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The Real Story Behind Tax Sale Overages & Excess Proceeds (Good, Bad & Ugly)

cash envelopeEvery now and then, I hear talk about a “secret new opportunity” in the business of tax sale overages (aka – “excess proceeds”, “overbids”, “tax sale surpluses”, etc).

If you’re completely unfamiliar with this concept – I’d like to give you a quick overview of what’s going on here…

Quick Overview

When a property owner stops paying their property taxes, the local municipality (i.e. – the county) will wait for a period of time before they seize the property in foreclosure and sell it at their annual tax sale auction. Every county in the U.S. uses a similar model to recoup their lost tax revenue by selling properties (either tax deeds or tax liens) at an annual tax sale. 

Let’s illustrate this with an example:

Suppose you own a property worth $100,000.

One day – you decide (for whatever reason) to stop paying your property taxes.

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Eventually, a couple of years go by and the county treasurer comes in and seizes your property for non-payment of property taxes.

At the time of foreclosure, you owed somewhere in the neighborhood of $18,000 of taxes and late fees to the county. A few months later – the county brings this property to their annual tax sale – where they sell your property (along with dozens of other delinquent properties) to the highest bidder – all in an effort to recoup their lost tax revenue on each parcel of real estate.

Home being soldSince you owed $18,000 on your property at the time of foreclosure, the county decides to start the bidding process at $18,000 (because this is the minimum they will need in order to recoup the money that you owed them).

But here’s the thing…    your property is easily worth $100,000 (and most of the investors bidding on your property are fully aware of this). In many cases, properties liked yours will receive bids FAR beyond the amount of back taxes actually owed. It wouldn’t be uncommon for a property like yours to actually sell at auction for say – $40,000 (still a great deal for the buyer – at 40% of market value, and FAR more than the $18,000 you originally owed).

But get this – the county only needed $18,000 out of this property. The margin between the $18,000 they needed and the $40,000 they got is known as “excess proceeds” (i.e. – or at “tax sales overage”, “overbid”, “surplus”, etc). Many states throughout the U.S. have statutes that prohibit the county from keeping the excess payment for these properties. 

This is where the “secret business opportunity” exists in collecting excess proceeds. The county has rules in place where these excess proceeds can be claimed by their rightful owner – usually for a designated period of time (which varies from state to state).

And who exactly is the “rightful owner” of this money?? In most cases, it’s the last owner of record at the time of foreclosure (aka – YOU).

That’s right! If you lost your property to tax foreclosure because you owed $18,000 of taxes – and if that property subsequently sold at the tax sale auction for $40,000 – you could feasibly go and collect this $22,000 difference after going through a few simple steps to claim the money (e.g. – proving you were the prior owner, completing some paperwork, waiting for the funds to be delivered).

Who Should Be Using This Strategy?

businessman questionNow – for the average person who paid full market value for their property – this strategy doesn’t make much sense. If you have a serious amount of cash invested into a property, there’s way too much on the line to just “let it go” on the off-chance that you’ll be able to milk some extra cash out of it.

However, this approach DOES make sense for an investor who has almost nothing to lose.

For example, with the investing strategy I use, I’m able to buy properties free and clear for pennies on the dollar. To the surprise of some investors – these deals are all over the place and assuming you know where to look, it’s frankly not difficult to find them.

When you’re able to buy a property for a ridiculously cheap price AND you know it’s worth substantially more than you paid for it…   it may very well make sense for you to “roll the dice” and try to collect the excess proceeds that are generated through the tax foreclosure and auction process.

The real beauty behind this strategy is that you don’t have to do anything to sell your property. Rather than spending your money, energy and efforts to create a great real estate listing and promote the heck out of itthe county will do all the work for you. If you’re the “rightful owner” of any excess sale proceeds generated from their selling efforts (which will happen on their dime, not yours), you just need to be smart enough to claim those excess proceeds after the fact (and most people have no idea that this opportunity exists).

The Truth About Tax Sale Overages

This is  all sounding pretty interesting, right?

The only problem with everything I’ve said so far is…     I’ve been describing the most ideal situation ever. While it can certainly pan out very similar to the way I’ve described it above – there are also a few downsides to the excess proceeds approach that you really ought to be aware of:

1. Many properties will never generate excess proceeds.

While it depends greatly on the characteristics of the property, it is entirely possible (and in some cases, very likely) that there will be no excess proceeds generated at the tax sale auction. Often times this happens when a property isn’t very “desirable” in the first place or perhaps the county doesn’t generate much public interest in their auctions. Either way – if you’re buying a property with the sole intent of letting it go to tax foreclosure so you can collect your excess proceeds…   what if that money never comes through? Would it be worth the time and money you will have wasted once you reach this conclusion?

2. In nearly all cases, it takes a long time to collect tax sale overages.

If you’re expecting the county to “do all the work” for you, then guess what – you’ll have to work by their schedule. In many cases, their schedule will literally take years to pan out. So tell me…    is it worth your time to sit around for that long, all so you can maybe get paid one day?

3. Several states don’t even allow the collection of excess proceeds.

I actually had to learn this lesson the hard way. The first time I pursued this strategy in my home state – I was told that I didn’t have the option of claiming the surplus funds that were generated from the sale of my property (because my state was one that didn’t allow it). In states like these (and there are several of them), when they generate a tax sale overage at an auction – the state becomes the “rightful owner” automatically. They just keep it!

Does your state allow for the collection of excess proceeds?

If you’re thinking about using this strategy in your business – you’ll want to think long and hard about where you’re doing business and whether their laws and statues will even allow you to do it. I spent several hours doing some very high-level research on all 50 states and this was what I found (click the map below to find out)…

Disclaimer: Some of these states were rather vague in the way they addressed the specific issue of tax sale overages (and several states had different versions of similar rules). I did my best to give the correct answer for each state above – but I’d recommend that you verify your state for yourself before proceeding with the assumption that I’m 100% correct. Remember, I am not an attorney or accountant and I am not trying to give out professional legal or tax advice. Talk to your attorney before you act on of this information.

When and Why is this a Legitimate Strategy?

It’s impossible for me to make a blanket statement that this type of business IS or ISN’T a valid opportunity. The fact of the matter is – there are thousands of auctions all around the country every year. At many of these auction, hundreds (or even thousands) of investors will show up, get into a bidding war over many of the properties and drive prices WAY higher than they should be (note: this is part of why I’ve never been a huge fan of tax sale auctions).

If you want to pursue this strategy – here’s how you can get started:

Step 1: Verify that you can actually collect excess proceeds in your state (use the map above as a starting point – but verify its accuracy with a third-party professional before you get started).

Step 2: Get a delinquent tax list. There are a few ways to do this (one of which is described here).

Step 3: Send out a direct mail campaign (preferably, a few months from the foreclosure date – when motivated sellers are most motivated to unload their property for next-to-nothing prices).

Step 4: Send out offers for as low as possible and buy as many as you can (preferably – ones that are actually desirable).

IMPORTANT: You should NOT pay off the delinquent tax balance during your purchase process (you will most likely have to accept a Quit Claim Deed rather than a Warranty Deed for the property).

Step 5: Play the waiting game until the property has been foreclosed by the county and sold and the tax sale.

Step 6: File a claim for the excess proceeds with the County Treasurer / Tax Collector (follow the applicable rules/process in your state).

Closing Thoughts

Pursuing Excess Proceeds as a business offers some pros and cons. All are important to weigh in your decision on whether or not to add this strategy to your real estate investing repertoire.

Pros:

  • This strategy requires minimal effort on the selling side (and if selling is something you absolutely hate – this may influence your decision).
  • There can be some HUGE upside potential if & when the stars align in your favor (and they seriously need to align in your favor in order to achieve the best possible outcome).

Cons:

  • This is a unique approach to real estate investing in that it create a major lack of control in the selling process.
  • There is the very real possibility that you will earn nothing in the end – which means you’ll lose not only your money (which hopefully won’t be very much), but you’ll also lose your time as well (which, in my mind, is worth a lot more).
  • Waiting to collect on tax sale overages requires a lot of sitting, waiting & hoping for results that usually have a 50/50 chance (on average) of panning out favorably. If you’re the kind of person who needs control and immediate results, this approach will probably drive you insane.
  • Collecting excess proceeds isn’t something you can do in all 50 states – so if you’ve already got a property that you want to “roll the dice” on with this strategy, you’d better hope it’s not in the wrong part of the country.

Want To Learn More?

I’ll be honest – I haven’t spent a lot of time dabbling in this area of investing because I can’t handle the mind-numbingly slow pace and the complete lack of control over the process – it drives me crazy. That being said – I know there is still money to be made in this arena (it’s just not the niche that I’ve chosen to carve out for myself).

If this sounds like a business opportunity you want to dive into (or at least know more about) – there is only one guy I know of who has actually created a full-blown course around this kind of system. If you want to learn more about it – you can check it out right here.

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{ 13 comments… add one }

  • Tate June 26, 2014, 9:16 am

    Alsome post Seth.. I actually might be using this one a property i have. Thanks!

  • Eve June 29, 2014, 12:53 pm

    Never thought about this niche, nice article.

    With the marketing I have done in land in the last couple of months, I have found my state have real high property tax rate which makes it hard to acquire. 90% of the motivated sellers have situations like this: their land appraisal value is only 3000-5000 while the late taxes is above 1000. The owner only wants a few hundreds for their land, but even with that, the deal is tight. I am start wondering should I start looking at the lower property tax state. Your thoughts?

    • Seth Williams June 29, 2014, 1:16 pm

      Hi Eve, I’ve run into this before too – it could be that you just need to target property owners who aren’t quite as close to their foreclosure date. If you go after people who are a few months away from their drop-dead date, you’re much more likely to see tax balances that kill the deal. However, if you target people who are only 1 year behind, or even just a few months behind (rather than 2 or 3 years), you’ll probably find that there is a much larger spread for you to make a profit. In my experience, it usually has less to do with the state I’m working in and more to do with contacting property owners at the right time.

      Food for thought anyway.

  • No Nonsense Landlord June 29, 2014, 10:16 pm

    Why not just sell it yourself? If the county can get $40K, you should be able to sell for $40K. Or are the underlying mortgages extinguished with the tax sale?

    • Seth Williams June 30, 2014, 9:02 am

      The answer is twofold:

      1. Yes – underlying mortgages are extinguished with the tax sale
      2. If you want to collect the excess proceeds, the county will do all the “selling work” for you (advertising, listing, closing, etc.) – you just collect the cash after the fact (assuming there is anything leftover for you).

      But to your point… selling it yourself does give you much more control over the process. Personally – I wouldn’t go this route with a property unless it was REALLY tough to sell. I think in most cases, selling it yourself is probably in your best interests.

      • Andrew August 16, 2014, 10:40 pm

        Aren’t the other lien holders, 1st, 2nd mtg. holders able to get the excess funds before the owner??

        • Seth Williams August 17, 2014, 12:19 pm

          Hi Andrew – that’s a good question. I can’t say for sure (because I honestly don’t know), though it would make sense to me if the answer was “Yes” (since they did have a claim to the property). The properties that I typically deal with (vacant land) usually don’t have any liens or mortgages on them in the first place – just the tax foreclosure, so it isn’t something I’ve encountered very often in my business.

  • Eve June 30, 2014, 12:54 pm

    Hi Seth,
    Agentpro doesn’t provide the delinquent list indicating how many years the owner is behind the taxes, does it?

    • Seth Williams June 30, 2014, 2:10 pm

      Hi Eve, it all depends on which county & state you are looking in. Every county is a little bit different in the quantity and quality of information they provide to the general public (which AgentPro then pulls from) – I don’t think it’s terribly common to see precisely how far behind they are, but it’s more common to at least find a “Yes” or “No” answer to whether they are delinquent in the first place. Does that make sense?

  • hayley December 9, 2014, 2:43 pm

    This happened to my family! There was $7,000 left over after the property sale of our land, but I am wondering HOW we go about claiming it? Or at least getting the process started? Do we contact the appraisal district? ( It is in Grimes county, Texas )

    • Seth Williams December 9, 2014, 3:59 pm

      Hi Hayley, that’s a good question. I honestly don’t know how the process works in Texas, but if you do some searching and calling around, I’m sure you can probably find the answer somewhere else. Good luck!

    • Note Dashboard December 10, 2014, 4:03 pm

      Hayley,

      You can also try the County Tax Assesor. In Grimes county their number is 936-873-4465

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