Every now and then, I hear talk about a “secret new opportunity” in the business of tax sale overages (a.k.a, “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.
When a property owner stops paying their property taxes, the local municipality (i.e., the county) will wait for a 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 its lost tax revenue by selling properties (either tax deeds or tax liens) at an annual tax sale.
REtipster does not provide legal advice. The information in this article can be impacted by many unique variables. Always consult with a qualified legal professional before taking action.
Suppose you own a property worth $100,000. One day, you decide (for whatever reason) to stop paying your property taxes.
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 owe about $18,000 of taxes and late fees to the county. A few months later, the county brings this property to their annual tax sale. Here, they sell your property (along with dozens of other delinquent properties) to the highest bidder—all to recoup their lost tax revenue on each parcel.
Since you owed $18,000 on your property at the time of foreclosure, the county decides to start the bidding process at $18,000. This is because it's the minimum they will need to recoup the money that you owed them.
Here's the thing: Your property is easily worth $100,000. Most of the investors bidding on your property are fully aware of this, too. In many cases, properties like yours will receive bids FAR beyond the amount of back taxes actually owed. It wouldn't be uncommon for such a property 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., “tax sales overage,” “overbid,” “surplus,” etc). Many states 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 (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—YOU.
That's right! If you lost your property to tax foreclosure because you owed taxes—and if that property subsequently sold at the tax sale auction for over this amount—you could feasibly go and collect the difference. There are a few simple steps to claim the money, though. This includes proving you were the prior owner, completing some paperwork, and waiting for the funds to be delivered.
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 can 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 could buy properties free and clear for pennies on the dollar. To the surprise of some investors, these deals are all over the place. Assuming you know where to look, it's frankly not difficult to find them.
When you can 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 the tax foreclosure and auction process generate.
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 effort 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!
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 similar to the way I've described it above, there are also a few downsides to the excess proceeds approach you really ought to be aware of.
While it depends greatly on the characteristics of the property, it is entirely possible (and in some cases, likely) that there will be no excess proceeds generated at the tax sale auction. Often, this happens when a property isn't “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?
If you're expecting the county to “do all the work” for you, then guess what, you'll have to work with their schedule. In many cases, their schedule will literally take years to pan out. So is it worth your time to sit around for that long, all so you can maybe get paid one day?
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 didn't allow it. In states like this, when they generate a tax sale overage at an auction, the state becomes the “rightful owner” automatically. They just keep it!
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 statutes will even allow you to do it. I spent several hours doing some high-level research on all 50 states and this was what I found (click the map below to find out)…
