Surviving a Slow Economy Through Tax-Defaulted Real Estate Investing

According to tax-defaulted property expert, Ted Thomas, “Regardless of a good or bad economy, tax-defaulted real estate investing thrives.”

That’s good news because Jamie Dimon – One of the world's most influential business leaders – warns us “The war in Ukraine will slow the economy and it could easily get worse”. Indeed, the turbulence of the war in Ukraine mixed with the fall-out of living three years in the pandemic, along with the fastest rate of inflation since 1982 and we find ourselves in a ‘perfect storm’ for a slow economy. 

Investing wisely in these unstable and uncertain times is critical to surviving a slow economy. This article will focus on a special subset of real estate investing that is open to the average person and is relatively low risk – tax-defaulted real estate. In fact, this subset is considered an excellent side hustle for retired military personnel.

What is Tax-Defaulted Real Estate Investing?

Tax-defaulted real estate investing goes back over 200 years. The process begins when property owners fail to pay their property taxes. Collecting these taxes is non-negotiable for the government because the money is used to pay for essential services such as hospitals, libraries, police, fire, sanitation, etc. 

Each state or county handles non-payment in one of three ways:

1. 1. The local government  places a lien on the property and sells the lien certificate to investors at auction. The property owner cannot refinance or sell the property until they pay their back-taxes along with significant interest (anywhere from 12 to 36%) and penalties – and they only have a finite amount of time to do so. The investor makes their money back, plus the interest paid by the property owner.

• The local government confiscates the property and sells the property deed to investors at auction. The mortgage is wiped off the property. The government keeps the amount of back-taxes owing, and usually gives the property owner the balance. The investor has only paid pennies on the dollar, and can do with the property whatever they choose – live in it, fix it and flip it for market value, rent it out, or sell it as-is at a discounted rate well below market value.
• A hybrid program that combines the two. 

Shouldn’t I Feel Bad Profiting From Others’ Misfortunes?

While investing in tax-defaulted property may seem opportunistic – especially in a slow economy – a closer look may put you at ease. 

• More than $14 billion in property taxes goes unpaid across the United States (according to the National Tax Lien Association), which is a direct hit to essential services that are needed to keep citizens safe, healthy and educated. This government-mandated program is necessary to keep our country running.
• Not every tax-defaulted property represents an owner who has fallen victim to the slow economy. In many cases, the owner has passed away without any heirs to claim the property, or their heirs are unable to care for and maintain the property and willfully abandon it.
• In states and counties that sell tax lien certificates instead of tax deeds, the local government or municipality benevolently grants the property owner a set period of time to redeem the lien certificate by paying the back taxes plus interest and penalties. 

What are the Benefits?

Tax-defaulted real estate investing can be very lucrative, if armed with the right knowledge and strategies. Among the benefits are:

• • Potential high return on investment (ROI). While the interest rate on tax lien certificates is mandated by law and unique to each state or county, it can range anywhere from 12 to 36% – how much do you make leaving your money in a savings account?
    Tax deeds let you buy property for pennies on the dollar, so no matter what you do with the property (live in it, rent it out, sell it), your ROI is high.
    

• Your investment is with the government. You cannot buy tax lien certificates or tax deeds from anyone but the government. This eliminates the inherent risk of trusting your dollars to unscrupulous people or investment companies who may have questionable ethics.
  
• Your investment is secured by property. When investing in tax lien certificates in particular, if property owners fail to pay within the time granted by law, you have the right to foreclose on the property and make your money back through the sale of the property (or whatever you wish to do with it).
• Tax-defaulted property is a relatively low-risk investment. Compared to the volatility of stocks or the much-narrower profit margins of traditional real estate investing, this is a relatively low-risk investment, secured by property and backed by government mandates.

What are the Risks?

While tax-defaulted real estate investments can be lucrative – especially in a slow economy – the advice to jump in comes with a strong ‘buyer beware’. There are some risks associated with this subset of real estate investment.

• • Worthless property. If an investor hasn’t done their due diligence about the value of the property they are bidding on, they can be stuck with property that isn’t worth the amount of back-taxes owing. For instance, the property may in fact be nothing more than swampland, there may be zoning issues, or there could be environmental hazards that would take a great deal of money or time (or both) to resolve. Always do your research ahead of the auction, before you bid.
    

• You may have to foreclose. Although 97-99% of property owners redeem the tax lien certificates on their property, there is still the risk that they won’t. In this instance, you may be put in the unfortunate position of having to foreclose on the property and evict the occupants, which may either go against your own sense of fairness, or cost you extra cash in fees associated with eviction.
  

• You could find yourself saddled with owning property. You may have chosen to invest in tax lien certificates specifically because you enjoyed investing in real estate without actually owning property. While the risk is small that property owners won’t redeem the certificate in time, you may find yourself owning property after all.
  

• Unanticipated costs. The riskiest circumstances are the ones we can’t predict. There may be unexpected legal fees if the property owner declares bankruptcy at the last minute, or challenges your claim. Or the property may require a great deal more clean up or repair than you anticipated. These are not common scenarios, but you should be aware of the risk.

How Do I Get Started?

You may want to consider investing in tax-defaulted real estate to minimize the impact of a slow economy on your portfolio. So how do you get started? It starts with asking the right questions:

1. 1. What type of investment do I want to make? Depending on your risk tolerance, you may want to play it safer with tax lien certificates, or make a bolder investment in tax deeds.
      
   2. Where are those auctions held? Approximately half the states are tax lien states and the other half are tax deed states (with some states being a hybrid of the two). Figure out what states offer the type of investment you want to make.
      
   3. What are the rules? Every state – even every county – will have their own set of rules and types of auctions they hold. Do your research specific to where you want to invest.

• What is my budget? Figure this out before you attend the auction. How high are you willing to bid proportionate to the value of the property you want to bid on? One of the biggest mistakes you can make is to succumb to ‘auction fever’.
  

• Know when to call in professionals. Whether it's a lawyer for legal advice or representation, or a real estate professional, know when to call in people who are trained and certified to handle unexpected situations.
  

1. Get a mentor. We have covered the basics of tax-defaulted real estate investing from a very high level. To navigate the intricacies of this investment strategy, hire a mentor or enroll in a course, at least for the first several auctions you attend. 

Conclusion

High-ROI and low-risk investment strategies such as Tax-Defaulted Real Estate can be a savvy choice to survive a slow economy, even if you aren’t a real estate or investment professional.. While there are risks associated with this, they can be mitigated with a commitment to learning and research. 

As a free gift to David’s loyal subscribers, we would like to offer a free Insider’s Report, which will kick-start your learning to invest in tax-defaulted real estate.

Blog Credit: The Ted Thomas Team

BIO: Ted Thomas is a Florida-based educator, author and leading authority on tax-defaulted property investing. For over 30 years, Ted has dedicated his life to educating people about this low-risk, high-yield investment strategy through online courses and comprehensive coaching.

© Ted Thomas 2022