This guide explains the basics of tax lien investing, outlining the process from deciding what type of property liens to buy, to understanding auction procedures, and finally, collecting payments. It also discusses the potential profits and risks involved, offering insights on how to manage these investments effectively. Moreover, the guide provides practical tips for those considering setting up a real estate investment business focused on tax liens, emphasizing the importance of understanding legal responsibilities and conducting thorough property evaluations.
Through careful planning and informed decision-making, tax lien investing can be a profitable venture, though it demands experience and a solid grasp of real estate laws and practices.
What Is a Property Tax Lien?
A property tax lien is a claim filed by a county or municipality against a person or business owing taxes on their property. The lien specifically attaches to the property. All counties maintain some sort of list and proper documentation related to tax liens for their jurisdiction’s delinquent properties. Any property that has a tax lien against it cannot be sold, transferred, or refinanced until the owner satisfies the delinquent taxes, and the property tax lien is removed.
What Is Tax Lien Investing?
Tax lien investing is an investment strategy in which investors purchase property tax lien certificates with the intent of collecting payments plus interest from the property owner. Tax lien certificates are created by a municipality to detail the taxes owed on the property and any interest or penalties due. Subsequently, the tax lien certificate is auctioned off to the highest bidder at a tax auction. Investors can purchase tax liens for as little as a few hundred dollars. Realistically, the cost is usually over a thousand dollars.
Property tax liens are similarly purchased the same way actual properties are bought and sold at auctions. Depending on the municipality, an auction can be held at a physical location or online. Tax liens are typically auctioned off six months to a year after the property owner becomes delinquent. The prospective investor who is willing to pay the highest premium receives the tax lien.
How To Invest In Tax Liens
- Consider What Type of Property You Want to Buy
- Contact Your County Office For Auction Information
- Research Available Properties
- Attend the Tax Lien Auction and Bid
- Pay Back the Debt On the Tax Lien
- Collect Payments From the Property Owner
1. Consider What Type Of Property You Want to Buy
Before you start investing in tax liens, you need to consider which type of property liens you want to buy. Specifically, the investor should consider whether they want a residential, commercial, or land tax lien.
2. Contact Your County Office For Auction Information
After making this decision, the potential investor can contact the local county’s office and find out the next auction’s details. Additionally, the office should be able to tell the investor about any rules and procedures for the auction, such as methods of payment and bidding structure.
3. Research Available Properties
Once the investor has a plan and all the pertinent information, the buyer should consider conducting due diligence on the available properties. Most experts advise dividing the amount of delinquent taxes by the market value of the property. If the ratio is over 4%, the buyer should probably avoid investing in that property and tax lien.
4. Attend the Tax Lien Auction and Bid
If you find properties that interest you, you'll need to attend the auction so that you can bid. Tax lien auctions are straightforward, and the highest bidder will win the tax lien. In many counties you can also attend the auction virtually and make bids online.
5. Pay Back the Debt On the Tax Lien
After winning a tax lien auction, the investor will need to pay the debt on the lien to the issuing municipality. In most states you'll have to make this payment immediately. Afterwards you'll be able to collect the tax lien certificate and start collecting money plus interest from the property owner.
6. Collect Payments From the Property Owner
Once you hold the tax lien, the property owner will be required to make monthly payments to you for the debt plus interest. They'll typically have between 6 months to a 3 years to pay you back plus interest. You can expect to collect around an annual interest rate of 10-12% in most states. If the owner doesn't make the scheduled payments, you will start the foreclosure process, so that you can force the sale of the house so that the owner repays you.
How To Earn Money Through Tax Liens?
Earning money through tax lien investing starts with understanding where these opportunities are more likely to occur. Properties that are fully paid off and do not have a mortgage are common targets for tax liens. This is because if a property owner stops paying taxes and there is no mortgage, the government will place a tax lien on the property instead of the mortgage company handling the back taxes.
Here’s how the process works: When you buy a tax lien at an auction, you are paying the owed taxes on behalf of the property owner. In return, you get the right to collect back this money plus interest and fees from the owner. The interest rates can be quite high, ranging from 5% to 36%, depending on the state’s laws, which makes it a potentially profitable investment.
If the property owner manages to pay off the tax lien during the allowed time—known as the redemption period—you will receive all your money back plus the interest. If they don’t pay within this period, you could end up owning the property. During this redemption period, the property cannot be sold or refinanced by the owner until they pay off the lien.
The redemption period varies by state, and if the property owner pays back the taxes, interest, and penalties in full during this time, the lien is considered satisfied. If you paid more than the taxes owed at the auction, sometimes this premium can also be added to the total amount the owner must repay.
Overall, tax lien investing offers a way to earn from the interest on unpaid taxes, but it requires understanding the legal and financial aspects thoroughly.
Tax Lien Investing Pros
1. Tax Liens Are High Yield Investments
The biggest advantage of investing in tax liens is that they are typically high-yield investments. You can make anywhere from 10% to over 20% or more on your investment with tax liens, depending on the location of the property as each state sets limits for how much interest can be charged.
2. Tax Liens Investing is Safe
Another benefit of tax lien investing is how safe it is because your investment is secured by the property. Additionally, tax liens have priority over other liens or debts the property owner may have. You even have priority over mortgages. So if the seller has to sell, your tax lien plus interest will be paid off first.
Tax Lien Investing Cons
1. Tax Lien Investing Requires Experience
In general, investing in property tax liens should not be conducted by novice investors or those with little to no experience in this area of real estate investing. Mainly investors should be very familiar with how tax lien investing works to ensure that they can collect their money back from the property.
2. Some Properties Are Risky Investments
Sometimes, you can lose money when investing in tax liens. For example, an abandoned or dilapidated property, located in the middle of a crime-ridden neighborhood, is probably not a good investment regardless of the interest rate or the rate of return. Likewise, properties with known or suspected environmental issues, such as chemical deposits or other hazardous materials, are, in general, not suitable investments either.
3. You Need To Be Familiar With the Law
Lien owners should probably understand their legal responsibilities after they receive their lien certificates to avoid common legal missteps. Typically, there is some sort of legal requirement that the lien owner notifies the property owner in writing about the acquisition. Specifically, the lien owner must inform the property owner of the amount of time that they have to satisfy the tax lien. Additionally, there is typically a second or final notification required to be sent to the property owners, explaining that their redemption period is about to end, and that payment must be paid before the expiration date.
Real Estate Investing Through Auctions
Buying properties with tax issues at auctions can be a great deal for investors, but it's crucial to be well-prepared and informed. First, it's important to research the property thoroughly. For instance, buying land that frequently floods might not be a wise choice since it could be hard to resell or develop.
When attending these auctions, having enough cash is essential. Most of the time, you'll need to make a down payment or even pay the full price of the property shortly after winning the bid. This means you need to have the funds available upfront. Essentially, investing in real estate through auctions is not something you can do without immediate access to money. This type of investment demands readiness and the ability to act quickly with financial decisions.
Setting Up Your Own Real Estate and Property Tax Lien Investing Business
You can always start up your own real estate investment business, provided that you have enough resources and capital. Additionally, if you have enough expertise on the state regulations on tax liens in your location, you can actually begin buying property tax liens rather quickly. Among the most important things to do is to examine the property liens that you’ll be purchasing. Physical examination is required, but given that it can be so time-consuming, you should limit your searches to someplace you can drive to.
In recent years, tax lien investing has gained immense popularity. This was mostly spearheaded by the 2008 real estate crash, where we saw many homes being foreclosed upon due to both past-due mortgages and tax liens. These events encouraged investors to learn more about this niche in real estate investment.
Although profiting in tax liens can be a slow process, it is still a very hidden investment sector and real estate. In general, by investing in tax liens, your capital will go towards something profitable and realize some type of return over a certain amount of time. However, only when you learn the fundamental principles of investing in tax liens, you will then generate substantial profits.
Should You Invest in Tax Lien Certificates?
Investing in tax lien certificates can be a good opportunity, but it requires careful evaluation and understanding. Before deciding to invest, it's important to do thorough research or "due diligence" on each property. For instance, checking if the property owner is close to bankruptcy is crucial. If they are, the IRS or a bankruptcy trustee might have the power to override your tax lien, which could affect your investment.
If you're interested in this type of investment, gaining a deep knowledge of the industry is vital. This could involve studying property laws and local regulations, or learning from a mentor who has experience in tax lien investments. The more informed you are, the better your chances of making a successful investment.
Tax Lien Investing Bottom Line
Investing in property tax liens can be a great way to make money, especially for those who have experience in real estate. By doing your homework and understanding the properties you invest in, you can earn significant profits. However, this type of investment also comes with unique risks, making it less suitable for beginners. If you're considering tax lien investing, it's important to learn as much as you can and proceed with caution.