A tax lien is a charge taken against property owners who fail to pay their property tax. If a property owner does not pay their taxes in a given period of time, this debt can be put up for auction where investors can purchase the lien.
When you win the lien bid in an auction, you pay the government in exchange for the lien, thus transferring all the risks and rewards of the lien to you. When you own a lien certificate, the property owner is expected to pay you the entire value of the lien, plus interest that can be as high as 36%. That is what makes it profitable.
In the event a property owner is unable to pay the lien and interest in time, you can take ownership of the property and foreclose it, allowing you to make your money back plus profit.
This is a niche with great potential, which provides big breaks for many first time investors. It is a time tested approach that is making a lot of money for many people, but it is one that should be approached with clarity and understanding. If you are considering investing and tax liens seem like a unique opportunity for you, follow this guide to help simplify the process and choose investment deals that will return a good profit.
1. Understand Tax Liens
Most things work out better when you know what you’re doing. Read about tax liens extensively. Speak with the county treasury or tax office to find out how your area lists liens for sale, the process in buying one, and the risks or rewards that comes with purchasing a lien.
Find out how you make money on tax liens, including the interest rates you can earn. Research the types of properties for sale in your area, their value if foreclosed, and the purchasing market for such properties. Gather all this information, study it thoroughly, and if possible, get advice from other investors in this niche.
2. Understand the Laws of Your Potential Investment Area
Investigate the laws of the area you want to purchase in. Visit the county website and read their real estate laws, or call the county executive office for more information.
Find out when and how the county places tax liens to avoid buying illegal liens. Focus your efforts in specific areas. It saves you time in learning the rules and laws of multiple jurisdictions.
Consider the county’s process of collection of payment from property owners. Owners can sue for harassment if you call and send excessive letters demanding payment. Some counties can extend the payment period if a homeowner applies for it.
Local governments facing financial difficulties may offer good deals for tax liens because it provides quick cash flow. Investigate your local government’s financial statistics and chose areas where you are likely to get the best deal for a lien certificate.
3. Find Liens for Purchase
Ask the county tax office about getting a list of liens that will be sold in the next auction. This gives you an opportunity to research the property in advance and plan for your investment.
Counties may also sell leftover liens outside of auctions. Typically, leftover liens were not sold because they were a bad investment, so research them very carefully before you invest. Find out why they never made sale, the risks that come with it, legal limitations, and the interest you stand to make. Be wary of these types of liens and only buy them when you are fully satisfied and convinced you can make a substantial profit.
After you have surveyed and researched all liens for sale in your selected area, draw a final list of prospects for investment. If it is your first investment, it is best to keep your list modest and consistent with the amount you are willing to invest. Bid for properties you have shortlisted only. Impulse buying is extremely risky, so avoid bidding for a property that you have not properly researched.
4. Purchase the Lien
Once you’ve decided to proceed with purchasing liens, prepare a shortlist of properties you are interested in and have an exact figure of what you are willing to bid. Your bidding amount should take into consideration all other potential costs associated with the lien purchase. For example, should property owners fail to pay taxes, there may be legal fees associated with going through the foreclosure process.
Also, be aware that liens usually come with expiration dates. This means that you can only claim the taxes for a certain period of time, after which, you will no longer receive the taxes. Take note of the lien’s expiration date and make sure it’s a reasonable timeframe that will allow you to earn back your investment and make a profit.
Plan for the auction in advance, being prepared with the appropriate amounts of money and proper forms of payment. Auctions can be very fast paced, so pay attention to avoid missing the properties on your list.
Once you have bought the lien license, follow the legal procedure required in notifying the property owner of the lien purchase. This should not be a surprise since they would have already been notified by the county that the lien was being auctioned. Your notification should be sent via Certified Mail, including how much taxes they owe and when the amount is due. The property owner will pay the money to the government then you will collect it from the county executive office. If the property owners do not pay their debt, notify them and take proper legal action to avoid losing your investment when the lien expires.
Tax liens can be a great investment option, especially for first time investors with a modest budget. The keys to successful lien investment is doing your research, fully understanding the process, and being prepared to take the risk.