Is Tax Lien Investing for You?
Understanding key factors can determine your success with this investment vehicle.
Counties and municipalities depend on money from property taxes to meet their budget. When property owners don’t pay their taxes, the local taxing district of some states will sell the taxes to an investor in an auction. At these auctions, the investors bid for the right to pay the taxes on the property and place a lien on the property.
Why would an investor want to do this? Two reasons.
First, they receive a high interest on their investment (much higher than they could get in the bank or a money market account).
Second, the tax lien that is created on the property is a super lien. That means it must be paid off before all other liens, except for government liens. This makes a tax lien a very secure investment.
Difference Between a Tax Lien and a Tax Deed
In some states, when property taxes go unpaid, instead of selling a lien on the property, the county or municipality sells the property at a tax deed sale. In states that sell tax deeds, you are buying the property. In most states that sell tax deeds, the bidding starts at the amount of back taxes and penalties that have accrued on each parcel. In some deed states, however, the minimum bid is a certain percentage of the assessed or market value of the real estate. A tax deed can be a good investment, especially in states that sell the property for the back taxes. It all depends on how much competition there is at the tax sale and what investors are willing to pay.
Redeemable Tax Deeds
Some states sell “redeemable tax deeds.” In these states, the county auctions the deed to the property at the tax sale. But even though the investor is paying for the deed to the property at the tax sale, ownership does not transfer to the investor until the redemption period is over.
During the redemption period (which is a different time period in each state), the delinquent taxpayer can redeem the property by paying a hefty penalty or interest on the amount that was bid at the sale. The tax deed holder (investor) gets their investment back with the interest or penalty amount. In some states, the penalty or interest can be quite high, making it very attractive to the investor, and more difficult for the delinquent property owner to redeem the deed.
Common Myths About Tax Lien Investing
People have been told that tax liens are a great investment. Many investors assume that interest is paid out by the county or municipality on a regular basis. The truth about tax lien investing is that you do not get paid a cent until the delinquent property owner decides to redeem the lien. If the delinquent property owner does not pay during the redemption period (which is different for every state), then you can foreclose on the property.
Another misunderstanding about tax lien investing is that after the redemption period is over, the lien holder will automatically get the deed to the property. The truth is that in most states, you need a lawyer to foreclose and get the deed to the property. In the state of Florida, the property will be sold in a tax deed sale and will be auctioned to the highest bidder in order to satisfy your lien. You only get the property if it is not sold at the deed auction.
Some are under the impression that tax lien investing is a good way to buy properties for pennies on the dollar. The truth about tax lien investing is that almost all tax liens on good properties will redeem, especially in states where the value of real estate is very high. If the lien is not redeemed during the redemption period, it will almost always redeem sometime during the foreclosure process. Even when the lien is not redeemed, you may have to wait years to foreclose the right of redemption and get the property. Tax lien investing is a way to get a high return on your money. If you are interested in buying property for under market value, you are better off with tax deeds or redeemable tax deeds.
Is Tax Lien Investing for You?
Tax lien investing used to be something that only the wealthy knew about and took advantage of. For decades it was a little-known, high-yield investment vehicle. All of this has changed in the past couple of decades as more and more people have become aware of the high yields and minimal risk of investing in tax lien certificates. Still, many are not sure if it’s really something they can do.
Tax lien certificates are an attractive investment for small investors because you don’t need thousands of dollars to start and you don’t have to pay any brokerage fees. There are drawbacks, however. You almost have to be an expert to invest profitably. This is an investment that you need to be able to devote some time to. It’s not like you can call your broker and tell him to buy some tax liens for your portfolio.
Tax lien certificates are sold at tax sales conducted by a county or municipal official. These sales are usually held as auctions, in most states just once a year. There are a few states with counties that hold tax sales quarterly or even once a month. In order to invest successfully, you need to find out when and where these tax sales are held, research the properties in the sale and in many states physically attend the auction to bid
on properties.
Getting Started
First, find out where and when the tax sale is held, and get all the information you can about the tax sale. You’ll want to get the tax sale list. You also need to know the rules and procedures for the tax sale. This is sometimes published online on the tax collector’s or county treasurer’s website. The rules and procedures can vary from state to state, and sometimes even for each county within a state. Not knowing the rules and procedures, or not following them, can cost you!
You’ll have to do some research on the parcels that are in the tax sale to determine which ones to bid on. Check the tax records to find out as much about each property as you can. Estimate the market value for each property you plan to bid on. For tax deeds, do some type of title search to check for liens or judgments that might survive the tax sale. For vacant land (both liens and deeds), check any zoning laws to make sure the property is buildable.
Next, prepare for bidding at the tax sale. You’ll need to complete a W-9 form for tax lien and redeemable deed sales. Either have the form completed and bring it with you to the sale, or have your tax ID (Social Security, ITIN or EIN #) ready. Depending on which type of tax sale (deed, lien or redeemable deed sale) you’re going to, you may also need to fill out a bidder information form, or an affidavit stating that you don’t owe any property tax in that taxing district.
You’ve done your homework and now you’re prepared to bid at the tax sale!
Joanne Musa
Joanne Musa is a tax lien investing expert and consultant who has helped hundreds of investors, entrepreneurs and small business owners profit from high-yielding, real estate secured, tax lien certificates. Known online as the Tax Lien Lady, she is one of the most trusted authorities in the industry. She is the best-selling author of the book “How You Can Get 8%-36% Return On Your Money Without the Typical Risk of Real Estate Investing or the Uncertainty of the Stock Market.” She can be reached via her website at www.taxlienlady.com.
