Understanding the Basics of Tax Lien Investing

Many of the topics related to tax lien certificates are covered in the real estate education courses that prospective realtors have to complete and be evaluated on before getting their professional licenses. Investing in tax liens is only possible because of statutes, rules, and legal processes enabled by revenue collection agencies at the county level.

At its most basic level, tax lien investing consists of purchasing outstanding debt in the form of certificates issued by revenue collection and management agencies. The debtors are property owners who have fallen behind on paying taxes; the properties can be residential structures or plots of land. 

If a property owner refuses to pay their taxes, the county will place a tax lien certificate on the property. Investors often purchase tax lien certificates because they are backed by real estate collateral. In many states, the county allows the certificate holder to take ownership of the property through tax lien foreclosure. Prospective investors need to understand that acquiring a certificate means paying off debt owed to a municipal entity, which means that they are bailing out an agency by providing them with the cash needed to manage their budgets. The delinquent property owners are not bailed out because they are not off the hook yet; they must repay the investor in the form of back taxes, fees, and interest accrued.

A tax lien certificate can be thought of as being similar to a municipal bond in the sense that you know the investment is legitimate under its issuance. If the process of auctioning off outstanding tax debt was not legal, revenue collection agencies would not be able to conduct it. Unlike bonds, investors will not get interest payments from the issuer; they are supposed to collect it from the property owner over a period stipulated by law. This is known as idle tax lien investing. Let's say a homeowner in Arizona owes about $2,000 in unpaid property taxes plus penalties that result in a lien being filed and a certificate auctioned off. An investor holding the certificate can legally get $2,000 back from the homeowner plus the interest indicated at auction; if this repayment is completed within the term, the debt obligation is satisfied and recorded by the county clerk. Should the homeowner not be able or refuse to pay the investor, the certificate can be redeemed in the form of a legal right to foreclosure, which presents an opportunity to being named on the deed and acquiring some level of property ownership; we cannot say full ownership because there may be claims to title and other liens to clear.

Some investors enter the world of tax lien certificates in the hopes of acquiring properties for far less than their market values. This is called active tax lien investing, and it can be facilitated in states where revenue collection agencies are legally allowed to auction off tax deeds. One such state is Florida, and this process's intent enables the highest bidder to initiate foreclosure right away. In a tax deed auction, the properties may have already gone through the tax lien certificate process more than once, and this will have to be settled by the highest bidder. You can turn an idle tax lien investing situation into an active position if you choose to initiate the foreclosure process at the first opportunity. Some investors negotiate with owners who do not wish to hold onto their properties any longer, thereby getting on the deed utilizing a legal transfer motivated by a cash payment. Investors who strike this kind of agreement with homeowners will have an easier time during foreclosure because objections would have been eliminated. 

Most states typically operate under two forms of foreclosure: judicial or administrative foreclosure. Tax lien investors will have to go through either one of the processes if they hope to get their names on the property title. The aforementioned real estate seminar scammers will never tell you about foreclosures. You need to be aware of these legal proceedings because they may add to the property acquisition's final cost. 

Judicial Tax Lien Foreclosure

Judicial foreclosure requires that the process is completed through the court system. If no litigation issues arise, investors should expect to pay between $2,500 and $3,500 in attorney fees. Suppose the homeowner decides to deploy a foreclosure defense strategy. In that case, court costs and legal fees will likely increase, and the same goes for third parties such as creditors, heirs, lien holders, and even gold diggers who may wish to claw at the property value. 

In an administrative foreclosure state, the tax lien foreclosure is completed through the county government. The cost is decidedly less than in a judicial state and ranges between $500 to $1,000. While it might seem more beneficial to invest in an administrative state, there are pros and cons to both.

The main advantage of investing in a judicial state is that a licensed attorney typically handles each foreclosure. This means that the attorney is liable for any clerical mistakes. The attorney will typically include a service called “quiet title.” This document is considered crucial to a successful tax lien foreclosure. You will have the added assurance of a court decision backing your right to a clear property title. 

Seasoned tax lien investors will tell you that judicial foreclosures are not as bad as some people claim. In the wake of the housing market crash of 2008, unethical mortgage borrowers took advantage of a broken court system in order to milk the judicial foreclosure process for as long as they could; however, this is no longer the case in many states because bar associations and court divisions worked together to enact corrective measures. In 2021, a foreclosure in Florida will go through a court process that is many times smoother than it was a decade ago.

Administrative Tax Lien Foreclosure

When investing in an administrative state, the investor pays the fees directly to the county. The county workers will be responsible for carrying out the process of the foreclosure. However, if mistakes arise from issues such as incorrect paperwork, the investor is responsible. Although it is cheaper to complete tax lien foreclosure in an administrative state, many investors prefer the judicial method since the attorney will submit the documents. Please note that this type of foreclosure is not wholly exempt from lawsuits. A disgruntled homeowner or someone who is named on the deed can file a civil complaint as the process is taking place. Even though a lawsuit will not necessarily stop the foreclosure process, it may create headaches in the future. 

Smoothly completing the tax lien foreclosure process largely depends on your knowledge. It is essential to conduct due diligence and understand the laws of the state you're investing in. With all this in mind, many tax lien investors prefer to operate in judicial foreclosure states because law firms can ensure that their clients are able to get clear titles that are free from liens and encumbrances. This is known as a marketable title; what it means is that a prospective buyer can order a title search and get peace of mind from knowing that they are looking at a free and clear property. If the buyer needs to finance the purchase through a mortgage loan, the bank will also get a clear opinion of title and even insurance from a title indemnity company.

Success in tax lien investing starts with identifying the right opportunities. Marketplace Pro is the only software solution that gives you actionable information about properties you can bid on a tax lien certificate and deed auctions.

Get in touch with our office today and schedule a demonstration of Marketplace Pro.

Tax lien investing is generally regarded as one of the safest real estate strategies out there. But as with any investment, there can be risks. Tax lien foreclosure, low property values, or additional investment requirements can be profitable to investors; however, you cannot ignore potential risks. On the surface, coming away as the highest bidder on a tax lien certificate auction, which is sometimes referred to as a sheriff's sale, may seem like a win-win situation, particularly in states where the auction is for the actual deed of the property. You may ask yourself: What can go wrong if I secure the title of the property? The answer will depend on the circumstances by which the residential structure or the land came to fall into a county auction.

One of the best ways to hedge yourself against tax lien investing risks is to know what you are getting yourself into. It would help if you considered what the worst-case scenarios could be, and you also have to formulate an exit strategy if things do not go your way. In other words, you have to figure out ways to reduce liability and mitigate risk. Let's start with discussing the various investing strategies you can evaluate concerning tax liens; each of them can pose particular problems you will want to avoid.

Tax Lien Foreclosure

For those looking only to collect interest, property acquisition can pose a risk. Many newcomers to the world of tax lien investing believe that they can take over a property by paying off overdue taxes and penalties assessed by a local revenue collection agency. This is what unscrupulous providers of tax lien education conferences will tell you, and it is not always as clear cut as that.

When you obtain a tax lien certificate, you have the right to collect interest from the morose homeowners who may or may not exercise tenancy in the property. The interest rates can be quite attractive because they hover around 5% and 10%, but they are capped by statutes and rules, which also dictate the maximum repayment period. When you think about it, a homeowner whose family occupies the property will probably consider you a suitable business partner in avoiding foreclosure, but think about what can happen if the owner cannot or does not want to play along. Will you be ready to exercise your right to foreclosing on the property and evicting the occupants?

Even with a tax lien certificate in your name, a foreclosure could be a costly affair. You may need to retain a law firm's services, and this is an idea that the homeowner may explore. You will become a plaintiff filing a complaint to the defendant owner. If the owner retains a foreclosure defense firm for some reason, you may be looking at legal headaches. There may also be the likelihood of the property owner being an attorney or having connections to law firms; this is more likely to happen when the property is a lovely beach home or a ripe piece of land for development. 

Lack of preparation for foreclosure could potentially lead to lost money on a tax lien certificate. For the investor that is solely focused on interest, we recommend concentrating on single-family homes, properties with a homestead exemption, or properties with liens that are likely to be redeemed.

Tax Lien Property Values

There will always be a chance of acquiring a property that is not desirable or does not hold any real value. This is more likely to occur in states where the deed is auctioned off, but it can also happen in tax lien certificate situations. A deed may be packed with caveats, and one of them is related to the property's market value. For example, an investor could acquire a tax lien certificate on a parcel of land in Arizona's desert, and with an ugly view of the border wall separating the United States and Mexico. The property is undeveloped and is not surrounded by any residential or commercial real estate. An excellent way to avoid this risk would be to get an aerial view of the land. The aerial view will provide an idea of the property's condition and the surrounding area and can prevent this risk to a certain extent.

When real estate markets enter a downturn period, all property owners are bound to be affected, and some will be impacted more than others. This happened mainly in certain Southwest Florida regions between 2004 and 2008, when land buyers went crazy purchasing plots of land that appeared to be located close to residential developments under construction. When the housing market crashed, some of those development projects came to a screeching halt, and those who purchased lots near those construction sites were left holding titles that ended up losing more value than they expected. This is a highly speculative strategy that can happen whenever market conditions are not favorable.

Additional Investment Requirements

Another risk in tax lien investing also comes in acquiring the tax lien property through tax foreclosure. Because you are often buying a tax lien certificate, most likely on a distressed property, it is expected that additional investments need to be made to make the property marketable. A new roof, municipal liens needing to be satisfied, cleaning the yard, changing the locks, etc. There are countless ways additional investments may be required. When purchasing a tax lien certificate, it's crucial to anticipate all exit strategies and set aside extra investment money if repairs are needed.

Properties that are in a severe state of disrepair may end up becoming too expensive to improve. This can happen in California with homes that were never brought up to seismic code; the risk could be cracks in the foundation caused by earthquakes, which would require a complete demolition of the structure. You may still be able to profit from the land value, but only if you commit to paying for the cost of demolition and debris disposal. Yet another risk is related to environmental impact or damage. We should mention the Golden State once again because new stormwater disposal requirements are coming into effect in 2021.

The bottom line of additional investment risk is: Are you willing to shell out extra money to make the acquisition attractive? We may not even call this a risk because it can be an exercise in building equity. If you think about it, real estate investors who are into flipping properties for a quick sell deal with this kind of risk all the time; for them, it is implied, but it has more to do with market conditions. Here we should mention that some house flippers are also tax lien certificate investors. 

In some cases, they can see market conditions improving, and they move towards negotiating with the homeowners for a quick exit and amicable foreclosure in exchange for a cash payout. In this example, the advantage would be a summary foreclosure judgment without eviction because you would be paying the occupants to move out.

There Are Risks In Every Investment

Each of the risks mentioned above can be avoided by conducting thorough research. We understand that you may not know all the details you need to pay attention to avoid these risks, but we are dedicated to teaching our members how these processes work.

Proper research doesn't always mean that you will avoid all of the risky situations. In the realm of tax lien investing, some risks can be unpredictable. It would be best if you were prepared to solve problems to make money; nonetheless, it is often in difficult situations where expert investors can thrive and earn the most significant profits. It is important to remember not to be scared of a potentially profitable investment because the property needs some repairs or negotiations. There will be times when you come across information that merits ignoring an auction listing altogether. Seasoned real estate investors will look at title search or abstract to get an idea about mechanic's liens or potential claims to the title that can grow into headaches that are not worth dealing with. 

In the end, education, proper training, and a formidable team will help reduce the risk of losing money on an investment. With Marketplace Pro software, you can significantly reduce your risk because you will not be going blind when registering for a tax lien certificate or a property deed auction. 

If you are familiar with the Multiple Listing Service (MLS) used by real estate professionals, Marketplace Pro is the closest you will get, and it can give you a distinct advantage over other auction bidders. Whenever you are ready to experience the power of Marketplace Pro, be sure to get in touch with our office so that we can arrange a demonstration.

A business plan is not complete unless it has a fully dedicated section to outlining an exit strategy. Banks will not grant commercial loans to new business ventures unless you can formulate a solid exit strategy. Let's say a retail entrepreneur wants to start an e-commerce website. For the bank to consider lending startup funds, the entrepreneur must explain how she intends to either liquidate the business, transfer it to someone else, or sell the entire company when the operation comes to an end. The bank wants to see an exit strategy conducive to loan repayment, but the entrepreneur would like to profit when exiting the business.

In the case of real estate investing and the pursuit of tax lien certificates and deeds at county auctions and sheriff's sales, exit strategies are not limited to the overall business enterprise but also each investment made. Suppose you are writing a business plan to attract potential investors or commercial financing. In that case, you have to include both the overall exit strategy in addition to the five systems we will discuss below. 

Developing an exit strategy is a crucial component to formulating a solid tax lien investment plan. Having a formal process will undoubtedly save you valuable time and money. An exit strategy is how you intend to realize a profit from each particular investment, which will begin when you come away as the highest bidder at an auction. You need to understand each strategy to determine which one will work out better for every deal. You will have to research the value of the property and its type and potential to settle on an exit strategy that makes sense.

You must always keep in mind that an exit strategy is required for every deal, and you have to approach it as the way you will be generating a profit. You will find that some of the exit strategies used by tax lien investors are very similar to those applied by house flippers.

Choosing an Exit Strategy


The Five Most Common Exit Strategies for Tax Lien Investors

  1. Redemption
  2. Quick Flip
  3. Wholesaling
  4. Fix and Flip
  5. Fix & Rent

1. Redemption

This is usually the most popular exit strategy for tax lien investors. This happens when another investor or the property owner pays off the delinquent taxes. The investor will receive their money back plus interest. Interest rates are determined by each state and may vary.

State law and county rules will determine the manner of repayment as well as the term. Some homeowners will want to set up an installment plan, while others will opt for a lump sum or a couple of payments to be made within the term, which can last up to three years. Should the owner of the land or home decide to sell the property in the meantime, the closing agent will arrange for the tax lien to be satisfied using the transaction proceeds. Once the certificate is redeemed, the satisfaction of the lien is recorded, which means that it will go away; you would have collected an excellent rate of interest, and the transaction will serve as a notch in your investor's belt.

2. Quick Flip

Selling the property to another investor may be an option for you. You'll need to evaluate the condition of the property once again and determine a reasonable sale price. Many investors specialize in flipping real estate, so pricing the property to sell will work in your favor. In this case, building a network would mean you could already have a potential buyer in mind. This makes for an even quicker and easier transaction.

This exit strategy is similar to what you see in reality television shows that focus on house flippers' work, but it foregoes improvement of the property. Flipping for quick profit is often contingent upon housing market conditions. In a hot seller's market where the housing supply is low, quick flips are more comfortable since buyers are continually looking to become flippers themselves. Please note that this strategy assumes that you have somehow taken possession of the property, and you can clear other liens.

3. Wholesaling

Wholesaling is a good strategy if you're looking for quick cash flow because you can sell the contract to another investor. If you're not against doing minor rehab work or if you acquire a property in good condition, this is a great option. With this method, you can sell it under market value to speed up the selling process.

The potential profit you can generate with wholesaling is generally less than other exit strategies because you only sell the contract. Potential buyers will not necessarily occupy the property; they may be real estate professionals, investors, or speculators who are wholesalers themselves. Some people would argue that you would better off acting as a real estate broker, but this requires licensing and registration with a state regulator.

4. Fix and Flip

If you have some extra cash and are looking for a property to fix up, this tried and true strategy is perfect for you. Before choosing this option, it's crucial to check the numbers to ensure that the margins are worth your time. For instance, if you acquire a $30K property worth $50K and needs $15K in repairs, this may not be the most profitable strategy.

Tax lien investors should not assume that all the properties that fall into certificate auction status are in disrepair. In some cases, the homeowners fell behind on paying taxes, and they would most likely want to keep their properties. Some investors can negotiate with the homeowners to walk away from the property if it is falling apart. A few thousand dollars and a recorded agreement may allow you to file foreclosure in an uncontested manner so that you can take possession and proceed to improve the property. 

If you are a licensed realtor, you can simultaneously act as a tax lien investor and as a house flipper. You will need some capital to pay for the remodeling projects, and you will also need to list the property; however, acting as your real estate broker means keeping all fees to yourself.

5. Fix and Rent

Rental property investing is often a common goal among real estate investors because it provides constant passive income. Like fix and flips, renovations are often required. The key to completing a successful rental property deal is making sure you understand the market. While it's helpful to know that the margins are solid, knowing what other renters are paying in the area can help determine your returns. Doing this will help predict how long it will take to make back the money you invested.

For example, if you acquire a property for $30k and spend about $10k in repairs, that's $40k spent in total. If a similar property in the area rents for $1,500 per month, it will take a little over two years to break even. After that, the rental property would be a steady cash flow.

Of all the exit strategies, becoming a landlord is one that will require work, dedication, and patience. It can be very profitable in San Francisco markets, where a one-bedroom apartment could easily rent for $2,800 in late 2020. This is a commitment to entering leasing contracts and watching market conditions to decide whether you wish to keep renting or listing the property for sale.

Overall, Choose an Exit Strategy Based on Research

Choosing an exit strategy doesn't have to be complicated, but you do have to do your due diligence. Understanding your market and analyzing the margins will help you make an educated decision. It is hard to predict if you will be redeemed or if you'll acquire the property, but creating an exit strategy beforehand can save you from making mistakes.

Another exit strategy that was not discussed above is not entirely business-related. It involves falling in love with the property that you hold a tax lien certificate for. This could be a home in a lovely part of town that needs a certain level of repair and maintenance to make it attractive to the point that you will want to keep it for yourself. This situation is not unheard of among investors who participate in deed auctions, which means that they can walk away from the courthouse steps with title to the property. 

A great deal of the success you can derive from tax lien investing has to do with locating diamonds in the rough. With Marketplace Pro software, you can quickly and easily identify properties offered in county auctions. Learn more about Marketplace Pro by contacting us today and scheduling a demonstration.

The world of real estate investing has various dimensions. The United States' housing market is one of the most dynamic globally, and this translates into various profit opportunities. When you talk to seasoned real estate professionals, they will tell you that every homeowner can be considered a prospective property investor. Still, not all of them will be able to capitalize on this potential. Unfortunately, some property owners cannot keep up with all the financial obligations required to hold onto their homes or plots of land. When homeowners fall too far behind on property tax payments, their delinquency opens the door for smart investors to enter the tax lien auction process.

In this article, we will be reviewing the process of applying for a tax deed certificate on a property that has entered delinquency status. As previously mentioned, this can be thought of as one of the various investment opportunities you can explore in the housing market, but not as a property buyer. Instead, you will be an investor seeking to collect interest payments and perhaps getting your name on the deed. It is important to note that tax lien investing is not the same as flipping properties; nonetheless, these two strategies are not mutually exclusive.

We ask that you not think about tax lien or deed investing as ways to “buy homes for a dollar.” If you leaf through old issues of magazines such as The Atlantic, Rolling Stone, and Newsweek, in the back pages you will find small advertisements urging you to receive a mailed booklet explaining how you can participate in “secret” property auctions where paying off outstanding taxes will get you the keys to a nice beachfront home. Tax lien certificates do not work that way; below, we will explain how they unfold and what you can expect. The jurisdiction we have selected to illustrate the process is the Maricopa County Treasurer's Office in Arizona. Tax revenue agencies in other states and counties will not work the same, but you get the general idea. 

Filing a Tax Deed Application

When beginning the process of tax lien foreclosure, filing the tax deed application (TDA) on a property is typically the first step. If you plan to acquire the property or collect interest, filing the TDA will commence the process. You will still need to go through the auction, which may be called a sheriff's sale.

In Maricopa County, delinquent property taxes are auctioned off in an open session that is based on the interest that investors can derive if they pay off the obligation on the spot. Many jurisdictions usually require that the lien be transferred to your name so that you can later file a foreclosure lawsuit if needed. Of course, the timeline for this can vary, but you can expedite the process by providing the required documentation on the spot. When buying on the primary market, you will be required to ask the county directly what they will need from you.

Initiating a Tax Deed Application

When the lien is transferred into your name and is firmly out of the redemption period, the Tax Deed Application process can begin in earnest. You will need to pay off the active certificates in order to complete the foreclosure. Filing the TDA tends to be helpful here as it will trigger the interest rate to increase to 18% annually on the roll-up amount if it is allowed by statute and rule. Please note that this will depend on the jurisdiction. 

The next step in the TDA process is to pay any necessary fees. It's worth noting that most counties' TDA fee in an administrative foreclosure state is usually from $200-$600. You will not acquire interest on any fees paid for the tax deed application. On the plus side, if you are redeemed on the lien, the county will reimburse the fee.

To understand why this process takes place, think about counties and states' needs to fund various services such as road construction, park maintenance, school district improvements, and others. To this effect, property taxes are collected on an annual basis. Maricopa County gives morose homeowners the chance to enter collection status for up to a year. Still, once December comes around, a parcel adding up all delinquent and uncollected property taxes is created to conduct a tax lien sale. 

Revenue collection agencies' goal is to shore up budget holes in the most practical manner, which consists of holding a tax lien certificate auction in many jurisdictions. Winning bidders get the certificate and the chance of collecting excellent interest repayment rates from homeowners. In essence, tax lien investors purchase debt, but they may be able to take possession of the property in some cases.

In the case of tax lien sales in Maricopa County, homeowners have three years to repay their debt to the investor holding the certificate. After that period, the parcel becomes a right to file for foreclosure, which is a judicial process in Arizona. This is when the investor has the opportunity to hold deed and title to the property through a court order.

Should you be wondering about existing mortgages on the property, that is a great question. In the American mortgage lending system, the bank providing a principal mortgage is the lienholder that takes first position. A home equity line of credit usually subordinates to the first bank. You will rarely see these properties going to sheriff's sale because they tend to be mortgaged at 80% loan-to-value ratios, which means that a mortgage servicing company collects tax payments in escrow monthly. There are escrow reserves for taxes and insurance because banks will jealously protect their collateral. 

A mortgage borrower who falls behind on monthly payments will take a while before they are delinquent on property taxes. Once borrowers are far behind on mortgage payments, the banks initiate their forbearance and foreclosure processes; in the meantime, they may reach into their coffers and pay off taxes and insurance until they take possession of the property. In other words, the land and structures you can bid on a tax lien certificate or deed auctions are not usually encumbered by a first mortgage. If the homeowner had been tied to a monthly mortgage payment, he or she might not have fallen into property tax delinquency.

Mortgage banks may not hold interest to the property when you file for foreclosure based on non-repayment of the tax certificate, but this does not mean that the asset will not be saddled with other liens and encumbrances. This is something that all tax lien investors should always keep in mind.

Once the Tax Deed Application is Filed

Upon completing the paperwork, the county will notify the property owner that an investor has applied for the tax deed. From that point, the property owner has time to pay off their back taxes. Typically the given time is between 30-60 days. If the property owner does decide to pay within that time, you will be redeemed on your investment. Additionally, the amount paid to you will include all of the money you invested in the roll-up, fees, and any interest that you have naturally accrued. If the property owner does not pay within the 30-60 day time frame, the county will schedule the property to go to the tax deed auction. The county will also charge a fee to schedule the auction that ranges from $200-$600. Interest will not be earned on the fee amount but can be reimbursed.

After My Certificate Goes to Auction

What do you do when your certificate goes to auction? At the tax deed auction, the minimum bid price starts at the amount invested to guarantee redemption for the tax lien investor. If the property does not get bid on at the auction, the county will then transfer ownership. As a result, the tax lien investor has rights to the property and the opportunity to exercise their preferred exit strategy. 

While it's true that the process of filing a Tax Deed Application can seem complicated, understanding the fundamentals of the process is a surefire way to set yourself up for success. We can provide you with the necessary training you need to make the most out of your tax lien investing efforts, which should always begin with a list of real opportunities available. When you use Marketplace Pro software, you will have access to actionable information about properties that will be hitting tax lien auctions in the future. 

You really need to see how this software works and how it can help by pointing out where you should be pursuing tax deed applications. To schedule a demonstration of Marketplace Pro software, we invite you to contact our offices today.

Vacant land is one of the most overlooked and misunderstood real estate investments out there. Many people shy away from vacant land because they don’t understand the benefits of the investment.

Pros to Investing in Vacant Land:

  1. No Tenants
  2. Motivated Sellers
  3. Easy to Invest Remotely
  4. Fewer Expenses
  5. Establish the Highest and Best Use
  6. Direct Ownership and Peace of Mind
  7. Affordability 
  8. Less Competition
  9. Multiple Ways to Make Money
  10. Land is a Limited Resource

What is Physically Possible?
– What could realistically be built upon the land in question? To answer this question, you’ll want to have a thorough site survey performed. The land’s terrain, for example, could preclude certain types of improvements. Its proximity to easements and utilities may also affect what can be built upon it.

What is Legally Permitted?
– Regardless of where the vacant land is located, it is subject to whatever zoning restrictions have been placed upon it. However, you may be able to appeal to the local planning board to have the zoning changed. That’s something that may be worth investigating, and it should be done to ensure that you arrive at the best and most profitable use of the land.

What is Financially Feasible?
– If you have a proposed use in mind for the land, you also need to determine if it’s financially feasible. In other words, would your proposed improvement generate enough income to justify developing the land in the first place? To get to the bottom of this, in-depth financial analyses are needed.

What is the Most Productive Usage?
– Finally, you take the above factors together to decide the most productive, or profitable, use of the land. Ideally, you’ll come up with a list of several options, and then you can rank them from highest to lowest.

Direct Ownership and Peace of Mind

You Can Establish the Highest and Best Use:
Vacant land is like a blank canvas. Many times, there’s a variety of ways to put it to practical and profitable use. When you invest in vacant land, you gain the opportunity to establish its highest and best use. You can be as creative as you’d like since no one has developed the land before, and there are no improvements involved.Land is a Limited Resource

When it comes to vacant land, there’s no need to worry about construction or renovations. You need to know if the property is suitable for building. As long as another party can build on the land, this now opens up opportunities for someone else to build on the land if/when they want to. 

No Tenants:
Raw land behaves itself. There’s no dealing with tenants, toilets, bugs, mold, lawn care, leaking roofs, bursting pipes, broken furnaces, and all the other issues that come with owning a building.

People Are Motivated to Sell:
Vacant landowners are often highly motivated to sell because they’re usually absentee owners. When a person doesn’t live inside or even near the vacant property that they’re trying to sell, there’s less emotional connection. If it isn’t their primary residence, you’ll find sellers are typically willing to sell very inexpensively. 

Easy to Invest Remotely:
It’s also easy to buy and sell vacant properties without having to see them in person as long as you’re learning to research the properties effectively. Everything is done virtually in this day and age. There are handfuls of free online tools to help you with your due diligence. For example, Zillow or Trulia can help you find the information you need.  

There are Fewer Expenses:
When you’re buying vacant land for a low price, there is no mortgage payment requirement. There are no utility bills to pay, and the cost of property insurance (if you have it at all) is minimal. If you’re an investor looking to park your money somewhere and forget about it, vacant land could be exactly the investment opportunity you’re looking for.

When determining the highest and best use for a parcel of vacant land, consider these four factors:

Ultimately, you may find that the highest and best use for the land aligns with something that is in high demand in the local area. For example, you might develop the land into office space; if office vacancy rates are low, you could make serious money on the ground down the line.

Since you will likely purchase the land outright with cash, you won’t have to worry about the ongoing costs of a mortgage. There won’t be any interest fees, loan origination fees, or other expenses to worry about. At the same time, you have acquired a tangible asset with its own value – one that is likely to appreciate over time, allowing you to enjoy a tidy profit down the line. 


Investing in raw land is an affordable way to diversify an investment portfolio. The upfront costs involved are minimal, so you can get started quickly. In fact, it’s an excellent way for someone interested in real estate investing to get their foot in the door with minimal risk. Ideally, save up some cash so you can buy some vacant land outright. Down the line, you may be able to offer seller financing to future buyers, tapping into another potential income stream.

Less Competition

If you have been involved in real estate investing to any extent, you already know how much competition there tends to be for the most promising income-producing properties. If you’re tired of dealing with bidding wars and other headaches while acquiring properties, vacant land is something to consider. Since there are no improvements on such land, it doesn’t attract nearly as much interest from investors. That’s because there’s no immediate way to earn money from such properties, of course, but there are plenty of ways to do so over the long haul.

As long as you have perseverance, patience, and fortitude, investing in vacant land can be surprisingly easy. The lack of competition lets you take your time when considering a property, allowing you to determine whether or not it’s worth your while.

Multiple Ways to Make money

As noted above, investors often turn up their noses at vacant land because they can’t start generating income from it right away under most circumstances. Unimproved land doesn’t tend to appreciate as quickly as improved land, either, which also gives many investors pause.

Still, there are plenty of ways to generate profit from an investment in vacant land. Buying and holding the land is a good option, but you must be prepared to stick with it for the long term. That’s because it can take several decades for land to appreciate to the point that it’s worth your while financially to sell it. Always consider the potential near-future use of any vacant land that you view. If it’s on the outskirts of a growing area, its value could shoot up more quickly than you expect.

A faster way to potentially realize income from vacant land is by leasing it out. Farmers may be willing to lease the land from you for growing their crops. Note, however, that farmland tends to be more expensive than “regular” vacant land. Also, land is often left vacant for good reasons – and being unable to grow anything on it is considered one. You may also be able to lease the land to hunters, but restrictions typically apply.

Finally, you may be able to offer seller financing to potential buyers in the future. Most banks won’t make loans to purchase vacant land, so offering to finance yourself could make the land more attractive. You’ll be able to collect interest income in this case, which will add to your bottom line.

Land is a Limited Resource

One last thing to consider is that land is truly a limited resource. You can’t make more of it, so snapping it up where and when you can often is a good strategy. Of course, vacant land is more precious in some places than in others, so it’s wise to be strategic when buying vacant land for investment purposes. Perform some research to determine how much vacant land is available in the surrounding area. If there’s not much of it to go around, it could increase in value pretty quickly. Remember that if you don’t buy the land, another investor probably will. Could you be handing over considerable future profits to someone else?

Raw land is a long-term investment. It should give you peace of mind knowing it’s a tangible asset that doesn’t wear out. It doesn’t depreciate, and nothing can be broken, stolen, or destroyed. You can always unload the property by wholesaling, getting in contact with real estate agents, or developing the land. As a result, you’d add substantial value to the property.

Don’t Knock It Until You Try It! It’s an unfortunate misconception that vacant land is a bad investment. Vacant land can produce some serious passive income and can be great for many investors because of its hands-off nature and versatility.

One of the unique advantages of real estate investing is the tax benefit it offers. This benefit is primarily due to the concept of depreciation.

Depreciation and Taxes

Most people recognize that business expenses are deductible. Labor, cost of goods sold, and equipment purchases are all expenses that reduce a typical business's taxable income. In the case of equipment purchases, they must typically be deducted from income over the expected useful life of the equipment purchased. Depreciation occurs by removing an expense over time. 

For example, a construction company purchases machinery for $80,000 that has an expected life of 10 years. Rather than deducing the full amount, the Internal Revenue Code (IRC) allows the company to write off $8,000 per year for 10 years. It recognizes the depreciation in the value of the machinery.

Similarly, the tax code allows owners of income property to deduct the cost of any equipment they purchase – including the cost of the buildings themselves. But unlike most equipment, which really does wear out and loses value over time, buildings typically grow in value as time passes. Unlike other costs associated with operating a property (i.e. taxes, insurance, maintenance, etc.), which are actual, out-of-pocket expenses for a landlord, depreciation is a deduction that does not reflect a real cost to the owner. In other words, this depreciation deduction essentially allows the owner to treat the property as though it were declining in value. You can do this even as the property steadily increases in value. Let's see how this might work with an actual income property investment.

Deprecation and Real Estate


How Depreciation Works Over Time

Suppose you purchase a 4-plex for $380,000, with a monthly cash flow of $500. When you calculate your tax obligation for the year, determine how much of the building's cost was in the land's value. Buildings could depreciate, but land cannot. Let's say that you allocate $70,000 to the cost of the land. The remaining $310,000 is allocated to the cost of the building.

Residential income property depreciates over 27 ½ years. So, we would divide $310,000 by 27.5. With this formula, we find that we can take a deduction of $11,272.73 each year for depreciation. Remember, we had a positive cash flow of $500 per month after operating expenses and debt service. That is $6,000 per year. However, after the $11,272.73 deduction allowed for depreciation, the entire cash flow of $6,000 would be offset. This means no tax liability incurs. The property would be showing a “paper loss” of $5,272.73 for the year. In other words, the $6,000 you made from your property was tax-free!

Furthermore, you could have a loss to use as an offset to other income you may have earned during the year. Being able to claim that you are losing money, legally, is a benefit to real estate ownership. Understanding depreciation can be as significant as any other consideration.

Requirements for Depreciating Rental Properties

To realize the considerable benefits of depreciating a rental property, ensure that your situation applies. You can depreciate a rental property for tax purposes if the following are true:

  • You own the property; you are considered the owner even if you hold a mortgage on it.
  • You use the property as part of your business or as an income-producing activity.
  • The property has an effective life that can be determined for calculation purposes.
  • The property is expected to last for at least one year.

An important caveat: If you place a rental property into service and discontinue it within the same year, you cannot depreciate it. Additionally, you can only depreciate the cost of the buildings, or improvements; since it can't be “used up,” land cannot be depreciated. Likewise, you can't depreciate the costs of landscaping, clearing, or otherwise altering the land.

When Can You Start Taking Depreciation Deductions?

You can begin taking depreciation deductions on a rental property as soon as it is ready and available for use as a rental. In other words, if you buy a property in April, work on it in May, list it for rent in June and fill the vacancy in July, you can start taking the depreciation deduction in June – when it became available.

Once you've deducted the entire cost of the property, you must stop taking the depreciation deduction. If you take the property out of service, you must stop deducting depreciation – even if you haven't recouped the full amount.

The Basics of Calculating a Depreciation Deduction for a Rental Property

To calculate the depreciation deduction for your rental property, you'll need to know three things: your basis in the property, the recovery period, and the depreciation method to be used. Any residential rental property placed into service after 1986 must be depreciated using the Modified Accelerated Cost Recovery System, or MACRS. This technique spreads the costs and depreciation deductions over the property's useful life of 27.5 years.

  1. Figure Out the Basis of the Property – First, determine the rental property basis, which is the total amount you paid. In addition to the property's cost, the basis may include certain closing costs and settlement fees, including legal fees, transfer fees, recording fees, and title insurance. It may also include any other expenses owed by the seller, such as back taxes.
  2. Determine the Cost of the Land and the Improvements – Since you can't depreciate the value of land. It would help if you separated the cost of the land from the cost of the improvements. You can use the fair market value of each at the time of purchase or use the assessed real estate tax value.
  3. Determine Your Basis in the house versus the Land – Using the information from the previous step, calculate your basis in the house. If you bought the property for $150,000, and the assessment says the property is worth $100,000 — $80,000, or 80 percent, for the improvements and $20,000, or 20 percent, for the land — your basis for the house would be $120,000 ($150,000 x 0.80).
  4. Calculate the Adjusted Basis – You may need to adjust the basis you arrive at in some cases. Increases to the basis prior to service may arise from improvements or additions, certain legal fees and restoring damage to the property. Decreases may occur from insurance payments for theft or damage to the property or money obtained for granting an easement, for example.

    GDS vs. ADS

    Next, determine which depreciation method to use. The vast majority of the time, you will use the General Depreciation System, or GDS. In some instances, you may have to use the Alternative Depreciation System, or ADS. ADS may be required if you irrevocably elect to use it or if it's mandated by law. Instances in which it's required by law include if the property has a tax-exempt use, if it is financed using tax-exempt bonds, if its primary use is for farming or if it has a qualified business use 50 percent or less of the time.

    Once you know which method you're using, you can figure out the recovery period. GDS sets the recovery period for residential rental properties at 27.5 years. For ADS, the recovery period is 30 years if put into service on or after December 31, 2017, and 40 years if put into service before that.

    How Much Depreciation Can You Deduct Per Year?

    With depreciation deductions, you can spread out the cost of purchasing a property over decades, which allows you to reduce your tax bill every year for many years. A property depreciates by an equal amount per year – a rate of 3.636%. If it was put into service later in the year, the amount is less for that year. You can get the exact percentage by checking the IRS Residential Rental Property GDS table. Note that this rate is essentially equivalent to dividing the basis by 27.5.

    How does this help to save you money? You report rental income and expenses on Schedule E; the net gain or loss from that then goes over to your 1040 return. Depreciation deductions are applied on Schedule E, so they can reduce your taxable income. For instance, if you depreciate $4,122.65 and are in the 22% tax bracket, you can save $906.98 on your tax bill for that year through this method. Needless to say, this can really add up over time.

    Make the Most of Real Estate Investing with Depreciation Deductions

    As you can see, deducting depreciation from a rental property is a terrific way to reduce your overall tax liability. In some cases, it can even wholly offset any taxes that you may owe on the property, allowing you to pocket even more of your hard-earned money. To make the most of this technique, make sure to consult with a qualified tax accountant before getting started.

As of 2020, wholesaling is still one of the most underrated ways to get into real estate with little to no money or risk. New and experienced investors alike, this investment approach can produce significant revenue and contribute to your overall success as a real estate investor.

Basics of Wholesaling

When completing a wholesale deal, there will be three main players involved. The seller, the wholesaler, and the buyer. When wholesaling, you will be putting a property under contract and then selling your contract to someone else at a higher price. Since you are selling your contract, you are never closing on the property, which means you are not buying the property; someone else is. (This means no money, no credit needed from you). By doing this, you do not have to put down a large down payment, and you do not have to get a loan. The only money you will need is money for an earnest money deposit (EMD). In some cases, the EMD can be a minimal amount of money and can even be nothing at all.

What's the Next Step?

The trick to completing a successful wholesale transaction if you're low on money or credit is establishing your exit strategy beforehand. Start by building your network and try finding a buyer early. If you're not prepared to purchase the contract due to low funding, having a few potential buyers in mind can help ease some stress when coming to the end of your deal.

When wholesaling a property, you must put the property under contract at a discount. Why? Because you are placing the property under contract at one price and then selling to an investor at a higher price. There must be enough room or profit margin for the investor to pay your higher price. You can do this by offering to buy a distressed property. While you may not be in the position to do a fix and flip on your own, someone else might be. Making an offer on a distressed property can be easier because a lot of the time, the seller is motivated to sell quickly.

Making Offers

Most likely, you will have to make several offers to get one accepted, but that's OK. It costs nothing to make an offer. Making a low offer is also OK. If a seller accepts your first offer, you'll never know how much lower you could have gotten the property for. Remember, every dollar less that you can put the property under contract goes straight into your pocket. Let's look at an example. You find a property that has an ARV of $275,000 needing $25,000 in rehab. Let's say you can put the property under contract for $175,000. Say you sell the contract to an investor at $185,000, you make $10,000 and leave the investor $90,000 to rehab, pay money costs, holding costs, selling prices, and profit. Everybody wins!

So How Do I Start Wholesaling

Education! Every real estate investor should always start their real estate journey by getting the right education under their belt. Understanding the market, knowing the risks, analyzing potential exit strategies, and familiarizing yourself with the different processes of wholesaling will leave you feeling more confident and capable of performing a seamless wholesale transaction. Once you have the education, the only thing left is having the courage to take that first step. And that is up to you. 

What is Your Role as a Real Estate Wholesaler?

Real estate wholesaling is easy enough to understand as a process. However, you may be wondering about your actual role. Put simply; you'll act as the middleman between distressed or undervalued properties and the property investors who seek them out. You bring value to the equation with the time, effort, and skills you put into putting everything together. When done correctly, you'll become a reliable source for undervalued properties that investors otherwise wouldn't be able to find.

Top Characteristics of Successful Real Estate Wholesalers

So, is real estate wholesaling right for you? It probably isn't unless you have the following:

  • Property Valuation Education – The key to making money through real estate wholesaling is identifying properties that are undervalued enough to provide returns for you and the investors who ultimately acquire them. Therefore, you should be well-versed regarding the ins and outs of property valuation.
  • Negotiating Skills – As a real estate wholesaler, part of your job is convincing investors of the merits of the properties that you have to offer. This means negotiating with them to arrive at terms that still deliver substantial profits for you. Depending on your exit strategy, you might also have to make a deal at the closing table or at other times during the process, so be sure to hone those negotiating skills.
  • Marketing Prowess – One of the most crucial aspects of successful real estate wholesaling is effectively marketing yourself and your services. The better your exposure is in the local market, the more likely you will develop a pool of reliable buyers. Marketing also alerts others that you're interested in distressed properties, increasing the odds of coming to you when they want to unload them.
  • Real Estate License – Technically, you don't need a real estate license to engage in real estate wholesaling. However, many wholesalers obtain them to gain access to crucial resources like the MLS. Having a real estate license is also a great way to bolster your networking capabilities, and it might come in handy in other ways down the line.

    Top Characteristics of Successful Real Estate Wholesalers

    As a real estate wholesaler, real estate investors will be your primary customers. They fall into two categories: fix-and-flip investors and long-term rental property investors. You'll need to employ different strategies with each group.

    To appeal to fix-and-flip investors, you'll need an in-depth understanding of the costs of repairing and rehabbing residential real estate to ensure that the after repair value, or ARV, is high enough to ensure profits for all.

    To appeal to long-term rental property investors, you should be well-versed regarding many factors, including the local real estate market, the local rental market, current rent prices and local demographics. It will help enormously understand things from your buyer's perspective, including what they consider to be adequate cash flow, how much they can expect to collect in rent, and the costs of maintaining the property and other related factors.

    Steps for Building a Successful Real Estate Wholesaling Business

    Here are the necessary steps for developing a successful real estate wholesaling business:


    1. Research the Local Market – Educate yourself about the market where you'll be wholesaling real estate to more effectively identify distressed and undervalued properties with enough value to go around for everyone.
    2. Curate a List of Buyers – Next, develop a list of investors who buy distressed properties in the local area. Strategies for building such a list include attending real estate events, promoting yourself and your services on social media, engaging in email marketing and using bandit signs to share your contact information across the local area.
    3. Line Up a Reliable Financing Source – Although you typically won't need much capital to engage in real estate wholesaling, you'll still want a reliable source for obtaining financing when necessary. That's especially true if you plan to use double closing as an exit strategy, which involves personally closing on a sale and immediately selling the property to a real estate investor.
    4. Find Deals – Next, identify distressed and undervalued properties with enough “meat on their bones” to provide profits for you and your eventual buyer. As mentioned before, obtaining your real estate license will give you access to the MLS, which is very helpful in this regard. Alternatively, you can use sites like Zillow and even Craigslist; it's also often possible to search public property records online.
    5. Choose an Exit Strategy – Finally, you should have an exit strategy in place before engaging in real estate wholesaling. Most people opt to put down earnest money, sign a purchase agreement, find an interested buyer, and then sell the contract to them, which transfers the obligation to them. Alternatively, you could employ a double closing. In that case, however, you must be prepared to close on the deal, which involves a lot more money and red tape.

      Tips for Making a Profit in Real Estate Wholesaling


      Real estate wholesaling is not without its risks, so it's crucial to study up about it as thoroughly as you can before you begin. Understand that if you sign a purchase agreement and fail to line up another buyer, you'll have no choice but to fulfill your legal obligations to the contract. 

      There are ways to increase your odds of success as a real estate wholesaler. Be prepared to spend a decent amount of money on marketing; the most successful real estate wholesalers are highly effective marketers. Set aside plenty of time for networking events, and keep business cards with you at all times. Get educated regarding property valuation, using real estate comps to assess properties, the costs of repairing residential real estate, and any carrying costs that you may be responsible for along the way. Finally, learn strategies for turning leads into deals; the main trick is talking to people effectively, so honing your communication skills is always a good idea.



It's time! You've either acquired your first property through a tax lien, or you're doing an old-fashioned fix and flip. And… The property needs some work. The key to a successful fix and flip is knowing what rehab projects will add to the property's value without breaking the budget. A common mistake that many new real estate investors make is going overboard on the rehab. New granite countertops, a full bathroom remodel, some new floors, the works. Before you dive headfirst into your rehab, take a look at these do's and don'ts.

The Do's of a Fix & Flip

1. Know the Local Market

When rehabilitating a property, it's essential to look at other local rental listings to see the status quo. Does every listing show overly shiny granite countertops? If so, it may be smart to factor them into your budget. However, you'll probably find that many listings boast simple updates. Knowing the market can help you decide what renovations are necessary for your property to sell and which ones are overkill. Using a search tool like Zillow can help you get an idea of other similar properties.

You'll have an easier time with your fix-and-flip endeavor when you know the basics of the local real estate market. Current market trends will clue you into the types of features local buyers expect. For example, are home values currently rising or falling? How long are properties sitting on the market before selling? In a seller's market, you can typically get away with more straightforward improvements; in a buyer's market, you might have to include more upscale extras to fetch the price you need.

2. Analyze the Numbers

To make a profit, you'll need to know accurate numbers. Comparing the resell value to the purchase price and factoring in the anticipated rehab costs will help you get off to a good start. Knowing these numbers can help you determine your budget as well. If you purchased a property for $50,000, and it has a resell value of $90,000, it's safe to say you could put $20,000 worth of renovations in and still make a good profit on your investment. Whatever the margins are, it's important to know what you're working with to ensure a successful flip.

When you buy a property intending to flip it, you know its current market value. After analyzing the local market and comparable properties, or comps, you should have a clear goal to shoot for in terms of what you'd like to list it for when you're done. To get from point A to point B, figure out which repairs and renovations are needed to bring the property in line with similar ones. The result will be the property's after repair value, or ARV.

Determine the ARV for any property with this simple formula: 

Purchase Price + Value of Repairs/Renovations = After Repair Value

This formula won't do you any good if you don't base your information on realistic comps. The comps you use should be for properties sold in the local area within the last three months. Find comps that match your property as closely as possible in terms of the following:

  • Age – Comps should have been built within 5 to 10 years of the property that you're flipping.
  • Bedrooms and Bathrooms – Stick with comps with the same number of bedrooms and bathrooms as the subject property.
  • Square Footage – Choose comps that have roughly the same amount of interior square footage as your property.
  • Finishes – Consider the quality of finishes like flooring, fixtures, appliances, and the like, and select comps with a similar quality level in those areas.
  • Amenities – Consider any special amenities that the subject property has; ideally, comps should include similar amenities.
  • Lot Size – The lot's size should be taken into account, too; comparing the subject property with one that sits on a much larger or smaller lot will produce inaccurate results.
  • Curb Appeal – Likewise, the landscaping and overall curb appeal of the subject property should be similar to those of any comps that are used.

Create a spreadsheet to compare the subject property to the top three to five comps that you have found. Identify the home that sold for the highest amount, and then see what it has that the subject property lacks. Perhaps the comp has better finishes, for instance, or maybe it offers an attached garage while the subject property has no garage at all. This information will clue you into the types of repairs that you should make to get the price that you want.

3. Create a Budget, and Stick to It!

Once you have estimated the numbers, it's time to create a budget. Take a look at the needed renovations and what they cost. Will these repairs exceed your budget? If so, the property may not be worth the investment. On the other hand, if the numbers work, create your budget and stick to it. We recommend including a little extra room in your financial plan for unexpected repairs. While we all want to assume the best-case scenario, sometimes things come up. Including this extra cushion can keep you from exceeding your budget.

Creating a budget for your fix-and-flip property won't do much good unless it's based on timely and accurate information. That's why it's crucial to have a clear idea of how much it will cost to make the upgrades, repairs, or renovations needed to increase the property's market value to the desired amount.

Start by having a basic understanding of the ballpark cost of various types of home improvement projects. Some examples include:

  • Adding a Home Addition – $21,000 to $70,000
  • Rewiring a Home – $4,000 to $20,000
  • Installing New Plumbing – $500 to $2,000
  • Exterior Remodel – $5,000 to $15,000
  • Kitchen Remodel – $4,500 to $50,000
  • Bathroom Remodel – $6,000 to $35,000
  • Basement Remodel – $11,000 to $30,000
  • New Roof – $5,500 to $10,500

Next, contact local contractors for quotes. That way, you will know the exact cost of whatever rehab work needs to be done. Make sure that the quote includes the price of whatever new items you will need. Add a cushion of 15% to 20% for contingencies. As with any home improvement project, things happen, and unexpected costs often arise. It's better to have more than you need than to fall short and potentially lose out on additional profits.

At this point, you should be comfortable that the cost of performing the upgrades or repairs will increase the market value of the home to an acceptable level. Your knowledge of the local housing market should reassure that the property will be sold at the desired price when the work has been done. 

Of course, it is also important to keep timing in mind. Market conditions can change quickly, so make sure to have a realistic timeframe in mind for when the work can be finished. Sometimes the work can drag on for months and months, for example. In that case, you could end up listing the property under entirely different market conditions – and that could be a recipe for disaster if, say, the market has switched from a seller's market to a buyer's market in the meantime.

Finally, the most critical point of all: Stick to your budget no matter what.

If you hit a bump in the road and learn that a repair or renovation will cost way more than anticipated, it is better to back out and cut your losses than to end up in the red. Even with your cushion in place, it is always possible to end up with a property that will simply cost too much to repair to the point of profitability. Therefore, always be prepared to cut and run, knowing that there are still other opportunities to explore.

Rule of Thumb, Don't Go Overboard!

The easiest thing to do as a new investor is to get caught up in perfecting your first flip. Many new investors go overboard by adding all of the bells and whistles with the rehab, but it isn't always necessary. Knowing the local market, analyzing your numbers, and sticking to your rehab budget is a surefire way to know what renovations will help you, and what will hurt you.

Remember: No matter how many upgrades you make, the local housing market caps the maximum value that you can hope to get for your property. Therefore, the wiser strategy is upgrading the property to the point that it is in line with similar properties – not to the point where it is conspicuous. Most of the time, you can get away with performing simple yet effective repairs and renovations. Installing new carpet, freshening up the paint, patching holes, and swapping out some fixtures is often all that's needed. When it comes to fixing and flipping a house effectively, there's a fine line to walk; over time, though, you'll get better and better at knowing what to do, allowing your property investment prowess to improve accordingly.

Tax lien investing is an overlooked but safe investing strategy that has been around for centuries. State governments created tax liens to collect unpaid property taxes. An underrated form of real estate investing, tax liens are typically a high return investment and a great addition to any investor's portfolio.

If you are looking for ways to diversify your portfolio while potentially realizing considerable returns, tax lien investing may be a viable option to explore. However, as with any investment strategy, it's not without risks. Therefore, it's crucial to educate yourself about how tax lien investing works, including its potential pitfalls, before putting any money on the line.

How Do Tax Liens Work?

Every property owner is required to pay property taxes in the United States. Local governments use property taxes to fund public departments such as police, fire departments, schools, parks, and the construction of roads. In fact, property taxes are often a primary income source for many local counties. When a property owner doesn't pay their taxes, the government needs to find another way to collect that money.

When a property owner doesn't pay their taxes, the county places a tax lien on the property. The county will give the property owner time to pay off their delinquent taxes, but they will send the lien to auction if they fail to pay. The county will hold a public tax lien sale or tax lien auction to sell the tax lien certificate. The certificate price is composed of the delinquent taxes, plus any fees the county paid to bring the certificate to sale. Usually, anyone can attend a tax lien sale. When someone purchases a tax lien at auction, they do not satisfy the property owner's tax liability. They are simply buying a certificate for the amount of the property taxes. This is beneficial for the county because it allows them to continue to fund public programs.

So How Is Tax Lien Investing Beneficial For Investors?

As with any other delinquent payment, the property owner will be penalized for the delinquent taxes. This penalty passes directly on to the tax lien investor. The return is realized when the property owner either pays their taxes or if the property is acquired. If the property owner pays their delinquent taxes, they are responsible for paying the amount of the certificate, plus any accrued interest and fees. The most attractive aspect of tax lien investing is that you will get your money back, plus interest, when the certificate is redeemed. When the county receives the payment from the property owner, they send a redemption check to the investor. 

The payment typically comes in the form of a check or ACH. If the property owner does not pay their taxes, property acquisition becomes possible. Real estate investors will typically pursue this investment strategy because it is possible to acquire properties for a much lower cost than if they were buying it on the traditional market.

Getting Started with Tax Lien Investing

Not all states offer tax lien sales, so the first step in getting started with this investment strategy is finding out whether such sales happen in your state. Here's a current list of states that allow tax lien sales:

  • Alabama
  • Arizona
  • Colorado
  • Florida
  • Illinois
  • Indiana
  • Iowa
  • Kentucky
  • Maryland
  • Mississippi
  • Missouri
  • Montana
  • Nebraska
  • Nevada
  • New Jersey
  • New York
  • Ohio
  • South Carolina
  • South Dakota
  • Vermont
  • West Virginia
  • Wyoming

After confirming whether or not your state allows tax lien sales, follow these steps to get started. A quick note: This type of investing is not recommended for novice investors or for those who are not well acquainted with how real estate works.

  1. Choose a Property Type – Choose a type of property on which to focus your tax lien investing efforts. For example, you might choose to focus on undeveloped land or on improved land; you can also choose between residential real estate and commercial real estate.
  2. Contact the Treasurer – Next, contact the treasurer of the county where you will be bidding on tax liens to find out when and where the next auction will be held. Have them explain to you how such auctions work – are they held online or in person, for example? Obtain a list of rules and requirements for tax lien auctions in that county. In particular, find out what type of payment methods are accepted, and make sure you meet any applicable requirements.
  3. Get a List of Liens for Auction – The treasurer should also supply you with a list of property liens coming up for auction. This is important because it allows you to perform research on those properties and liens before attending the auction, increasing your odds of engaging in effective and lucrative tax lien investing.
  4. Perform Due Diligence – With your list of liens in hand, investigate each one to identify the most promising options. Remember: Not all tax liens are created equal. In fact, it's not unheard of for the value of a tax lien to exceed the value of the underlying property, which dramatically increases your exposure and risk. A good rule of thumb here is to divide the tax lien certificate's face value by the market value of the underlying property. If the resulting ratio exceeds 4%, cross that one off the list. Properties with tax liens are usually assigned a number within the parcels where they are located. Most municipalities allow you to look up information online, so you can visit the county website and search by the applicable reference number. You should then receive an array of information about the property and lien, including the property address; the name of the property owner; the legal description of the property; the assessed value of the property; a listing of any structures that are located on the property and a rundown of the condition of the property.
  5. If You Win at Auction – Armed with the information you have uncovered, attend the auction and bid on the most promising tax liens. If you win, you usually have to pay back the certificate to the county immediately. Now, the property owner is required to repay you for the entire amount of the tax lien plus interest. Interest rates vary by state and range from 5% to 36%; most commonly, they fall between 10% and 12%.
  6. Recoup Your Investment – The property owner must repay the lien within the assigned redemption period, which usually lasts anywhere from six months to three years. The vast majority of the time, the owner repays the amount in full before the redemption period expires. Only around 4% of such properties end up in foreclosure, so investors typically realize their returns through property owners' repayments.

Know the Risks – and Alternatives

As with any investing, it's important to understand the risks of tax lien investing. As noted previously, this type of investing is best suited for seasoned investors with solid knowledge of real estate principles. You must be able and willing to put time and effort into investigating available liens before bidding on them.

Failure to do your due diligence could cause you to lose serious money. For example, as noted previously, the tax lien's value could exceed the value of the underlying property; if the property owner doesn't pay, you will be out the money from the lien and stuck with a property worth less than what you have already paid.

Another thing to look out for is properties with environmental damage or extremely run down and dilapidated properties. The owner of such a property may not be incentivized to pay off any liens that have been placed on it, and you could again end up with a low-value property that could strip away any profit that you hoped to realize. 

Although rare, if you have to foreclose on a property during this process, you may find out that other liens have been placed on it. As the new property owner, you are now on the hook for those liens if you want to sell the property and recoup your investment.

Finally, commercial institutions have jumped onto the tax lien investing bandwagon en masse over the last several years. Big banks and hedge funds, with their massive volume, can easily outbid private investors, driving down the resulting yields. Luckily, an alternative has emerged: funds that invest in tax liens. It's an option that is worth considering, and it may be an excellent way to dip your toe into the pool without getting in over your head.

Buying tax deeds is not a typical starting point for new investors, but it can be a lucrative investment strategy. This niche of real estate investing can be an excellent resource for buying properties at a steep discount and can be used if you fix and flip houses, own rentals, or if you want a return on your money. This guide will explain what tax deeds are, how you can invest in them, and what you need to do before buying tax deeds as a real estate investment.

What is a tax deed?

All real estate is subject to property tax. When a property owner falls behind on their real estate taxes, a tax lien is placed on the property in the form of a tax lien certificate. Depending on the state, the owners have a few months to a few years to pay the taxes due. Eventually, if the taxes remain unpaid, the city or county will sell the property through a public auction as a means to recoup the back taxes owed to them.

In summary, a tax deed is a legal document that grants the governing body the right to list the real estate for sale through a tax deed sale to recoup the unpaid property taxes.

How does a tax deed sale work

Tax deed sales are public auctions, similar to a foreclosure auction that allows parties to bid on the property either in person or online. The county or city sets a minimum bid, which is typically the unpaid tax amount with any fees or interest to this point, and the property is sold to the highest bidder.

The city or county will deduct any taxes owed from the winning bid. If there are overages, a party with a vested interest in the property, such as a mortgage lender or possibly the property owner, can apply to receive the remainder of the tax sale. Tax deed sales require that the property be purchased for cash and request that a small deposit be made upon completion of the sale with payment in full to be made as quickly as 24 hours after the sale up to a few weeks later, depending on the state.

Some states have a redemption period after a tax deed sale, where the homeowner or a lienholder with interest in the property (such as a mortgagee) has the right to pay the unpaid taxes plus fees and penalties, redeeming their interest in the property within a specified period of time.

Other states have no redemption period on the tax deed. Once the property is sold at a tax deed sale, the property is conveyed to the new buyer, wiping out most debts or encumbrances, including mortgages, and giving the buyer ownership to the property from the sale date forward.

Properties acquired from a tax deed sale will have a cloud on title, meaning the property can not be conveyed until the defect is cured or resolved. This can be done in one of two ways:

  1. Filing a quiet title action, which is a lawsuit that establishes the buying party's title or claims in the property, quieting all other previous claims to the title (such as a mortgage of the prior owner). A quiet title action can cost $2,000 to $3,000 depending on the state and can take several months to complete.
  2. Order a title certification with a tax title curative consultant review and confirm the correctness of the sale/tax foreclosure. After verifying everything, the consultant will work with a title insurance agent, clearing the property's title. This can be done in as little as one month and usually costs $1,500 to $2,250.

How can I invest in tax deeds?

Most tax deed investors like buying tax deeds because properties can often be purchased for steep discounts compared to the property's market value, and they can be a unique way to find investment properties outside of the MLS. Once the property is purchased at the tax deed sale, the investor can:

  • Sell the property as-is (with or without owner financing).
  • Rehab the property and sell it.
  • Keep the property as a rental.

Sell the property as-is

If you bought the property for $48,910 and sold the property as-is, you would net roughly $14,000 (estimating 10% of the total sales price for Realtor fees, closing costs, and holding costs), with the entire transaction taking anywhere from one to three months.

Rehab the property

Let's say the property is in an area where the fix-and-flip activity is high, and you determine the property's after repair value is $125,000. Rather than selling it as is for $70,000, you put $35,000 into the property, and at that point, you will be able to sell it for $125,000 four months later.

Your total cost of the investment is roughly $85,000 (accounting for the purchase price, holding costs, rehab, and clearing title), which nets you about $30,000 after deducting 8% of the sales price for closing costs and Realtor fees.

Fix it up and keep it as a rental

Instead of selling the property, you decide to hold it as a rental. After putting $20,000 into the property to get it in rent-ready condition, you can secure a tenant for $1,200 a month. After holding costs like property management fees, property taxes, insurance, and maintenance reserves, you net $800 a month. Your total investment in the property is around $70,000, giving you a 13.7% return on your initial investment.

As you can see, there are several ways to invest and make money when buying tax deeds — as long as you conduct thorough due diligence and don't overpay for the property.

Where to find tax deeds for sale 

Every state has different laws regarding tax deeds or tax liens. Before you begin investing in tax deeds, it's best to identify one state to focus on and learn the state's regulations. From there, you can determine which county or city you want to start investing in.

If a state is tax lien only, that means there are no tax deed sales. The winning bidder at the tax sale is issued a tax lien certificate. This pays the city and county what is owed to them, and the tax lien holder earns interest on the delinquent tax amount until the tax amount is repaid in full.

Tax sales are typically held online through the county's auction software but may occur at the county courthouse in smaller or rural counties. Depending on the county or municipality, tax sales can be conducted daily, weekly, monthly, quarterly, or as rarely as once a year. 

Most counties advertise the sale process and how to register as a bidder on their website. Otherwise, call the tax collector directly to determine the process for buying tax liens or tax deeds. County websites also often have a list of pending tax deed sales or an auction calendar showing you the properties up for auction, when they go to auction, and the minimum bid. This list can be used to identify which properties, if any, meet your investment criteria, such as location, property type, or size and what your maximum bid will be.

What you need to do before buying tax deeds

While buying tax deeds can be a profitable investment, it can also be risky if not done properly. There are some essential things to know about and research before bidding on a property at a tax deed sale. Below are a few important things to take care of. 

Determine property value

When you buy a tax deed, you are purchasing a property without being able to examine the interior. It is possible to assess the condition of the property from the exterior, but in general, you will not assess the interior condition. For this reason, many tax deed investors assume the property is in poor condition when determining the value of the property using comparable properties. If the property is in better condition than anticipated, the value will only increase.

Determine your maximum bid

It's easy to get caught up in the bidding war and pay too much for a property. Once you've established a property value, determine the maximum amount you would be willing to pay for the property, considering the possible work it needs or the rental income you could collect. You may want to use the 70% rule most flippers would use or set your maximum bid at a percentage of its as-is value.

Regardless of which method you use, if you are a savvy investor, you will go into the auction knowing your maximum bid. If the bidding exceeds that price—stop. One of the biggest mistakes you can make in tax deed investing is overpaying for a property.

Check for other liens 

The process of clearing a title after a tax deed sale will wipe away certain liens, including open mortgages on the property. However, there are certain liens it will not extinguish, including:

  • Municipal fines.
  • Code violations.
  • Other tax liens.

Some counties will provide a lien search prior to the sale to help bidders conduct their due diligence on the property. This information may also be available in public records, but some code violations may not be recorded yet. It's a good idea to call the local municipality code department to determine if there are any recorded or unrecorded liens.

Buying Tax Deeds Can Be Challenging 

In some counties, buying tax deeds is competitive. For example, Florida has many of the top real estate markets in the entire country, making it a competitive place to invest. While you can find tax deed sales opportunities, properties are often overbid by novice investors, leaving very few deals available to purchase.

Don't be surprised if the property you wanted to bid on never makes it to auction. Out of the long list of properties set for sale, only a few will be auctioned. The taxes may be paid off just before the sale, or the homeowner may have filed bankruptcy, which temporarily pauses the collection of the unpaid taxes. You can research a lot of properties to only be able to bid on one or two.

In summary, buying tax deeds can be a unique way to find off-market investment opportunities at great prices — but not every property is a deal. Before you begin investing, keep learning about the tax laws for the state and county of your choice. Look at recent tax deed sales to see what properties are sold for and practice doing your due diligence to determine whether buying tax deeds in your area will be a worthwhile endeavor.