Month: February 2021

If you have been researching tax lien investing, you have probably come across the term “redemption deed” and wondered how it fits in. It is not a tax lien certificate. It is not a standard tax deed. It sits somewhere in between — and for the right investor, it can offer some of the highest penalty returns available in the tax sale space.

This guide covers everything you need to know: how redemption deeds work, which states use them, what the penalties look like in practice, and the key differences between a redemption deed state like Texas and one like Georgia.

What Is a Redemption Deed?

The tax deed system is extremely similar to the tax lien system, but the investments are offered at another point in the certificate county's timeline. The term “tax deed” refers to granting ownership of a property to a government body when the owner fails to pay property taxes. A tax deed will allow the government to sell the property to collect the taxes that are due. Once sold, the property is transferred to the buyer. These legal transactions are called “tax deed sales” and are held at auctions both online and in person.The county depends on property taxes to support the fire department, the police department, roads, schools, etc. When property owners fail to pay property taxes, the county is left in a difficult position. They have to try and replace their primary source of income. Instead of raising taxes for those that pay, they made a great system that allows investors to loan money to the county in exchange for assets. The county will then issue a tax lien on the property to keep the property owner from selling their property and creates a tax lien certificate with a state-mandated interest rate to sell to investors. They give the delinquent property owner a certain amount of time, usually one to three years, to pay back property taxes to the county.

As a reminder, the property owner does not write a check out to the investor, but to the county. The county issues the first notice of a property that has defaulted and announces the sale of the tax lien certificate. The property owner is notified that there will be a penalty for paying property taxes late. When the property owner pays property taxes and their penalty to the county, the county delivers a check to the investor for the investment plus the interest built up to that point. If the property owner fails to pay during the redemption period, the investor has the opportunity to take ownership of the property through the foreclosure process.

Tax Deed Process

Tax deeds legally transfers ownership to the new buyer on the condition that the buyer must pay the amount owed within 72 hours, or the sale is canceled.

In California, claims must be filed within one year, while the deadline in Texas is two years. In Georgia, you can claim funds within five years after sale of a tax deed certificate. At that point a court order is required to retrieve excess funds.

The county does not sell a certificate with an interest rate to tax deeds, but sells the deed to an already foreclosed property. When the property owner is delinquent, the county issues a delinquency notice and issues a tax lien to the property, so the property cannot be sold. The county allows the property owner a set time to pay off their property taxes. The redemption period starts when taxes are due. If taxes are due April 1, and the redemption period is two years long, the property owner would have until April 1 due to the penalty increase. If the property owner completes payment for the taxes and liability, the county keeps the money and moves on. If the property owner fails to pay during the redemption period, the county begins the foreclosure process. The county takes control of the property through foreclosure and announces its sale.

The county makes a public notice of the auction: in the newspaper, on the county office bulletin board, or their website. Educated investors show up and start bidding on tax deed properties. Bidding begins at the amount of the delinquent property taxes and goes up according to the competition. Depending on the number of investors interested in that particular property, the property can go for low prices. The winner walks away with a tax deed to the property and a big smile.

Some states will sell the title to the winning buyer on the day of the tax deed sale auction. Others will allow a redemption period. During this time the original owner can repay their debt and redeem the property. If the owner pays their debt within the allotted time, they must pay the winning buyer the amount bid at the auction plus interest, which can sometimes be high. But if the redemption period passes, and the owner still does not reclaim their property deed, the highest bidder can foreclose on the property.

Differences

The primary differences between tax liens and tax deeds are tax liens are usually long-term investments and tax deeds are short-term investments. Tax liens are very similar to tax deeds, but there are differences. Tax deeds complete the ownership process of property itself to a new bidder. While tax liens are an actual legal claim against the property when the taxes aren't paid in due time. Tax liens provide a solid investment for investors with a rare thing in the investing world: guaranteed ROI (return on investment). Liens can be as low as a few hundred dollars and pay simple interest that accrues monthly. 

A state government places a lien against a property if its owner does not pay property taxes on time. These taxes, which prevent owners from doing anything profitable with the property, are actually sold off at auction rather than the property itself. Those interested can invest in these liens by placing a bid for them. The return will be calculated with a maximum rate of interest allowed by the city or state. When a property owner first begins to default on their property, the city will send a notice advising them about the upcoming lien. If the owner doesn't pay, the tax certificate will then be sold at auction. The lien will then be owned by the highest bidder, who pays the outstanding tax amount to the municipality. To remove the lien, the owner must pay the new lien owner the due amount plus interest.

You can get into tax liens at lower prices than tax deeps; for tax liens, you get a certificate with the promise of an interest rate, and with tax deeds, you get the property. Tax deeds are inspiring since it is possible to get outstanding deals since the bidding starts so low. Once the property is finally sold, properties acquired from a tax deed sale will have what is called a “cloud” on the title, meaning the property can not be conveyed until the defect is cured or resolved. 

This can be done in two ways: Filing a quiet title action, a lawsuit that establishes the buying party's title or claim in the property, effectively silencing all claims to the title (such as a mortgage of the prior owner). A quiet title action can cost up to $3,000 depending on the state and can often take several months to complete. One must order a title certification with a tax title curative consultant and confirm the sale and tax foreclosure process's correctness. After verifying everything, one can work with a title insurance agent. This will effectively clear the property's title. The entire process can be done in as little as one month and usually costs $1,500 to $2,250.

Before Buying Tax Deeds

Sales of properties by tax-distressed owners can be a very good deal. With that said, you'll need to find out if your real estate investing opportunity is going to be worth it. Check the property location beforehand, because you might be buying something worthless, like purchasing a piece of land that is routinely flooded. If you are able to acquire and own a piece of land legally, you can participate in property auctions as well. But, you'll have to have cash on hand or in easy access, because auction sites will usually require that those who win the bidding on their chosen properties to pay a down payment or the full amount in a short span of time, if not cash up front. This is not an investment to be made for those without capital.

Most counties hold tax lien auctions on an annual basis. You'll want to contact your local county to find out when their tax lien auctions are held so you have time to prepare. In particular, you will want to learn about how the county conducts its auctions, including requirements for bidding. 

These days, most counties and other municipalities hold tax lien auctions over the internet. Typically, you have to register ahead of time for the right to participate in the online auction. You can expect to pay a registration fee for this, so it's important to factor in calculating how much you stand to make. The fee varies from place to place but is usually around $100.

Once you're registered, you will be assigned a bidding identification number and given login information. When the auction starts, you will be able to bid on the certificates that interest you. Counties typically release lists of the tax lien certificates available for auction a few weeks beforehand. It's crucial to obtain this list and investigate it carefully. That's because you need to perform due diligence to ensure that the certificate is worth your while. Most of the time, this involves finding out the condition of the underlying property.

After obtaining the list, whittle it down to options that look the most promising to you. First, set a budget, and then eliminate any certificates that exceed it. Next, choose a property type to focus on. For example, if you are mostly interested in interest income, you'll want to focus on tax lien certificates on single-family homes with mortgages. Some investors choose to focus on commercial properties or on undeveloped land. There are pluses and minuses to all of these options, so it's vital to learn the ins and outs before getting started.

While buying tax deeds can certainly be profitable, it can also pose some risks if not done correctly. There are several things to know about and research before bidding on a property at a tax deed sale. Below are a few essential items to take care of.

When you purchase a tax deed, you are buying a property without getting inside in most instances. It is possible to assess the property's condition from the exterior, but in general, you will be able to see the interior condition. Because of this, some tax deed investors assume the property is in poor condition when assessing the value of the property using those that are nearby properties. If the property is in better shape than anticipated, the discount will only increase.

Those new to tax lien investing should be wary of getting into bidding wars and overpaying for the value of a property. Once you've established a verifiable property value, it's pertinent to determine the maximum amount you want to pay for the property, considering the possible work it needs or the rental income you could collect. 

You may want to also set your maximum bid at a percentage of its as-is value. Regardless of which methodology you use, if you are an experienced investor, you will go into the auction knowing your absolute maximum bid. If the bidding exceeds that price, pull in the reins. One of the biggest issues you need to avoid in tax deed investing is accidentally overpaying for a 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. You can learn more about Marketplace Pro by contacting us today and scheduling a demonstration.

Before beginning, it is crucial to define what a tax lien is. 

The county within the property's location will usually conduct tax lien sales auctions. For a property to satisfy auction requirements, it must be considered tax-defaulted for a defined period of time. Instead of bidding on a specific amount for the property, the interested parties will bid on the interest rate they want to receive. The investor who bids the lowest rate wins the auction and is issued the tax lien certificate.

Basic Steps

Next are the necessary steps an investor takes:

• Find a Tax Sale List
• Quickly Narrow the List
• Due Diligence
• Make the Investment
• Exit
• Find a Tax Sale List
• Rate of Return 

Tax liens and deeds are sold by municipalities at the county level with 3,000 counties nationwide. Those counties get narrowed by investors via investment type: tax liens, tax deeds, or redemption deeds and then further by the rate of return, accessibility ease, and investment ease.

There are two essential lists investors can get for each county: pre-auction list and over-the-counter lists. The investor finds these lists by state and county. Because we are dealing with real estate specifically, the lists are broken down by geographical county or municipality. There is one way to get those lists: the county. Investors can get those lists directly from the county through the county's public notice or investors from an aggregator like our website. Most websites charge per download, but we do not. We will not go over how to find a list in detail again.

Another thing to remember is scheduling. To get a pre-auction list, you must know when the auction is being held. You should know when the auction is ending to get the updated list as soon as possible for over-the-counter investors. Most tax lien counties have their auction only once a year and on about the same date every year. Tax deed and redemption deed counties tend to hold their auctions usually once every month.

Quickly Narrow the List

Once the list has been acquired, download it from our website or contact the county directly and see many possible investments. Not all of the investments will be right for you. Some might be expensive, commercial property, vacant land, and some may have low property values.

First, the investor needs to use the Quick Glance Method to narrow the list for potential investment. The investor will primarily look for three things:

• Investment Cost
• Property Value
• Property Type

After quickly narrowing the list, the investor has narrowed the list from 20,000 potential investments to a manageable amount. Maybe that number is 20 and maybe 200. You quickly learn that the fewer you have, the better since the next thing you need to do is perform due diligence.

Due Diligence

After you narrow your list to a manageable number of potential investments, you need to narrow the list to investments you are willing to buy. We do this by performing due diligence or more in-depth research.

You can use a few tools for due diligence are the county records (usually found online through the county assessor's website as shown in past videos), or visiting the county if you want (looking at physical documents or using the county's public computer system). We will usually use Zillow and Google Maps to compare images and estimated potential investment values. Using a mapping service allows you to see recent photos making travel unnecessary in some cases.

Investors buying tax deeds may want to get a title search on the property to ensure there are no federal liens or other red flags on the property. During due diligence, the goal is to narrow the list further to find investments that closely meet your investment criteria. Before spending your money on a tax lien certificate, you should know that a valuable property backs your investment, at least one with enough value to merit your investment on the front end.

If you buy a tax deed: Know exactly what that property is, the property type, the neighborhood, sale history, if there are other liens against it, etc. Get rid of any investments that you have big questions about.

Make the Investment

Now that you performed your due diligence and know what properties you want to purchase, you need to invest.

If you are purchasing at a live auction, register by contacting the county. Find out if forms need to be filled out beforehand and if a deposit is required. On the day of the auction, you must have your investment work done and bid limits set. After the auction, you will receive your tax deed or tax lien certificate on all properties you win.

If you invest post-auction, you call the county to speak with the sales official. Ensure the tax liens or properties you are interested in are still for sale and find out what rules you must follow to buy over-the-counter in that county. Usually, this means sending a cashier's check to the county with a note listing the tax liens or properties you want to buy. The county will then mail a receipt showing your investment listing the parcel number and interest rate you will make during the investment.

What Is a Rate of Return (RoR)?

A rate of return (RoR) can be defined as the net gain or loss of an investment over a predefined period of time, equating as a percentage of the investment's total cost. By calculating the rate of return, you are determining the percentage change from the beginning of the period until the end.

Understanding a Rate of Return (RoR)

Rate of return (RoR) can theoretically be applied to any investment. But it will usually apply to real estate, bonds, stocks, and possibly even fine art. RoR works with any given asset, provided the asset is purchased legally and eventually produces cash flow at some point. Investments are evaluated on past rates of return, which can be compared against the value in assets of the same type to determine which investments are the safest bet. Many investors like to decide on a required rate of return before making an investment choice.

Rate of return can be defined for any investment. For example we can take the idea of purchasing a home as a primary example to calculate the RoR. If you buy a house for $250,000 and six years later, you decide to sell the house for any reason. It could be that you need to move into a larger home. You can sell the house for $335,000, after deducting any realtor's fees and taxes. 

The next step to understand RoR is to account for the time value of money (TVM). Discounted cash flows will take the earnings of investment and discount each cash flow based on a discount rate. A discount rate represents a minimum rate of return acceptable to the investor, or an assumed inflation rate. In addition to investors, businesses will often use cash flows to assess the profitability of their investments. Assume, for example, a company is considering purchasing a new piece of equipment for $5,000, and the firm specifies a discount rate of 5%. After a $5,000 cash outflow, the equipment is used in the business's operations and increases cash inflows by $1,000 a year for roughly four years. 

The business applies value table factors to the $5,000 outflow and the $1,000 inflow each year for four years. The $2,000 inflow in year four would be discounted using the discount rate at 3% for five years. If all the adjusted cash inflows and outflows are greater than 0, then the investment is considered profitable. A positive cash inflow also means that the rate of return is higher than the 3% discount rate. The rate of return using a discounted cash flows calculation is widely known as the internal rate of return. Internal rate of return is a calculable discount rate that verifies net present value (NPV) of all cash flows from investment equate to 0. IRR calculations will depend on the same formula as NPV does and utilize the time value of money (using interest rates). 

How to Exit

Once you have your lien certificate, you should set a reminder for the end of the redemption period, then file the certificate somewhere safe. Then, you wait for a check from the county. After you receive the check, you have made your exit. In some cases, the property owner may not redeem during the redemption period. You should be ready to foreclose and then sell or rent to exit if this happens. When you buy a tax deed property, you have more options on your exit. As we talked about in a previous session, you can flip it, fix up and sell it, fix up and rent it, live in it, sit on it, etc. It is crucial to plan your exit before investing.

Buying your first tax lien certificate can be a very intimidating subject to tackle. That's why we are here to help concisely explain the ins and outs to you.

What is a Tax Lien Certificate?

A tax lien certificate is a certificate of claim against a property with a lien on it due to unpaid property taxes. Tax lien certificates are typically sold to investors through an auction process.

When property taxes are due, the municipality will issue a tax lien. When you pay your taxes in proper time, the lien is removed. If you don't pay your taxes, the town or county you reside in will auction off the tax lien certificate to investors. That investor will then have to pay the taxes on behalf of the property tax owner.

A property's location will usually dictate tax lien sales auctions. For a property to meet the criteria, it must be considered tax-defaulted for a minimum period. Instead of bidding on an amount, parties who are interested in the property will then bid. The lowest rate will win the auction and will then be awarded the tax lien certificate.

Once You've Bought a Tax Lien Certificate

After an investor receives a winning bid for a specific tax lien certificate, a lien is placed on the property. A certificate is issued to the investor that will detail any remaining taxes or penalties on the property. It is important to note there are only certain states that offer tax lien certificates. Some states, like California, only perform tax sales on a defaulted property, resulting in the winning bidder becoming the property's legal owner in question. The term of tax lien certificates will typically range from one to three years, roughly. The certification enables the investor to collect unpaid taxes with the applicable interest rate, which can vary from 8 to more than 30 percent, depending on the jurisdiction.

States that Sell Tax Liens

If you are interested in tax liens, the first thing to note is that only certain states sell them. Below is a complete list of states that have 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

Yearly, counties sell more than 6 billion in new tax liens: whether it is a single-family home, a business, or vacant land, every property owner in the U.S. has to pay property taxes to the county.

Property owners sometimes fail to pay property taxes, so the county places a lien on the property and sells a tax lien certificate for the same amount owed to them by the property owner. This way, the county receives the needed funds to function. If the owner pays their delinquent property taxes plus the penalty, the county sends that money directly to the tax lien owner.

In this program, we have taught countless students how to participate in the primary market, purchasing tax lien certificates from the county through their live auctions. Buying on the primary market is still viable, but a new opportunity has surfaced through the Tax Lien Buyers Club with our direct buy certificates.

Banks, broad companies, hedge funds, and large institutional investors invest a great deal of money yearly in tax lien certificates. They follow the model we teach our students but invest hundreds of millions annually.

Mainly, these large investors buy tax lien certificates for the interest earned the first 2 years. Most of their tax liens get paid off during that 2 years. Most institutional investors have no interest in taking ownership of the properties. Can you imagine trying to foreclose and own thousands of properties every year? It is too much for them to handle, so they focus on the interest earned by tax liens. This is where we come in. We negotiate and purchase the tax lien certificates that remain through our relationships with these large investors and brokers. As the new owner, we can continue to hold them, collect interest, receive redemption checks, or start the foreclosure process.

A few years ago, we began letting our students purchase tax lien certificates from our private inventory. The students would then collect interest or start the foreclosure process as the new tax lien holder. What began as a few exceptions here and there became a large marketplace where students could only build entire investment portfolios from our inventory. While we still teach our students how to participate in the primary market, our direct buy certificates have set off as an opportunity for investors to get into foreclosure-ready tax lien investments.

How They Work

There are three parties involved in every tax lien transaction: Property owner, county, and investor.

When the property owner does not pay the property taxes, the county sells a tax lien certificate to an investor. We see more and more large institutional investors, hedge funds, large corporations, and banks buy as many tax liens as possible. This is primarily true in large markets such as Miami or Chicago.

Some states where counties do not hold a public auction, sell their entire portfolio using an RFP (request for proposal) to sell the whole portfolio to one investor. Counties like this model since they can sell everything in one deal, making it easier for them.

Large investors can sometimes bid to buy the entire portfolio in one swoop. They like it since they want to buy as many as possible and obtain more certificates, essentially doing the same work it would take to buy one tax lien certificate. These investors usually hold their lien certificate for only 2 years and then liquidate all remaining certificates.

Due to our well-established relationships with large investors, we purchase as many matured tax liens as we can. These are certificates that continually make interest and usually are past the redemption period. This means that most of our certificates are ready to foreclose. We can hold the certificates to earn more interest or start the foreclosure process to take ownership of the property, instead of waiting years for the redemption period to expire.

A few years ago, we started allowing some of our students to purchase tax liens from our private inventory and started allowing more students until it became one of our students' favorite ways to buy tax lien certificates.

Purchasing Direct-Buy Certificates

When clients buy tax lien certificates directly from us, we must speak to one of our portfolio management team members. These portfolio managers interview the client for how much money they want to spend on tax liens, whether the client wants property or interest, how much experience the investor has with real estate, etc.

The portfolio manager will dive into our current inventory to find certificates they believe will fit the client's criteria. Then they send the certificates along with a simple agreement to the client and call to discuss the portfolio, answer questions, and replace certificates when necessary. If the client approves, the client signs the contract and arranges payment with the portfolio manager.

When the agreement is signed, and payment is received, our administration team will start the assignment process, filling out transfer documents, communicating with the county and servicer, and possibly requesting additional documents from the client, depending on what the county requires. Our administration team will do most of the work, but the client must review and sign some of the documents.

From that point on, the client is assigned all interest in the tax lien certificates. This means all redemption checks go to the new certificate holder, and that the client can take ownership of the property they want. Our clients have loved purchasing through us since they can avoid the county, auctions, competition, and work with the counties. They love the help through the process to answer questions, complete agreements, interact with the county and servicer, and all the hard work. It is a simple way to foreclose ready tax lien certificates.

Purchasing Direct-Buy Certificates

Buying a tax lien certificate can sometimes prove to be a lucrative investment. Some of the certificates have a low price point so that you can buy some of them for a few hundred dollars. If you compare that to a standard investment like a mutual fund, it will often come with minimum investment requirements. Because of this, you have more leeway in diversifying your cash flow so that you can purchase more than one certificate at a cheap price. Finally, the rate of return is pretty consistent, so you're not going to have to worry about the market's volatility.

Some drawbacks of tax lien certificates include the investor's responsibilities to pay for the tax lien certificate in full within a concise time frame, usually 72 hours. 

Tax lien certificate investors also have to undergo significant research to ensure that the underlying properties have an accurate assessed value.

Many real estate investors who thought they knew everything about their chosen sector are surprised to learn about individuals generating double-digit returns with tax lien certificates. In some cases, these investors have licensed realtors who remember seeing the topic mentioned in continuing education classes. Still, they did not realize the profit potential they had missing out on. The reality of tax lien investing is that it is not limited to real estate professionals; similar to how Wall Street is open to the public, tax lien certificates and deeds can also be obtained are also open to everyone. 

Investing in tax liens can be very profitable, but we cannot say that this strategy to derive financial gain is for everyone. Real estate is at the heart of tax lien investing, but you will not find a marketplace for tax lien certificates or deeds because such an idea would not be legal or ethical. Even the real estate owned (REO) portfolios of banks that have taken possession of foreclosed properties cannot be compared to tax lien investing. The reason is that the underlying value of the financial instruments put on the auction block is not always definitive. 

Before we continue discussing the merits and caveats of tax lien investing, we may as well answer the question that serves as the title: The answer is yes, you can make money on tax lien certificates, and there are various ways you can accomplish this. We should also reiterate that there is no marketplace for tax lien certificates. Still, you have certain resources, such as Marketplace Pro software, which can point you in the right direction concerning investing opportunities.

What Kind of Investor Seeks Tax Lien Certificates?

Tax lien investors are pretty much the same as those who get into stock or commodities trading; they look for opportunities, evaluate proposals, consider the risks at hand, and hope for the best. Perhaps you have heard the analogy of Wall Street being a perfect information game? This means that all market participants have access to the same information, but this does not make stock trading the same as chess.

The vast majority of beginners who enter Wall Street do not have the same level of experience or even the same level of information access as institutional investors. A day trader has a lot more to lose when compared to a mutual fund manager. In the case of tax lien investing, a licensed realtor will have a better shot at becoming profitable when compared to someone who has never entered a lien certificate auction or a sheriff's sale. This is not to say that you cannot catch up to a realtor in terms of tax lien investing knowledge; in fact, you are taking an important first step by reading this article. 

The type of investor who seeks to profit from tax lien certificates is usually a smart and curious individual who is not afraid to operate in a sector for which there is no marketplace. Some people compare property deed investors to house flippers, but there is a marked difference between the two. Flippers operate on a marketplace; the run-down properties they improve and sell are either on the Multiple Listing Service (MLS) or meet the criteria to be listed therein. There is no MLS for tax lien investors; however, software solutions such as Marketplace Pro inject MLS functionality into the tax lien investing world.

What Tax Lien Certificates Really Are

On the surface, tax lien certificates are easy to understand because they originate from the failure to pay property taxes. The taxes we spend on the lots, homes, and condos we own are used to fund municipal programs such as school districts, parks and recreation, libraries, road construction, and many others. If we fall behind on these obligations, the revenue collection agency has the right to file a lien on our properties; this is done to collect delinquent taxes at some point down the line. 

A property tax lien is a legal claim or a right to an equitable portion of the property. The revenue collector has the statutory right to file these liens without court opinion. Like other situations in which liens are filed against a property title, they must be satisfied and cleared when the property is sold, which could take a long time. Depending on the legal jurisdiction, a homeowner could stop paying property taxes for years and finally pay them off years later at the closing table. Naturally, this is not a good situation for the revenue collection agency because county and state budgets are drafted each year. 

A much better situation for revenue collectors is to enlist investors' help by offering certificates at public auctions, which in some counties, boroughs, parishes, and townships are called sheriff's sales. In essence, a tax lien certificate is a financial instrument that assigns repayment of delinquent taxes to an investor. If you think about it, this is a brilliant way of generating revenue. It also gives delinquent homeowners some breathing room because the certificate elicits a new repayment schedule. 

At the tax lien certificate auction, you are bidding on the interest rate that the homeowner will have to pay the new lienholder, which happens to be the winning bidder at the auction. Technically, tax lien investors start as certificate holders who can potentially become lienholders, which can occur when the homeowner fails to satisfy the terms of the certificate, but this may require the tax lien investor to initiate foreclosure.

Making Money With Tax Lien Certificates

If you register as a bidder to attend a courthouse steps auction, and if you walk away with a tax lien certificate, you will be in a position to receive payments and enjoy interest rates higher than 10%. The same interest is promulgated and can vary significantly from one county to another. In Denver, for example, you can make just a little below 10%; in Cook County, however, some Chicago tax lien certificates can fetch 36%. 

There is no telling how much a tax lien certificate will cost you. First of all, you have to keep in mind that these instruments are offered at auction, so the winning bid may end up being higher. Second, there is also the property value matter, and how far behind the homeowner has fallen. In some cases, the certificate maybe a few hundred dollars while it may be worth thousands in other cases. 

The bottom line of tax lien certificates as investments is that they represent debt. As with any other investment activity, you should expect some level of risk, specifically in the form of the homeowner not being able to repay or simply refusing to do so;. However, these situations do happen; they are not devoid of recourse. It is important to remember that each certificate has an underlying asset, which brings us to deed investing or taking possession through foreclosure.

Making Money Through Property Deed Investing

There is another way you can make money from tax lien certificates, and it involves redemption. We already mentioned that state laws set interest rates; we will now go into repayment terms, foreclosures, and deed investing.

Most states give homeowners no more than three years to repay investors who hold tax lien certificates. Should the term come to an end without satisfaction, the certificate holder becomes a lienholder who can file for foreclosure. Should you prevail as a plaintiff in a foreclosure case, you may be able to take possession of the property and hold title. 

In some states, revenue collection agencies can put deeds on the auction block. In this type of auction, participants are bidding for the right to get their name on the property deed, which means that they have a more direct path to ownership, which may not involve filing for foreclosure. This is what many people think about when they hear about properties being auctioned off because of unpaid taxes, but there is quite a bit of misinformation in this regard.

Deed investors do not always walk out of the auction with clear title to the property. County revenue managers who set up property deed auctions try to make the process seamless and painless, but this may not always be possible. In some cases, the winning bidder of a deed may also inherit outstanding liens, but they may also be considerably less than the property's market value. 

It would not be accurate to say that deed investing is a smarter option to pursue instead of tax lien certificates. Both strategies offer the assurance of real estate as collateral, but they are not the same as holding a municipal bond that pays you interest and has a face value that other investors will pay for in an open marketplace. In some cases, the collateral value may not only be underwhelming but also disappointing, especially when you learn that there are encumbrances to title and many other liens to clear. In other cases, the underlying asset may be an undeveloped lot not far from the Mojave Desert, thus making it less than attractive to prospective investors.

The bottom line of tax lien investing is that you can make money from it, but you will need to conduct proper research with the right tools. To this effect, Marketplace Pro is the closest you can get to an MLS-like system to identify properties worth pursuing at auction.

To learn more about Marketplace Pro software, please get in touch with our office today so that we can arrange a real-time demonstration.

As of early 2021, tax lien investors in the United States can look for certificate or deed opportunities in virtually any state. Even though the U.S. does not really have uniform property laws across all jurisdictions, legal analysts believe that statutory similarities will continue to develop over the years, thus opening more doors to investors who seek to profit from tax lien auctions and sheriff's sales. 

Not all states handle property tax delinquencies in the same manner, and this has a lot to do with the way their laws governing property are formulated. In some cases, revenue collection agencies at the county level will operate differently with regard to sheriff's sales and the issuance of tax lien certificates, but they all have to abide by state laws. The reason why there is no uniformity in the management of tax lien certificates has to do with property, probate, and even business formation statutes. Some states are more flexible than others in terms of how they allow residents to transfer real property; at the same time, some states are reticent to enact adverse possession that may lead to a deed being placed on the auction block.

As can be expected, all states have a real and present interest in collecting property taxes in a timely manner; after all, this is how they formulate their budgets. The National Tax Lien Association promotes the ethical, lawful, and competitive management of tax liens, and its directors have noticed that many jurisdictions are taking steps in the right direction to the benefit of prospective investors.

With all the above in mind, here are some states that tax lien investors should pay attention to as they look for lien certificates and deeds that are worth bidding on.

Florida

We have to mention the Sunshine State at the top of this list for various reasons, and the most important is the diversity of real estate. Florida is a place where there is no shortage of waterfront properties; some of them are situated along the Gulf of Mexico while others face the Atlantic Ocean. You also have lakes, rivers, and even the Florida Keys with homes that offer views of the Caribbean Sea. For the most part, Florida is a middle-to-high income jurisdiction, which means that homes tend to be on the nicer side.

There is still plenty of undeveloped land in Florida, and builders are always looking for the next spot where they can start construction of a new gated community, subdivision, or apartment complex, which is why many tax lien certificates in Florida are for undeveloped lots. Socioeconomic activity in this state is always high; Floridians tend to go through ups and downs in terms of employment and business opportunities, and this explains the high rate of property tax delinquency. In many cases, foreign buyers may have acquired a lot or a condo unit near the beach as an investment that did not work out, and which they chose to abandon in the end.

The typical interest rate on Florida tax lien certificates is 18%, but investors should expect plenty of bidding competition in some of the most attractive countries such as Broward, Palm Beach, Miami-Dade, Pinellas, Manatee, and Sarasota. When you register for a sheriff's sale in Florida, you should not be surprised to see bidders fighting for a tax lien certificate that is only worth about 8%; this happens because quite a few Florida properties are very attractive, and everyone hopes to get a shot at filing foreclosure papers and getting their name on title.

Florida is a judicial foreclosure state; this means that you have to go through the courts in order to gain possession of the property if the homeowner failed to repay the certificate within the legal term of two years. Going through a foreclosure in Florida used to be a nightmare because of the numerous law firms that practice foreclosure defense, but this is no longer the case. Circuit courts across the state have gotten their act together with regard to handling foreclosure cases, and they no longer fall for frivolous defenses. 

Anecdotally, some tax lien investors who have sat down with Florida homeowners to learn about their situation find out that they are foreigners getting ready to return to their home countries; in some cases, they are families who fell prey to predatory mortgage brokers, and they end up becoming frustrated with high payments. In these cases, investors may be able to convince the homeowners to move out in exchange for a cash payment; this would make the foreclosure process easier because it eliminates the need for eviction. Another advantage of investing in Florida tax liens is that you can retain a law firm that can not only represent you in foreclosure court but also work towards giving you a clear title to the property once all liens and encumbrances are dealt with.

Finally, it must be mentioned that many counties in Florida hold tax lien certificate auctions online; plus, deed auctions are also held for properties that can no longer go through the certificate process, which means that you can actually walk away from the auction with your name entered on the deed, thus putting you a step closer to the title.

Maryland

Similar to Florida, the tax lien interest rate in Maryland is 18%, but there is no regressive bidding at the auction; instead, investors bid on certificate premiums, but only a portion of the premium must be paid initially. Unlike Florida, only a few counties in Maryland hold online tax lien auctions; the most enticing in this regard is Baltimore, which has a huge annual event. In some Maryland counties, the repayment term is only six months, which means that you could be filing for foreclosure sooner than expected, and the process can be handled out of court through non-judicial means, but this does not mean that it will always be easy. 

Uncooperative homeowners in Maryland have ways to move a foreclosure case to the courts with the right lawsuit filing; when this happens, things could get complicated for the tax lien investor unless he or she is able to retain adequate legal representation, especially if the homeowner is basing the lawsuit on an obscure title issue. It really pays to conduct due diligence in Maryland, especially around the Baltimore area, because quite a few properties have fallen to severe levels of distress. 

The greatest advantage of Maryland for tax lien investors is that part of the state falls within the Northern Virginia and D.C. housing market, which boasts some of the highest property values in the country because of high demand.

Arizona

There are not that many counties in the Canyon State, and only six of them are set up for online tax lien certificate auctions. Maricopa County is where all the tax lien action is, and bidding starts at the 16% interest rate, but competition is not as fierce as in many Florida counties. Arizona is known to be a housing market where homeowners are interested in keeping their properties, particularly in vibrant cities such as Phoenix and Scottsdale, so you have a good chance at collecting double-digit interest rates. Quite a few of the listings that end up in Arizona tax lien auctions are undeveloped lots near the desert; this is when due diligence pays off because some counties will expect certificate holders to continue making tax payments past the term and until the end of the year.

Indiana

Some tax lien investors find Indiana to be a confusing state because some counties offer two auctions, one of them handled through the County Commissioner's Office. You are virtually guaranteed a double-digit interest rate on Indiana lien certificates, and the amount due is often reduced if the matter is elevated to the Commissioner's Office. The normal repayment term is 12 months, but it can be reduced to just 120 days in some cases. More Indiana counties are moving their tax lien certificate options online. 

Indiana is a judicial foreclosure state, but the courts tend to be far more organized when compared to other states such as Florida. The Indianapolis housing market is vibrant and active, which means that there are good opportunities for the right investor.

Scouting Tax Lien Auction Opportunities Across the U.S.

Now that you know some of the best states where it makes sense to invest in tax lien certificates, the next step you should take is to contact our office and arrange a real-time demonstration of Marketplace Pro, a software solution that can give you an edge by showing exactly where these properties are located. Similar to the Multiple Listing Service (MLS) used by realtors in the United States, Canada, and Mexico, Marketplace Pro gives you not only the location of properties on the auction block but also additional information that can guide you towards the right decision.

Getting the right information prior to registering for a tax lien auction can save you considerable time and money.

When you get to see what Marketplace Pro can do, you will be able to take your tax investing activities to the next level. Contact us today for a free software demo!

Online tax lien auctions are a fantastic way to participate in the creation of tax lien certificates. When investing in tax liens, it's essential to know how to acquire your liens. Many options exist to give investors access to these certificates. You probably know that real estate has long been the playground for the rich and well connected, and that according to recently published data, it's also been the best performing investment in modern history. And with a set of unfair advantages that are completely unheard of with other investments, it's no surprise why. But those barriers have come crashing down – and now it's possible to build REAL wealth through real estate at a fraction of what it used to cost, meaning the unfair advantages are now available to individuals like you.

Getting Started with Online Auctions

Every state has specific rules governing how tax liens are processed. To participate, one must first know the county you want to bid in. Once you have selected your county, simply login to the tax collector website and look for “Online Auctions.”

Inside the auction home page, investors can register to participate in the auction by following the steps outlined. Usually, this requires registration for a county bidder number. The bidder number registration requires tax lien investors to fill out an application with the necessary personal, banking, and financial information. After the application process is complete, you can bid at any online auction in the county. Auctions dates vary, so check the local listings on the website.  

The Pros of Online Auction

There are some significant benefits to buying virtually, particularly in today's environment. First, there's the health benefit. You don't have to venture out to a crowded auction house or shoulder-to-shoulder conference room, and you can bid on properties safely from the comfort of your own home. More than this, there's also the convenience factor. You don't have to drive or take time out of your busy schedule (or away from your family), and you can bid quickly and easily on the fly — even while doing other activities. Finally, there are the opportunities it affords you. 

With virtual auctions, you're no longer limited geographically. You can participate in auctions in any market and time zone, no matter where you're located. This could mean more potential deals (as long as you're committed to looking).

Importance of an Insurable Title

Insurable title usually means that they will provide title insurance with notable exclusions. If there are clouds on the title, their title insurance company will provide insurance that excludes those issues. Therefore, that means it's insurable—but not “marketable.” What does that mean? There may be improperly discharged mortgages, unrecorded death certificates, or any number of other issues. Some issues are a big deal; some are not. But the best time to clean up those issues is before you buy it, not afterward.

Why is that a big deal? You want to sell to an end buyer, and that end buyer's lender probably won't find those exclusions acceptable. You'll be stuck cleaning up the title when you have no leverage with the bank that sold it to you. The bank has no incentive after closing the sale to you, either. They have your money and are done with it.

Cons of Online Auctions

Virtual auctions do have their perks, but there are also some significant downsides. For one, there's the added competition they create. With properties available virtually, you're no longer competing against Jim and Bob down the street; instead, you've up against dozens, maybe even hundreds, of other investors from all over the country. This could make it harder to find a property or, more importantly, get a good deal on one. There's also the added risk of buying sight unseen. If you're looking at properties in different parts of the country, you're unable to do even the bare minimum physical evaluation. There's no driving by, peeking in the windows, or checking out the neighborhood. This could mean getting a lemon property—and not knowing it until well after you've put down the cash.

Reserve Price and True Market Value

The online bid price is meant to attract your attention. It is not necessarily the sales price you will pay and might have little relationship to actual market value. The estimated bidding price might be 50% to 75% of the amount the seller hopes to receive. It's a starting point for the auction and usually lower than what the seller will accept.

Many auction websites will post the estimated market value. To determine true value, you will need to examine comparable sales. These are the sales prices of similar homes that have recently sold. These are not the sales prices of homes for sale—because sellers can ask any price they want, it doesn't mean the home will sell at the asking price. Only the final sales price of a closed sale within the past few months is a comparable sale.

Reserve Price and True Market Value

Florida is a state that is worth looking at for online tax lien sales. The interest rate in Florida is 18% per year. Some counties in Florida do have online tax lien sales. However, online auctions are held once a year in May, and the interest rate is relatively low, but there is a minimum 5% penalty, so regardless of how low you bid, if the lien redeems, you will get at least 5% on your money.  

Another plus for investors who do not live in the state is that you are not likely to get the property if you do your due diligence and bid on solid property choices. Instead of foreclosing on the property if the lien doesn't redeem, you apply for the lien to go to a deed sale using the Tax Deed Application process.  

The property will then be auctioned off in a tax deed sale (some of these are online) to satisfy the lien and gain back all interest and fees owed to the investor. 

Investors who participate in these online auctions must bid against other investors in the bid down process. The opening bid will begin at the total tax bill for the previous year with an 18% interest rate attached. As bidding proceeds, the bids will decrease the interest rate by .25% increments, and low bid wins. Winners of the bid will receive an online tax lien certificate that holds the associated interest rate for a life of 7 years.

Active Tax Lien Investing

Every investor starts as an idle investor. It takes about four to six weeks for the certificates to transfer into your name. However, you can file for a tax deed application (TDA) once the transfer is complete. This means you are now an active investor to start the process that will grant you ownership interest in the property.

After completing the TDA, the county informs the property owner that they have 30-60 days to pay the delinquent taxes. If they don't comply, the county will notify the property owner that the certificate is scheduled for auction. 

The subsequent back taxes must be paid when filing the tax deed application. When this is complete, you will be able to push the property into foreclosure. This approach is attractive to real estate investors because it is possible to acquire the property for just the cost of the back taxes, related fees, and the legal costs of going through the foreclosure process.

Active tax lien investing is possible in Florida because this is a state where both certificates and deeds can be auctioned off; not all states allow investors to pursue both opportunities. If the property sells at auction, the investor will be redeemed for their investment plus interest. When the property doesn't sell, the investor will acquire the property. This is where developing an exit strategy is essential. If you acquire a property, what are you going to do with it? Fix and flip, wholesale, rent? Taking the active approach without anticipating all possible outcomes could lead to a failed investment.

Something that should be underscored concerning active tax lien and deed investing is that it can really keep you on your toes. You have to consider the numerous factors and aspects that could get in the way of your getting a clear title to the property. Even if you have a straight path to an uncontested foreclosure, there may be title issues to work out, such as an estranged spouse coming out of nowhere in a state where married couples get joint tenancy. The breadth of repairs a home may need could end up eating into your available capital, and you may run into legal snags when filing foreclosure should the homeowner or a line holder object to the proceeding.

Idle Tax Lien Investing

If you're not looking to acquire property, try taking the idle approach. It's important to remember that this strategy comes with slower and smaller returns. Some investors prefer this strategy when they realize that outright property acquisition may not be possible or realize that clearing up title issues would not be worth the effort.

At some point in the idle tax lien investing strategy, you will have an opportunity to redeem the certificate. County revenue agencies set terms on certificates so that investors do not have to wait forever to have the chance to capitalize on their efforts. Redemption can happen in two separate forms. Both result in the investor getting their money back plus interest. The certificate can be redeemed if the property owner pays off the back taxes.

If the property owner does not pay the taxes, redemption can occur if another investor files a TDA. Like previously mentioned, the active investor has to pay off all other certificates to acquire the property. Why would another investor seek to file a TDA? There may be the expectation or speculation that the homeowner will eventually get it together and pay off the delinquent taxes. It is crucial to keep in mind that some financial tragedies cannot be overcome in a matter of months. When you have millions of Americans living paycheck to paycheck, tax lien investors should not be surprised to learn that some homeowners will not be able to repay back taxes even when they have a couple of years to do so.

Some tax lien investors will file a TDA knowing that it may not be repaid because they believe they have a better shot at prevailing in foreclosure court, thus becoming active lien investors. If you do not get to know the homeowner and their intentions, you may be surprised to learn that you are dealing with a professional foreclosure defendant who knows how to exhaust the plaintiff. Many mortgage lenders learned about this the hard way in the wake of the 2008 crash of the U.S. housing market; by the time they were finally able to take possession of contested properties, they had already burned through thousands of dollars spent on years of litigation.

Is Active Lien Investing Better Than Passive Lien Investing?

Sales of properties by tax-distressed owners can be a very good deal. With that said, you'll need to find out if your real estate investing opportunity is going to be worth it. Check the property location beforehand, because you might be buying something worthless, like purchasing a piece of land that is routinely flooded. If you are able to acquire and own a piece of land legally, you can participate in property auctions as well. But, you'll have to have cash on hand or in easy access, because auction sites will usually require that those who win the bidding on their chosen properties to pay a down payment or the full amount in a short span of time, if not cash up front. This is not an investment to be made for those without capital.

Most counties hold tax lien auctions on an annual basis. You'll want to contact your local county to find out when their tax lien auctions are held so you have time to prepare. In particular, you will want to learn about how the county conducts its auctions, including requirements for bidding. 

These days, most counties and other municipalities hold tax lien auctions over the internet. Typically, you have to register ahead of time for the right to participate in the online auction. You can expect to pay a registration fee for this, so it's important to factor in calculating how much you stand to make. The fee varies from place to place but is usually around $100.

Once you're registered, you will be assigned a bidding identification number and given login information. When the auction starts, you will be able to bid on the certificates that interest you. Counties typically release lists of the tax lien certificates available for auction a few weeks beforehand. It's crucial to obtain this list and investigate it carefully. That's because you need to perform due diligence to ensure that the certificate is worth your while. Most of the time, this involves finding out the condition of the underlying property.

After obtaining the list, whittle it down to options that look the most promising to you. First, set a budget, and then eliminate any certificates that exceed it. Next, choose a property type to focus on. For example, if you are mostly interested in interest income, you'll want to focus on tax lien certificates on single-family homes with mortgages. Some investors choose to focus on commercial properties or on undeveloped land. There are pluses and minuses to all of these options, so it's vital to learn the ins and outs before getting started.

Is Active Lien Investing Better Than Passive Lien Investing?

The simple answer is no. Both methods of redemption are beneficial, but they largely depend on your strategy. If you're looking to acquire property or expedite returns, the active approach is best. If collecting interest over long periods is your strategy, then taking the idle route is ideal. It's important to know what your investing goals are before investing in tax liens.

You could argue that passive tax lien investing presents less risk, but this is not always the case because other investors may not bid as high for the certificate as you did. Then again, active lien investors run the risk of dealing with multiple liens, expensive repairs, and title issues. 

Some seasoned tax lien investors approach the market with a critical eye. They will research the property and the title, the neighborhood, market activity, and even the property owners. Some investors can negotiate with owners so that they will not contest the foreclosure and move out in exchange for cash; this could work to avoid the ugly process of eviction, which in some cases may require the involvement of sheriff's deputies.

You do not have to stick with active or idle tax lien investing. Many investors start with idle strategies that can later be turned into active investments, while others move straight into deed auctions because they feel that the housing market will always be on their side. 

Getting started in the world of tax lien investing starts with education and identification of the opportunities that await prospective investors. Properties burdened with tax lien certificates will not be listed on the MLS; they appear on Marketplace Pro, a software system used by smart tax lien investors. When you are ready to evaluate tax lien and tax deed properties across the U.S., you will need to rely on the reliable real-time information compiled by Marketplace Pro. Please get in touch with our office today to arrange for a live demonstration of Marketplace Pro.

Four Crucial Points

1. Establish a goal plan
2. Find financing opportunities
3. Research rental markets
4. Establish a Rental Property Goal Plan
   A goal plan provides you with a blueprint for what you are looking to accomplish with your investment. Rental property investing should be treated like any other business plan. Because real estate can involve a great deal of money, it's essential to know the numbers and determine what steps you need to take to meet your goals. Furthermore, cultivating an investor mindset is crucial. Having a confident attitude will help produce better results and help you achieve your goals more quickly.

How to Find Financing Opportunities

Securing financing might be the biggest challenge for some investors, but it's not impossible. It can be intimidating to figure out what type of financing is best for your business plan, but understanding these three things can make the process easier:

1. Loan to Value (LTV)
2. Make sure you're a smart investment
3. Don't be afraid of hard money lenders

Loan to Value 

Many investors prefer traditional lending. If this is the route you're choosing, make sure you have a down payment. Having a down payment will lower your LTV and save you money on interest and fees.

Make Sure You're a Smart Investment

Many factors can determine your eligibility for financing, but this is the easiest to overcome. Building your credit score will heavily increase your chances of getting the right loan. Furthermore, a good credit score, coupled with a healthy business plan can significantly increase your odds of being approved.

Don't Be Afraid of Hard Money Lenders

Hard money lenders are an excellent option for those that do not have a sizeable down payment. This is typically a short-term solution for people that are unable to acquire traditional financing. Sitting down with a conventional lender can help you know what kind of requirements you'll need to meet when you need to refinance.

Of course, the cost of borrowing money might be relatively cheap in 2021, but the interest rate on an investment property is generally higher than a regular mortgage interest rate. If you decide to finance your purchase, you need a low mortgage payment that won't eat into your monthly profits too much.

Research Rental Markets

Although it is common sense, the last thing that any rental property investor wants is to commit to an area that is in decline, has a high crime rate, or for whatever reason, is on a downward spiral. The key elements to note here are: low property taxes, a reputable school district, and additional perks such as local access to parks, malls, restaurants, and movie theaters. The first thought of many investors is that they want to invest locally. Before doing so, it's essential to consider the conditions of that rental market. Knowing property management costs, rental costs, and the local economy's stability can provide you with a better understanding of how a rental property in that area will thrive.

Additionally, public transportation and a growing job market are clear indicators of an upward trend in market value and profit margin.

Central Risks

As with any career endeavor, it's key to avoid pitfalls to be successful early on. Although rental income is passive, tenants can be a pain to deal with unless you use a property management company. Rental income may not cover your total mortgage payment. Unlike stocks, you can't instantly sell real estate if the markets go sour or you need cash. Entry and exit costs can be high. If you don't have a tenant, you still need to pay all the expenses. Factoring of unexpected costs is also crucial to note here. 

It's not just maintenance and upkeep costs that will eat into your rental income. There's always the potential for an emergency to crop up—roof damage from a hurricane, for instance, or burst pipes that destroy a kitchen floor. Realistically it would be best if you planned to allocate 20% to 30% of your rental income for these types of costs, so you have a fund to pay for timely repairs. 

Finally, while it can be extremely tempting to look for a house that you can get at a bargain, fix and flip it into a rental property. But if this is your first property, that's probably a bad idea. Unless you have a contractor who does quality work on the cheap—or you're skilled at large-scale home improvements—you likely would pay too much to renovate. Instead, look for a home that is priced below the market and needs only minor repairs.

Rewards

When it is all said and done, all investing carries within it both risk and reward–they are inseparable from each other in any aspect of investing, even outside the confines of real estate itself. 

Some rewards are as follows. Because your income is passive, notwithstanding the initial investment and upkeep costs, you can earn money while putting most of your time and energy into your regular job. If real estate values increase, your investment also will rise in value. You can put real estate into a self-directed IRA (SDIRA). 

Rental income is not included as part of your income that's subject to Social Security tax. The interest you pay on an investment property loan is tax-deductible. Short of another crisis, real estate values are generally more stable than the stock market. Unlike investing in stocks or other financial products that you cannot see or touch, real estate is a tangible physical asset.

Take Action and Get Started

These tips provide a good foundation for rental property investing. Once you have an idea of what you're looking to accomplish with real estate investing, start building a business plan. Use that business plan to propel you through your due diligence, and then start taking action.

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. You can learn more about Marketplace Pro by contacting us today and scheduling a demonstration.

If you're an aspiring real estate investor coming from a different professional field, you already know that beginning a new career can be quite challenging. Let's face it; this can be pretty overwhelming, but with the right tools and application of knowledge, you can make your real estate dreams come to life. There is indeed no “one size fits all” strategy; however, there are a few fundamental tips you can follow to get off to a good start. 

You do not want to plunge headlong into real estate investing. The best way to enter this financial endeavor is through proper research and substantial planning. If you are currently holding down a paying job, you should set aside time to read and investigate topics related to real estate investing before you quit. At the same time, you should also work towards building an emergency cash fund, consisting of enough funds to cover three months' worth of household expenses. You should never assume that your first deal will be successful; in fact, you should think about worst-case scenarios in which you end up losing money but can still tap into emergency cash reserves. This kind of recommendation is called actionable advice, and it is the kind that you should be reviewing before entering the market.

Why the Real Estate Market?

Governments collect property taxes and use them to fund a variety of services and benefits for the greater good. These services and benefits include police departments, fire departments, public schools, public libraries, roads and other infrastructure. As long as all property owners pay their taxes when due, local governments can operate effectively. However, especially during tough economic times, property owners don't always pay their tax obligations in full or on time. Since local governments need tax revenues quickly, they often sell tax liens that they have placed on properties to interested investors – and that's where tax lien investing comes into play.

Property owners in the U.S. pay property taxes that are based on the assessed value of their homes. Property tax rates vary by state. In Hawaii, the average property tax rate is only 0.27%; in New Jersey, it is 2.35%. Across the U.S., the national average is around 1.5%, and the typical homeowner pays an average of $2,149 per year in property taxes.

When a property owner fails to pay their property taxes, the amount that is owed becomes a tax lien. This lien prevents the property owner from selling or refinancing their property until the lien is satisfied. Naturally, this incentivizes most people to pay the taxes that they owe; however, it may take some time for that to happen.

Since counties and other local governments can't wait for property owners to come up with what they owe, they often choose to sell tax lien certificates at public auction. How these sales are conducted varies from municipality to municipality, but they generally fall into two categories. In one scenario, bidders bid down the interest rate on a lien; the bidder willing to accept the lowest interest rate wins the certificate. In the other scenario, bidders bid up the premium that they are willing to pay for the certificate. The bidder willing to pay the highest premium wins the certificate.

Either way, the tax lien sale process benefits investors and local municipalities alike. Investors gain the potential to realize significant returns on their initial investment in the form of interest payments on the amount owed, and municipalities benefit by recouping the property taxes that they are owed more quickly.

It's important to note that tax lien sales are not held in all states. Currently, they are allowed in 29 states plus the District of Columbia. Therefore, it's important to find out whether they are held in your state. And yes, you'll want to stick with tax lien certificates in your area – you will have to do a lot of research into the underlying properties, including driving by and checking them out. 

How To Earn Through Tax Liens

If a homeowner has defaulted on his payment, then the mortgaging bank will start the pre-foreclosure process. A tax lien will then be issued for the property so that the right to retain the property can be gained. You can do real estate investing in tax liens for a certain property that has been issued a lien and put out for an auction sale. You can earn profit from this because the state will pay fixed interest on a tax lien, and others will start the bidding price at auctions in the amount of the lien. Suppose the tax lien is unpaid during the duration of the redemption period. In that case, all other mortgages and liabilities on the house are extinguished, and the title to the property will be cleared. The investor will now own his or her new property with a clean title. However, if the owner can pay the property's liability, the investor can still earn through interest earned on the lien. Real estate investing in this manner can lead to profits in both ways.

Real Estate Investing Through Auctions

Sales of properties by tax-distressed owners can be a very good deal. With that said, you'll need to find out if your real estate investing opportunity is going to be worth it. Check the property location beforehand, because you might be buying something worthless, like purchasing a piece of land that is routinely flooded. If you are able to acquire and own a piece of land legally, you can participate in property auctions as well. But, you'll have to have cash on hand or in easy access, because auction sites will usually require that those who win the bidding on their chosen properties to pay a down payment or the full amount in a short span of time, if not cash up front. This is not an investment to be made for those without capital.

Most counties hold tax lien auctions on an annual basis. You'll want to contact your local county to find out when their tax lien auctions are held so you have time to prepare. In particular, you will want to learn about how the county conducts its auctions, including requirements for bidding. 

These days, most counties and other municipalities hold tax lien auctions over the internet. Typically, you have to register ahead of time for the right to participate in the online auction. You can expect to pay a registration fee for this, so it's important to factor in calculating how much you stand to make. The fee varies from place to place but is usually around $100.

Once you're registered, you will be assigned a bidding identification number and given login information. When the auction starts, you will be able to bid on the certificates that interest you. Counties typically release lists of the tax lien certificates available for auction a few weeks beforehand. It's crucial to obtain this list and investigate it carefully. That's because you need to perform due diligence to ensure that the certificate is worth your while. Most of the time, this involves finding out the condition of the underlying property.

After obtaining the list, whittle it down to options that look the most promising to you. First, set a budget, and then eliminate any certificates that exceed it. Next, choose a property type to focus on. For example, if you are mostly interested in interest income, you'll want to focus on tax lien certificates on single-family homes with mortgages. Some investors choose to focus on commercial properties or on undeveloped land. There are pluses and minuses to all of these options, so it's vital to learn the ins and outs before getting started.

Starting Up Your Own Real Estate Investing Business

You can always start up your own business in the real estate investing industry. Given that you have enough capital and enough knowledge of the state rules on tax liens in your area, you can start investing in property tax liens immediately. One of the most important things to do when doing business in this nature is to check the property liens you'll be buying. Physical inspection is needed, but since it can be so time-consuming, limit your searches to somewhere you can drive to. A real estate investing business will also require that you have adequate knowledge of the legal processes involved, since tax-distressed sales by homeowners will include banks and other institutions, most notably the government. There is a potential to earn a high profit with just a few pieces of properties sold. Still, you can also spread the profit out and sell properties for a smaller markup, provided that the turnover for those profits will be faster, so you can move on to other properties for sale. A distress sale is a great investment opportunity, but one should always be careful since at auctions, you won't know if the property you're buying is a good buy, and not a lemon. You should also check if the property owner is not on the verge of bankruptcy because the IRS can override your lien and take first priority and your real estate investing opportunity away from you.

Is Tax Lien Investing Right for You?

As promising as all of this may sound, don't get ahead of yourself. Since the potential returns for tax lien investing are so good, the associated risks are often quite high. For one thing, there's no secondary market for tax lien certificates. For the duration of the redemption period – typically six months to three years – you won't be able to sell. Therefore, you must be willing to play the long game.

Although rare, another risk is that the property taxes are never paid, and you have to initiate foreclosure proceedings. In some cases, the value of the tax lien certificate exceeds that of the underlying property. The certificate expires once the redemption period ends, and you are left with no choice but to sell. Therefore, you could end up losing significant amounts of money if you don't do enough research.

The bottom line is that if you're not willing to assume the responsibilities of property ownership, tax lien investing isn't right for you.