As most people know we have been in the real estate industry for several years.
And we don’t know about you, buy we have been just curious as to what happens to the extra money if a house is bought at tax sale or at an REO action. You might be surprised.
Then every now and again I hear about a “secret new opportunity” in the business of tax sale overages (aka – “excess proceeds”, “overbids”, “tax sale surpluses”, etc).
This being said we decided to get through the Hoopla, and get to the bottom of the hype. and bring you the Good News the bad news, and the Ugly news, about this.
For those of you completely unfamiliar with this concept – Let us give you a quick overview of what’s going on here…
The Real Story Behind Tax Sale Overages & Excess Proceeds (Good, Bad & Ugly)
When a property owner stops paying their property taxes, the local municipality, that is a fancy word for the local government (i.e. – the county) has to l wait for a period of time before they seize the property in foreclosure, and sell it at their annual tax sale auction. With is Normally every 6 or 12 months. 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, or semi-annual tax sale.
Let’s help shed some light on this…
Let’s illustrate this with an example:
I like to keep things simple, of for this, suppose you own a property worth $100,000.
One day – you decide (for whatever reason, you lost job, hate life, ant-Government, that time of the month, dog peed on your leg, what ever the reason) to stop paying your property taxes.
The county tries to collect by sending letters, notices, etc. and 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, this is just for example, you owed somewhere in the neighborhood of $18,000 of taxes and late fees to the county, which maybe a grand total of $20,000. A few months later – the county brings this property to their annual, or semi-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. After all no one wants to loose money.
Since you owed $18,000, not counting late fees, on your property at the time of foreclosure, the county decides to start the bidding process at $18,000 (because this is what they need in order to recoup most the money that you owed them).
But here is an interesting tad bit of info… your property is easily worth $100,000 (as you know, 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 (you stop and think about this, this is still a great deal for the buyer – at 40% of market value, and FAR more than the $18,000 you originally owed).This brings us to the question as to so, what happens to that money?…..
Okay so get this – the county only needed $18,000 out of this property, Right? The difference 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. AKA it is against the law for them to do so!
Because of this, this is where the “secret business opportunity” that we hear about from time to time exists in collecting excess proceeds, sometimes referred to bounty hunting, in a tax sense. 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). Which means you may have money coming to you for not paying your taxes… wait what?
Yea, that is 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, general bureaucratic BS). Pretty interesting ah?
So you might ask about this strategy, and how and whos should use this.
Who Should Be Using This Strategy?
Ok, so now, for the average person who paid full market value for their property, this strategy really doesn’t make much sense, I mean after all if you have a serious amount of cash invested into a property, there is just simply 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. Think about paid 100,000 for it but got the $22k?
However, this approach DOES make sense for an investor who has almost nothing to lose.
For example, with the investing strategy the we use at BMW Properties, we are 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, which btw we can help with that, 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. How ever, we normally try and return the extra money to the owners, IF they can be found. Because Normally we keep the houses and rent them out, sell them, what have you.
The supposed 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 it – the 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 Facts About Tax Sale Overages
So ALL this sounding pretty interesting, and cool right?
Here is the problem with everything I’ve said so fa… We have been describing the most ideal situation. While it can most defiantly pan out very similar, and close to the way I’ve described it above…. However there are a few downsides to the excess proceeds approach that you really should be aware of:
1. Generally most properties will never generate excess proceeds.
While it depends greatly on the characteristics of the property, such as location, condition, etc. it is entirely possible, and in some cases highly likely, that there will be no excess proceeds generated at the tax sale auction. This often times happens when a property isn’t very “desirable”, because of damage, location, etc. sometimes even the county doesn’t generate much public interest in their auctions, which can be good for investors if the know of them. Either which way, if you’re buying a property with the sole propose of letting it go to tax foreclosure so you can collect your excess proceeds… This about this what if that money never comes through? Or you do not get what you invested in it back? Would it be worth the time and money you will have wasted once you reach this conclusion?
2. Almost in 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 are on their schedule. Anyone that has dealt with the government knows they do not move fast in most cases. In fact, in many cases, their schedule will literally take months, if not years to pan out. So I ask this question… 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 am not saying this is legal or even right. but one person, actually that I knew, had learned this lesson the hard way. The first time they pursued this strategy was in their home state – I was told that they didn’t have the option of claiming the surplus funds that were generated from the sale of their property (because their state was one that didn’t allow it). In states like these (and there are several of them, come to find out), when they generate a tax sale overage at an auction – the state becomes the “rightful owner” automatically. They just keep it! I am not saying that is right…. but it does indeed happen.
Does Indiana allow for the collection of excess proceeds?
Alright, if you’re thinking about using this strategy in your business, you might want to think about where you’re doing business and whether their laws and statues will even allow you to do it. I did some digging on Indiana, means that they are my home state, they do pay back, or at least suppose t the laws can be found at Here at Indiana Legislative laws
Disclaimer: I am not attorney, and these are the latest laws that I found to date, please consult an attorney for more accurate information.
When and Why is this a Legitimate Strategy?
Let us start of by saying it is impossible for us to make a cover all statement that this type of business IS or IS NOT a valid opportunity. The fact of the matter is – there are thousands of auctions all around the country every month, of every year. At many of these auction, there maybe hundreds (or even thousands) of investors will show up, or maybe one or two, 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 REO sale auctions in general).
Wrapping it up
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. You may hear this as “bounty hunting”
- 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 sometimes they seriously need to align in your favor in order to achieve the best possible outcome).
- This is a unique approach to real estate investing in that it create a major lack of control in the selling process. Which is one thing that we do not like. I mean auctions twice a year? For starters.
- There is the very real possibility that you will earn nothing in the end, if you do not do your home work on a property, which could mean you will lose not only your money (which hopefully won’t be very much), but you could also lose your time as well, which, in many cases, can be 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, I would say on average, of panning out in your favor. If you are the kind of person who needs control and immediate results, this approach will most likely drive you insane, and possibly to drinking lol.
- Something you need to be aware of collecting excess proceeds is not 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, well, you better find out if it is in an area that they pay back. .
Want To Learn More?
I’ll be honest – I haven’t spent a lot of time dabbling in this area of investing, called “bounty hunting” because it just is not our niche, plus. we cannot handle the mind-numbingly slow pace, that it appears to go at, and the complete lack of control over the process – I think it drive me drinking lol. With that being said, I still know there is still a lot of potential money to be made in this arena of “bounty hunting” , it’s just not the primary niche that I’ve chosen to pursue myself. However I do use tax sales, and I am one of the bidders at a tax sell, it just not for the purpose of collecting the surplus or the bounty money. We do it as one of our ways of getting homes for penny on the dollar. If you are wondering how tax liens work, we have a blog on the pos and cons of investing in Tax-Lein Properties. and what they are and how they work.