean up arrangements; Typical payment terms expected (i.e. 1/4th at milestones, end of
job etc); Does he/she give a warranty; Does he/she have references you can call.
Questions to ask about references: What type of renovation was it? On a scale of 1-10 how pleased were you with the job? Was there anything you were not pleased with? Was the job completed on time? Was the job completed on budget? Was the work site kept clean? How long has it been since you used the contractor? Would you use him/her again? How did they handle any warranty or follow up issues?
Check out references of contractors or sub-contractors if you haven’t worked with them before.
Agreement with Contractor(s)
Get agreement with contractor(s) in writing. Firstly, establish if the contract is just for labor, or labor and materials. We generally recommend labor only costs if you have the time and knowledge to purchase the materials. Customarily, we accompany the contractor(s) to the supply store and pay for the purchase. Plan ahead for your purchase of lights, tiles, cabinets, or anything that requires you to make a decision on style, color, etc. It’s a good idea to have these on
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hand prior to time for installation. The bare minimum you want included in the contract is:
Location of project Specify labor and/or materials to be included Commencement date and estimated finish date Details regarding permits and inspections Attach any plans or drawings Specify how change orders will be handled Specify how disputes will be handled Waste disposal Clean up Specify any warranties Payment amount and terms of payment including any deposits
III RENOVATION SCHEDULING
Good planning from the beginning of a job will save a lot of time and money. The longer a renovation job takes to complete, the more you cut into your profit. You need a structure and method for organizing your renovations.
1) Determine if you need any permits. If permits are required, you will need to make a list of repairs you plan to make and a cost breakdown. If you are adding a bathroom or any additions to the house, you will also need plans. The plan doesn’t have to be done by an architect, but it does need to be to scale (this is generally true in GA).
2) Order a dumpster (30 or 40 yard).
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3) Hire day laborers to clean out any items left by former occupants.
4) Use day laborers to demolish any walls, cabinets, etc. If you plan to replace any molding, the laborers should remove them at this time.
5) While you have the day laborers, have them clean up and mow the yards, trim overgrown hedges, etc.
6) This is probably a good time to have any jacking of the house done.
7) Kitchen designer either previously looked at the kitchen, or he looks at the kitchen after the cabinets are out to measure and design the kitchen.
8) Any new framing should be done at this point.
9) Have your electrical rough work done, i.e. for running new wire or replacing a breaker box (the electrician will probably need to disconnect the power, so, carpenters should be scheduled before or after for interior work.
10) Have your plumbing rough work done, i.e. replacing bad plumbing, installing water lines, shut off valves, repairing leaks. (plumbing fixtures are not installed at this point).
11) Repair any rotted wood on the exterior and make repairs to porches and decks, and make any structural repairs.
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12) Repair and/or replace any sheetrock and any interior carpentry work, i.e. replacing doors and moldings. Tiling should also be done at this time. (Tiling should be run wall to wall in kitchens and baths).
13) Schedule painting, depending on how the work is going, determine if you want the painters to start on the outside first. When scheduling the painting always get an estimate as to how long the painting will take. It is also a good idea to have the painters agree to come back for touch-ups.
14) Refinish wood floors after the painting is completed.
15) Kitchen cabinets and countertop installation. Any cabinets that need to be installed in bathrooms, should also be done at this point.
16) The plumber come backs to mount toilets, bathtubs, sinks, et.
17) The electrician comes back to install light fixtures, garbage disposals, face plates, etc.
18) Painter comes back for final touch-up.
19) Cleaning crew cleans.
IV MARKETING AND ADVERTISING
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Now that you have purchased a tax deed successfully, renovated the property nicely, you’re ready to implement your exit strategy.
Marketing PlanIt’s important to have a written marketing plan, in order to carry out your exit strategy successfully. A Marketing Plan:
Gives you something to strive for; Keeps you on track; Allows you to plan in advance and set milestones; Helps you focus on exit strategy.
You should have a detailed marketing plan outlining what you want to accomplish, and how you’re going to do it.
V OTHER IMPORTANT POST REDEMPTION CONSIDERATIONS
Risk ReductionThe primary risk in investing in Tax Deeds in Georgia is, the potential for the property (bought at the sale) to be lower than what was paid for the Tax Deed. Keep in mind that the low price Tax Deeds tend to not have mortgages, and also tend to have either low value or very high renovation costs. For example, some properties may be under water, land locked, or just un-buildable. On the other hand, high value Tax Deeds, usually have mortgages, and Mortgage companies will normally redeem them to protect their interests.
The other pitfall to avoid is the few government tax liens (other than the property taxes) that may survive the sale, and end up being your responsibility.
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Both of these problems can be avoided by conducting thorough research and due diligence.
Beware of Subsequent TaxesOnce a Tax Deed is conveyed to the purchaser, it is the Purchaser’s responsibility to keep the property taxes current. You can get the taxes you paid after the sale reimbursed if the property is redeemed.
Over-Extending YourselfYou must carefully budget for the possibility of carrying the properties underlying Tax Deeds. Although you may have the funds to purchase the Tax Deeds, you must be aware of and have the ability to carry and/or rehab the properties in the event they are not redeemed.
How to Get Rid of Occupants After the Right to Redeem has ForeclosedIf there are occupants still in the property at the time the Right to Redeem has been foreclosed, you will have to evict them legally. See outline of Dispossessory proceedings in Georgia.
Dispossessory proceedings
Details for Dekalb County Georgia eviction procedures are used below.
1. Give Notice to Vacate at least 10 days before filing for Dispossessory (eviction); See Notice to Vacate in Appendix.
2. If tenant fails to vacate, go to the Magistrate Court Clerk’s office on the 2nd floor of 556 McDonough and file a Dispossessory Affidavit under oath (See sample Affidavit in Appendix);
3. Pay the filing fee and ask for copy of Affidavit filed;
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4. The Magistrate Court will issue a summons to be served by the local Sheriff or Marshall’s office;
5. The Tenant must answer within 7 days from the date of service;
6. The Sheriff’s Office will return the Summons by mail (to the Landlord), and it will state the last date upon which the Tenant has to answer the Summons;
7. If the Tenant fails to respond (Answer the summons) at the end of the seventh day as stated on the Summons, the Tenant loses the lawsuit by default;
8. If the Tenant does not answer by the stated date, you may then go to the Magistrate Court Clerk’s Office and file an Application for Writ of Possession (you will need the case number from the Dispossessory Affidavit and pay a filing fee);
9. After 48 hours of filing the Application for Writ of possession, call the Marshall’s Office to schedule an eviction date and time;
10. You must meet the Marshall at the premises with 5 or more workers to move the Tenant’s belongings out of the premises;
11. If the Tenant (Occupant) moves out prior to the eviction date, call the Marchall’s Office and cancel the eviction;
12. If the Tenant (Occupant) answers the Summons, a trial will be scheduled. In the meantime, the Tenant is allowed to remain in possession of the premises;
13. Once an answer has been filed, and a hearing has been held, the Court will issue a decision as to when the Tenant (Occupant) will have to move.
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MODULE E – HOW TO START A TAX DEED INVESTING BUSINESS
I PRE-FORMATION CONSIDERATIONS
Before deciding to start a Tax Deed investing business, it is critical that you get plenty of experience first. If you have never started a business before, it is advisable to take a business course as well. It is also very important to write a business plan before you form or start your business. Starting a business is a very serious endeavor. Owning a business is glamorized as the ultimate American dream, but it isn’t for everyone. Being in business and staying in business is very difficult. It isn’t for the faint of heart. Starting a Tax Deed investing business is very serious business, as it is a complex business. However, if you have the expertise, the wherewithal and the determination, it can be quite a lucrative business. If you are just investing for yourself, then this business will make an excellent home based business.
Determine your business concept The business concept describes the business, its products and services, the market it serves, and the businesses’ competitive advantage. It answers the basic question, what business are you really in? For example, your business concept may be to acquire properties at deep discounts at tax sales, renovate them, then provide rental options to low income families. Review the exit strategies outlined in previous chapter. This will help you in formulating a business concept.
Determine your products and services
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Determine precisely what products and/or services you will offer. Think about what will make your products and/or services different from others in the marketplace. Determine specifically how you will be competitive and why you will be profitable. Decide how you will finance your start-up
Review the financing options listed in ---------
Also, see Best Banks for Entrepreneurs America’s Top Small-Business-Friendly Banks, as listed by Entrepreneur Magazine (in Appendix).
Decide on business form
Sole Proprietor
A Sole Proprietor is any one person conducting a business that is not incorporated or a Limited Liability Company. As a Sole Proprietor, you have unlimited liability. This means that you are personally liable for any debts, obligations, and liabilities of the business.
Partnership
A General Partnership, consists of two or more people in business together. They typically share profits and losses, depending on their percentage of ownership in the partnership. General Partners are “jointly and severally” liable for the business’s debts, obligations, and liabilities. Jointly and severally refers to the fact that a creditor, for example, could pursue any one of the partners for the full amount of the debt, etc.
Limited Partnership
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A Limited Partnership is like a General Partnership, except the “limited partners” have limited liability for the debts, obligations, and liabilities of the business. There is also, at least one general partner, who has unlimited liability for the debts, obligations, and liabilities of the business. Under most state laws, in order to form a Limited Partnership, the partnership agreement must be in writing.
Corporation
A Corporation is a legal entity formed under state law. Unlike the Sole Proprietor and General Partnership, a Corporation is a separate taxpaying entity (Unless it is a Sub-Chapter S Corporation). The Corporation exists independently from the individuals that create it, own it, and carry on its business. Unlike a Partnership, one person can form and operate a corporation. Also, unlike a General Partnership, Corporations generally, have limited liability for the Corporation’s debts, obligations, and liabilities.
Limited Liability Company
The Limited Liability Company (LLC), is a relatively new business ownership form. A LLC is essential a hybrid entity, that has limited liability like a Corporation, but may be taxed as a general partnership or sole proprietor. The LLC is also considered a separate legal entity.
Determine who your associates or team members will be
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In order to operate a successful business, you will need a group of people to assist in carrying out your business plan. For the Tax Deed investment business, you will need, researchers, analysts, a good real estate attorney, a bookkeeper, Certified Public Accountant, and depending on your business concept, maybe a property manage, and a house inspector. You will definitely need a reliable contractor to work with as well as a good insurance agent who can act quickly. If you will be selling properties retail, a regular realtor to work with, and an appraiser. If you will be renting properties, you will need a reliable handy man or maintenance man on call. A money broker and a hard money are also valuable individuals to be associated with. Your team members do not necessarily have to work directly for you. If you are new to the business, you may want to have a mentor (in the business) or an advisory board in place.
Complete Business Plan
Planning your business is vital to business success. A good business plan is crucial to minimizing the risks involved in starting a business. A Business Plan describes in detail the business concept and how it will be carried out. A well thought out, comprehensive plan gives the owner an objective and critical look at all aspects of the business. The business planning process accommodates setting goals that will help manage the business and monitor its growth and performance. Many business people make the mistake of starting a business without proper planning. Then they get caught up in the day-to-ay operations and have very little time for planning, so they are in effect operating blindly. To successfully operate a business, it is imperative that you know where you are going and how you are going to get there. By writing out your plan, it forces you to analyze your concept, make decisions about marketing, production, financing, etc. Moreover
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Business Plans should be reviewed and modified on a regular basis. In addition to using a business plan for internal purposes, it is commonly used to persuade lenders and investors to invest in or lend money to the business.
The following is a typical business plan format:
I Executive SummaryII Business StrategyIII Market Research and AnalysisIV Marketing Strategy and PlanV Descriptions of Products and ServicesVI OrganizationVII ManagementVIII OperationsIX Financial Plan
In addition to the aforementioned, a title page, table of contents, and appendix with supporting documents should be included.
Details of how to develop and write a business plan, in addition to every aspect of starting a business is included in our intensive, hands on business course. See details in back of manual.
II FORMATION CONSIDERATIONS
MODULE F - REALISTIC SIMULATION OF ENTIRE PROCESS AND PROCEDUREEach Attendee will use an actual property as case study and go through the process using the subject property. Attendees will simulate
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the process, including researching properties, due diligence, bidding at auction, filling out requisite paperwork, etc.
END OF COURSE CERTIFICATE TEST
DisclaimerThis publication is intended to provide accurate and authoritative information with regard to the subject matter covered. It is offered with the understanding that neither the publisher nor the author is engaged in rendering legal, tax, or other professional services. If legal, tax, or other expert assistance is required, the services of a competent professional should be sought. This material is not a substitute for legal advice.
The author and publisher make no representations with respect to the contents of this publication and disclaim any implied or express warranties of merchantability or fitness for any particular usage, application or purpose.
This publication is covered under the protection provided by the copyright laws of the United States (Title 17, U.S. Code). It is illegal for anyone to violate any of the rights and protection provided by copyright law. Any unauthorized reproduction of this publication or its sections (in whole or in part) will be considered a direct violation of copyright protection and shall be punished to the fullest extent under the law.
Savant Capital Partners, LLC, © 2008 All Rights Reserved
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APPENDIX
Agreement for Purchase and SaleCash Flow Analysis FormContract for DeedGlossary of TermsLandlord’s Notice to VacateLease ApplicationLease Purchase AgreementRental Move-In-Out FormRepair and Renovation Estimate ChecklistProperty Inspection ChecklistResidential Lease AgreementSample Tax DeedSelect Tax Sale State StatutesState Tax Deed/Lien IndexTax Deed StatesTax Lien States
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