Author: United Tax Liens

Contents

• What Is Tax Lien Investing?
• How Does It Work?
• Tax Lien Investing: How To Get Started
• Is Tax Lien Investing Right For You?

What Is Tax Lien Investing?

It's a way to add real estate to your investment portfolio without having to buy homes, office buildings, or any physical properties. It produces fixed returns and doesn't require you to manage properties.

How Does It Work?

A tax lien occurs when a homeowner can't pay their property taxes. In response, the state or local government places a tax lien on the property. This means they can't sell the property until they clear the debt. A tax lien damages the homeowner's credit and prevents them from selling, refinancing, or borrowing against their home.

A homeowner in this scenario has three choices:

• Pay the taxes, fees, and interest in full.
• Try to dismiss the debt in bankruptcy.
• Make payment arrangements with the government agency to pay the outstanding debt.

Typically, the homeowner makes payment arrangements.

In most states, this gives the homeowner up to three years to pay back taxes and interest. Every state has different payment deadlines. If the deadline comes and the taxes are not paid, the lienholder has the right to sell the house at a tax auction.

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.

When local governments need to collect past-due taxes from property owners, they have a few ways of doing so, and one of them involves asking investors for help in this regard. The agencies that engage in these financial practices are often property assessment and revenue authorities at the county level. In most cases, these agencies would prefer not to deal with the burden of managing property taxes that have fallen behind payment schedule; however, the reality of revenue collection is that some cases can only be settled through the sale of tax lien certificates.

As with various other activities related to debt financing, property tax liens offer investment opportunities. In the United States, there is a market for deed investing; moreover, since tax liens are attached to properties, many real estate investors choose to enter this market. Real estate investors often participate in tax lien investing because they have a chance to become lien holders of properties, which means if the owner wants to get their property back, they must pay back the investor with interest accrual whenever applicable. 

Tax lien investors also stand a good chance of becoming property owners if they are willing to go through the foreclosure process. Most newcomers to the world of deed investing assume that they will be able to take ownership of free-and-clear properties by simply paying off outstanding taxes, but this is not exactly how it works. The first thing to know about tax lien investing is that sales of lien certificates are promulgated by state law. Not all U.S. jurisdictions conduct tax lien auctions. 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

The District of Columbia also holds sales of tax lien certificates. States that are not included in the list above either do not sell lien certificates to third parties or do not follow a statewide process. In Alaska, for example, boroughs have leeway in making rules applicable to the management of overdue property taxes. Prospective investors should not assume that all states follow the same procedures. Some states are more attractive to invest in than others. In Iowa, lien investors bid on a percentage interest, so this can be defined as a deed investing state.

The most common tax lien mechanism consists of bidding on a certificate and collecting payments from morose homeowners who do not want to lose their properties. Let's say you register for a tax lien certificate auction in Florida, where the interest rate on overdue property taxes is 18%. Bidding auctions may result in lower interest rates, but you will have to pay for the tax due amounts, penalties, and interest accrued to the auction day. If you win the auction and pay for the certificate, you have effectively bailed out the homeowner, who is now indebted to you. 

Tax certificates are legal instruments created by revenue collection agencies; you do not have to worry about their validity. Let's say you are the highest bidder in the auction of a 10% lien certificate imposed on a lovely Florida beach home. The owner has 24 months to adhere to the repayment schedule, and you have a good opportunity to capitalize on the 10% interest rate, which is a lot higher than you can usually get these days on Wall Street. If, for some reason, the homeowner does not adhere to the repayment schedule, you could be in a position to foreclose and ascertain ownership interest on the title. Still, the percentage will depend on the lien position you end up holding minus other liens that may be attached to the property.

Risks Associated With Tax Lien Investing

If you're interested in tax liens as an investment, you'll want to make sure you're completely educated on the process before diving in. This is the most salient risk of deed investing; to protect yourself, you should contact the National Tax Lien Association to see what they can tell you about the seminar provider. 

Investing in anything without being educated and knowing what you're doing is a great way to lose a fortune, which certainly extends to tax lien and deed investing. United Tax Liens, the developers of Marketplace Pro, offer guides for prospective tax lien investors who wish to explore their options in this market, and it goes over various risks you should be aware of. The basic principles of investing apply to tax lien certificates: You should only invest what you can reasonably afford to do away with, which means you should not tap into your emergency cash reserves. 

Understanding the kind of risks you may encounter is crucial because you can learn to spot them and avoid them; for example, when conducting due diligence on a property owner, you should proceed with caution if you find out she is a real estate attorney who specializes in foreclosure defense.

In this case, you may have to fight an uphill legal battle if the owner ends defaulting on repayment of the certificate.

How to Get Started With Tax Lien and Deed Investing

Here are a few key aspects of tax lien investing for you to think about:

* Know what your goal is: Do you want to own the properties you're bidding on, or do you want to collect the interest the lien will generate? You may not always be able to foreclose and acquire the property easily. 

* Understand what you want before committing to investing: A lot of valuable properties will have the owner redeem the property before the sale or will have the mortgage holder (if there is one) step in and outbid you to protect their interest in the property. The losses are not substantial in this case, but some investors tend to get burned out when this happens. 

If there is a mortgage on the home, and you manage to get your hands on the lien, some states will allow the mortgage holder to redeem the certificate. In this case, liens you have on a home with a mortgage is a really solid bet that you will get paid back, with interest, on the lien. Not all mortgage servicing firms are easy to deal with, but all of them are backed by investors who shudder at the thought of placing their first-position lienholder status at risk. 

Whatever your tax lien investing goal may be, you can always count on losing if the property does not hold intrinsic value. This means staying away from dilapidated homes in blighted neighborhoods with a high crime rate. For example, a small home in the middle of the New Mexico desert is not something you should be interested in holding a tax lien for. A house with multiple claims on title from heirs, grubby relatives, creditors, and gold diggers is probably not worth the hassle. Let's face it: There is always a reason why folks are just letting their properties go. Sometimes it's because they aren't worth anything, and even the county revenue collection agency may be aware of this but will decide to go through with the lien certificate auction.

* Do as much diligence as you can on properties before you bid: You have to understand this is a county, borough, township, or parish process. Every jurisdiction will have requirements, dates, deposits, fees, and other intricacies for their auctions. If you try to spread yourself too thin, you won't be successful.

You should always stick with what you know. Pick a few counties to focus on at first and build your experience. Try attending a few auctions to get your feet wet; doing so will not only make you familiar with the process but also give you a chance to meet the sheriff's deputies, court officers, and clerks who handle auctions. Some jurisdictions will have a fair amount of paperwork and red tape for you to deal with, and it is always better to go through this process when you have already made key acquaintances. 

* A Note on Tax Deeds: If you want to own the property right after the auction, then you'll want to look for states that sell tax deeds at auction. Deeds are different from tax lien certificates in the sense that the jurisdiction knows that no one will step forward to invest unless they can get on the title, which is why they offer deed interest opportunities.

Learn More About Tax Lien Investing With Marketplace Pro

Did you know Marketplace Pro is similar to a Multiple Listing Service (MLS) platform for tax lien properties? Contact us to schedule a demo today so that you can learn how the software can help you find hidden investing gems around the country.

In the world of investing, due diligence can be described as the collection of good practices related to the investigation of any financial asset. Legendary investors such as Warren Buffett, co-founder of Berkshire Hathaway, are known to spend several hours each day fully engaged in due diligence prior to making any investing decisions.

In any situation involving investments, due diligence is completely voluntary. Despite being highly recommended, not every investor conducts due diligence, and many will only complete cursory evaluations of the assets they acquire. A day trader, for example, will probably not do any kind of evaluation of Microsoft shares beyond running them through a stock screening tool; the reason for this dismissal of due diligence is that day traders typically take market positions that do not last very long.

Understanding Due Diligence

When it comes to property tax liens and deed investing, skipping over due diligence is strongly discouraged. You will never want to ignore due diligence in any real estate transaction, and this is double the warning with tax lien certificate auctions. Investors who participate in deed auctions, which are sometimes referred to as sheriff's sales, are actually engaging in the potential transfer of real property, and this could turn into a nightmare if the highest bidder fails to conduct thorough due diligence on the property, its condition, and encumbrances.

Due diligence is a must for investors who bid on tax lien certificates, and it should start at least a couple of weeks before the auction takes place. Investors who plan to bid on actual deeds will have to deal with even more due diligence than those who only want to profit from the interest paid by homeowners who want to hold on to their homes.

There is a subset of investors who willfully ignore due diligence because they are pure gamblers. We are talking about individuals who understand that winning and losing are secondary to actually playing.

You do not want to be among these reckless investors unless you have plenty of capital to lose and law firms on retainer to handle the legal issues that may arise from troublesome deeds and tax certificates.

Due Diligence Checklist for Tax Lien Investors

If you are seriously considering investing in tax liens and deeds, the term due diligence should be at the top of your real estate vocabulary. Knowing what data to search for and how to interpret the information you encounter can make or break your investment.

In addition, performing due diligence keeps you from making mistakes, which can be costly in any kind of real estate transaction. But even though you know you should do your research, where do you start? Don't worry. We've put together a due diligence checklist that will kick-off your research.

We recommend starting your due diligence checklist by examining these FOUR components at the very minimum:

* Property value

* Other certificate holders

* Total roll-up amount

* The aerial view of the land

1. Examine the Property Value

To start examining the value of a property, you will need to find the fair market value. Fair market value refers to the price a purchaser would be willing to pay for that property. Using online valuation tools like Zillow, Redfin, or other similar sites can help provide an estimated assessment of the property's worth. 

It is important not to get fair market value confused with the assessed value, appraised value, or potential sales value. The FMV is determined utilizing comparative market analysis, which is what real estate analytics websites such as Zillow utilize. The appraised value is what the property is actually worth after a licensed professional evaluates it. The assessed value is what tax revenue agencies use to calculate property value due, and it is related to land value and historical demand.

2. Identify Other Certificate Holders

More often than not, a property has multiple years of delinquent taxes. This isn't necessarily a bad thing but could be if you don't identify them beforehand. For example, if you bought a tax lien from 2014, there might be other tax liens from the years 2015 and 2016 on the property. As an investor, you will be required to “buy out” the other lien holders if you plan on filing a tax deed application (TDA) to acquire the property.

In addition to others who may be holding previously unpaid tax lien certificates, there may be other encumbrances on the property such as mortgages and lines of credit. In some cases, the Internal Revenue Service may have attached a lien for unpaid federal income or capital gain taxes. There could be mechanic's liens from contractors who were never paid for maintenance, repairs, or improvements. Finally, creditors may have won a lawsuit against the property owners on a simple motion for default.

3. Know the Roll-Up

A roll-up is the sum of all tax liens on the property plus any administrative fees imposed by the county revenue agency. Most investors who are looking only to collect interest on the certificate will get tunnel vision by looking only at the tax owed, but this may accurately reflect the roll-up. For instance, if you purchase a certificate that is close to expiration, a TDA will need to be filed. You can find this information by accessing the county treasurer's page or at the recorder's office.

The roll-up will let you know if it is actually worth to bid on a tax lien certificate and whether the threshold is worth registering for the auction. Once you start looking at a 4% interest situation, the certificate becomes less appealing, and it is at this point when you should start thinking about worst-case scenarios.

4. Get an Aerial View of the Land

Many people shy away from tax lien investing because they're afraid of purchasing a property in poor condition. But using a GIS map, Google Maps, or Google Earth can provide a visual of the land you're purchasing. Checking county records coupled with an aerial view will allow you to see if the property is landlocked or in a body of water (wetlands, swampland, etc), and this will allow you to check to make sure that the legal description matches. You can even use Street View on Google Maps, if available, to get an idea of what the property and the neighborhood look like.

One word of caution about using Google Maps: The satellite views may not be as up-to-date as we would all like them to be. If you are looking at a plot of land located on a flood plain, for example, you should think about when was the last time a storm surge impacted the region, or if it has been affected by accelerated erosion. A combination of active hurricane seasons and erosion could turn dry land into swampland in just a few years. The most dedicated deed investors are known to get recent photos of the properties they are interested in; to this effect, some of them contract the services of local photographers who can fly a drone over the property for fresh aerial images. 

These four key components are part of an excellent start to creating a due diligence checklist and every new investor should work on mastering this process. It is nearly impossible to create a plan of attack or develop an appropriate exit strategy if you have not done your responsibility of due diligence. 

As previously mentioned, investors who are after deeds will be obligated to go deeper with their due diligence. A thorough title search, for example, will let you know if there is a chance of individuals who could file an ownership claim on the property; think about heirs, banks, creditors, former spouses, gold diggers, and others. Title claims can be more challenging to clear than liens. Potential environmental issues can also create unwanted headaches, and these are easier to spot if you check with the state and county agencies that handle these matters because they are supposed to inform the public about them. Some information on the property owners could also help you guide your investment decision. Suppose you land a tax lien certificate on a property owned by a foreclosure defense attorney, for example. In that case, you may have to deal with legal challenges when attempting to take possession.

You will have to complete the amount of due diligence before bidding on tax lien certificates, or deeds will vary from deal to deal. You can get an idea of how much due diligence may be needed when you evaluate the property description, and this is when Marketplace Pro software comes in handy. 

If you are familiar with the Multiple Listing Service platform used by real estate brokerages, you will love the intuitive user interface of Marketplace Pro, which is the first step tax lien investors should take when evaluating investing opportunities. Contact our office today to arrange a free demo of Marketplace Pro; once you get the hang of it, we can start discussing due diligence strategies.

If you need to diversify your investment portfolio and have a solid understanding of how real estate works, tax lien investing may be a viable strategy to consider. In 2017, approximately $14 billion in property taxes went unpaid in the U.S. This accounts for about one-third of those taxes were sold off to private investors – and many of them enjoyed nice rates of return. However, tax lien investing isn’t something that one can just jump into. Competition can be fierce. In this overview, we’ll explore the basics of tax lien investing, including:

• how it works
• who it’s right for and;
• its advantages and disadvantages.

About Tax Liens and Certificates

When a property owner hasn’t paid taxes on property that they own, the local government issues a lien against it. This lien states that the property can’t be sold and ownership can’t be transferred until the amount that is owed is paid in full. When a lien like this is issued, a certificate is created. This certificate includes the total amount that is owed plus penalties and interest.

Municipalities – typically counties – often auction off these certificates. Municipalities can collect the money that they are owed right away by passing off the debt to the highest bidder. That person then assumes the right to collect payments, including interest, from the owner of the property through the redemption period. This period usually lasts anywhere from six months to three years. The vast majority of property owners repay the full amount by then. If they don’t, the owner of the certificate – the investor – is entitled to foreclose on the property to recoup the money.

Tax Lien Investing Basics

When an investor buys a lien certificate at auction, they agree to pay the amount of taxes that is owed for the right to collect that amount back from the property owner – plus interest. Interest rates for these certificates vary from state to state, which is why it’s important to understand local rules and regulations pertaining to these types of liens. The interest rate in Alabama, for instance, is 12%; in Florida, it’s 18%. 

Redemption Period

Over the course of the redemption period, an investor can collect a fair amount of money from repayments made by the property owner. In rare cases, when the owner fails to repay the amount that is owed by the end of the redemption period, the investor may place the property into foreclosure; however, this is not a reliable way to make steady returns. Even when it does happen, additional liens are often uncovered – and they can end up putting an investor in the red over the long run.

Tax Lien Investing vs. Tax Deed Investing

It’s worth noting here that there are big differences between tax lien investing and investing in tax deeds. Currently, 36 states have tax lien sales, and 31 states have tax deed sales; some states have both. With tax deeds, investors bid on the property title instead of on rate of return. If they bid and win, the tax deed is transferred to them. At the end of the redemption period, the investor may be able to pay off the delinquency and assume ownership of the property. In other words, they don’t gain the right to collect interest payments but are banking on being able to sell the property later.

Who Should Participate in Tax Lien Investing?

Tax lien investing isn’t right for everyone. Ideally, you should have a good amount of investment experience under your belt, and you should have a solid understanding of how real estate works. That’s because you will spend a lot of time investigating various properties to determine whether or not bidding on a particular lien makes sense. It pays to know how to work with real estate records and to have a good understanding of real estate terminology, for example.

Understanding Tax Lien Auctions

It also helps to be familiar with real estate auctions. That’s because tax lien auctions are quite similar, but they do vary from municipality to municipality. For example, some auctions work through a process of bidding down the interest rate. In this case, the municipality establishes a maximum interest rate for the certificate; the bidder asking for the lowest rate below that maximum wins. Other auctions work through a process of bidding a premium on the lien; in that case, the bidder offering the highest premium over the amount of the lien wins.

Because these auctions and their rules vary from place to place, it is crucial to do your homework before even attempting to enter the arena. Therefore, you should decide which county or counties you will focus on and then learn how they do things.

Pros and Cons of Tax Lien Investing

Before delving into the world of tax lien investing, it helps to understand the advantages and disadvantages.

Top advantages of tax lien investing:

• Gain real estate exposure without investing in physical real estate
• Get your hat in the ring with very little upfront capital – sometimes for as little as a few hundred dollars
• Receive a lump-sum payment from your investment efforts
• Enjoy a reliable and fairly predictable rate of return on your investment

Top disadvantages of tax lien investing include:

• Not a viable way to generate residual income over time
• The amount of interest that can be collected is limited by local municipalities
• Subsequent liens that are uncovered can negate any potential returns
• Competition is fierce – especially since so many institutional investors are involved
• It is a time-consuming enterprise that involves a lot of research

Tax Lien Investing Steps

If you aren’t scared away from tax lien investing yet, you would probably like to gain a clearer picture of how the process works. Again, things vary depending on where you will be doing the actual investing. However, here’s a breakdown of the basic steps that are involved:

1. Consider the Market: With tax lien investing, depressed real estate markets are better than hot real estate markets. In a thriving market, property owners can usually sell quickly and easily, giving them less incentive to work toward paying off old liens. Market conditions can vary from area to area, so do some research to identify areas that are more amenable to profitable tax lien investing.
2. Choose a Property Type: Since this type of investing is so complicated, it helps to focus on one or two property types. For example, will you focus on commercial properties or residential ones? Will you look for liens on vacant land or on improved land?
3. Contact the Local Treasurer: A huge factor in enjoying success with tax lien investing is knowing how the local system works. The best way to figure this out is by contacting the treasurer for the county or other municipality where you will be bidding on liens. The treasurer can tell you when such auctions are held, and they can provide you with a list of liens that will be up for auction. Make sure to also obtain the rules that go along with such auctions from the treasurer; for example, if you win, are you required to pay with cash, personal check or money order?
4. Perform Due Diligence: After narrowing down the list that you get from the treasurer, perform research on each available option. Steer clear of properties that have incurred environmental damage or other major issues that could render them virtually worthless. Similarly, watch out for properties that are in such bad shape that the owner won’t be incentivized to get caught up with their back tax payments. It’s entirely possible for a property to be worth less than the lien that is held on it. A good rule of thumb is to divide the face amount of the delinquent lien by the current market value of the property; if the ratio falls above 4%, do not bid on that one. Check county records for in-depth information about the lien and property, including the legal description, property owner name, property address, assessed value, condition and descriptions of any improvements.
5. Enlist an Attorney: Regardless of your level of expertise in this area, it is always wise to have a skilled real estate attorney on hand to look everything over for you along the way. Of course, paying for an attorney will cut into your returns, so this can be a bit of a double-edged sword.
6. Bid on Liens at Auction: Have a maximum bid in mind before attending the auction. Make sure that you have whatever you will need if you win, such as a cashier’s check. Understand that bidding wars often happen at these auctions, and they can drive down the rate of return; this is an especially big problem for private investors, who often must compete with institutional investors with a lot more volume.
7. Win an Auction: If you win on a bid, you are typically required to pay the full amount due to the municipality in full. You are also required to contact the property owner in writing by certified mail within a certain period of time. The letter must inform them that you have purchased the lien on their property and state the amount that is owed in back taxes. Later, a second letter needs to be sent if the redemption period is about to expire and the owner hasn’t paid back the full amount yet. Again, however, this rarely happens; about 98% of the time, the amount is repaid, the property remains in the owner’s possession and the process is complete.
8. Collect Payments: Once you are in possession of the certificate, the property owner makes payments to you throughout the redemption period. These payments include the amount of interest that was agreed upon under the terms of the auction. In the very unlikely event that payments aren’t made, or that the full amount is not repaid, you can proceed to take action to foreclose on the property. However, if subsequent liens are uncovered, you may end up on the hook for them before you can do anything else – which is exactly why this type of investing is not without serious peril.

Passive Tax Lien Investing: A Viable Alternative

With so many variables at play, tax lien investing as a private, individual investor can be pretty uncertain. Once you get to the point of locking down an interest rate through an auction, of course, you have a solid idea for how much you can make. Along the way to that point, however, there are lots of potential pitfalls. Finding the time to investigate several options in-depth – and knowing how to do it properly – is a tall order for most. On top of that, many big players, including money managers and huge investment firms, have entered the tax lien investment world and made it much more difficult for private individuals to make good money since they drive down rates of return through sheer volume.

If this sounds discouraging, you might consider investing in tax liens in a more passive way through a National Tax Lien Association investor. These days, nearly 80% of tax lien certificates are sold to NTLA members. Members with portfolios with less than $1 million pay around $500, and the fee for institutional investors ranges from $2,000 to $10,000 on average. By going this route, you can rely on an annual return of between 4% to 9%. That is lower than what you could potentially get on your own, but you avoid most of the serious perils that are involved in going it alone.

Conclusion

When it comes to real estate investing, investors tend to focus more on buying and selling for profit or on purchasing investment properties. Tax lien investing offers a unique way to gain real estate investing exposure without investing in real property, which isn’t right for everyone, and it can be a good way to further diversify a portfolio. With some research, time and planning, it might be a viable way for you to enhance your current investment strategy.

Of all the strategies that can be applied to real estate investing, one of the most overlooked involves acquiring properties that are under lien status for unpaid taxes. Smart property investors can combine the more traditional fix and flip strategy with tax lien investing, which is sometimes referred to as deed investing. When they put these two strategies together, they can really maximize their return on investment.

Properties with tax liens tend to fly under the radar because they are usually not the most adequate for marketing. With tax lien investing, real estate agents do not have opportunities to earn commissions. You will not find tax lien properties on the Multiple Listing Service (MLS) of real estate brokerages. Tax lien investing is one of the many ways you can profit from real estate investing, which means that it presents some risks you must be aware of, and that means learning to recognize scams related to tax liens and deed investing fraud.

How Tax Lien Scams Work

In November 2019, the Federal Trade Commission issued a news release giving details into an investigation and civil action taken against a company that sold real estate investing seminars on the topic of deed investing and property liens. The Utah company marketed its seminars and conferences to individuals who were new to the world of tax lien investing; to this effect, reality television stars from “fix and flip” shows such as Danny Perkins, who is one of the leads in the HGTV series “Renovate to Rent,” were contracted to appear in promotional materials.

As described by the FTC in its complaint, the information provided by the company in its seminars was very general. Attendees paid $1,100 for the three-day seminar, which would ostensibly introduce them to a system whereby they could access privileged real estate listings that included properties under tax lien status. Attorneys representing the FTC explained that no such system was provided to seminar attendees; instead, they were enticed to sign up for even more seminars at costs ranging between $20,000 to $40,000. To add insult to injury, some of the real estate investing information given was factually incorrect, and the real estate listings unveiled in the additional training packages were often sold at inflated prices.

The FTC civil complaint seeks to recover $400 million extracted from people who wanted to get a real estate investing primer. The Utah company apparently engaged in:

* Deceptive advertising

* Fraudulent practices

* Coercion

Preventing Tax Lien Scams

Other versions of scams involving tax liens target homeowners who get letters informing them of nonexistent liens that make reference to the Internal Revenue Service. These scams scare property owners into believing that overdue taxes could result in a lien, and they are direct to send payments to a fictional county or state agency. In some cases, the scam is actually a phishing operation whereby the victim is asked to provide personal financial information in exchange for assistance in clearing the bogus tax liens; this is often done for the purpose of identity theft. 

The IRS can impose tax liens on your property if you have unpaid tax obligations that are overdue. You will definitely know about this because the IRS issues multiple notifications before filing a lien. The same process is followed by tax agencies at the county and state levels. Don't believe letters referencing property liens; always check with relevant federal and state agencies.

The Reality of Investing in Tax Liens and Property Deeds

Tax liens are filed on properties that have outstanding property tax bills collected at the county level. IRS tax liens are not filed for failure to pay property tax; they are usually imposed against homeowners who have not paid federal taxes for a few years. When a lien is attached to a property, the homeowner cannot sell, refinance, or get a line of credit until the obligation is satisfied and the lien is cleared. 

Property tax liens can accrue penalties and interest. When the liens go unpaid, the revenue collection agency, usually at the county level, will issue a certificate that includes all the taxes and associated fees due. In the interest of making the most out of their tax collection efforts, agencies routinely offer these lien certificates at public auctions traditionally held “at the courthouse steps,” but more often in a courthouse lobby or conference room. Depending on the jurisdiction, these events may be called “sheriff's sales,” and they may be held online instead of at a physical location. 

Tax collection agencies only care about obtaining the past due amounts along with fees and penalties; they are not concerned about the assessed or market value of the properties. But they do realize that they have a chance to make additional profits at auctions. These lien certificate auction sales are legitimate and overseen by court officers and sheriff's deputies. Once a certificate is sold to the highest bidder, the tax collection agency will be able to foreclose on the property and legally transfer the deed. 

According to figures compiled by the NTLA, unpaid property taxes totaled $14 billion in 2017. So prospective investors can count on being able to tap into this market. It should be noted that only 30 states handle lien certificate auctions.

How to Profit from Investing in Tax Liens

Like all other investments, properties acquired through lien certificate options should be approached with a good amount of due diligence. Unlike regular property, sales handled through brokerages, land, and structures with attached tax liens do not go through a marketing process. Revenue agencies do not perform any maintenance or improvements to these properties, which is why many investors adopt the fix and flip approach when they acquire lien certificates and full ownership.

In cases when the morose homeowner is still occupying the property, the lien certificate is cleared but the investor has an interest in the deed, thus creating another lien obligation. In order to keep the property, the homeowner must pay the lien investor back at interest rates that vary from 5% to more than 30% depending on the state, although most of these situations are settled with interest rates between 10% and 12%. The repayment term can last between six months and three years; should the homeowner fail to pay, the investor can initiate foreclosure and eviction proceedings. Some investors will offer homeowners cash in exchange for moving out so that the foreclosure process can be accelerated and without the need for eviction. 

Most property lien investors prefer the fix and flip approach instead of holding the lien. This is a good strategy in jurisdictions with an active housing market, but it should be noted that some of these lien certificate properties have fallen into major blight and disrepair; this can definitely be expected in cases where the homeowner fell on hard times and was not able to afford property tax payments or even basic home maintenance.

In essence, buying lien certificates at auctions present two potentially profitable opportunities: High interest from the homeowner who wants to keep the property or going into an immediate foreclosure so that the land or building can be improved and sold. If the underlying property is a nice home in a good neighborhood, chances are that the homeowner will like to keep it; however, some properties with tax liens may be located in the middle of slums and may have fallen into deep disrepair. When lien certificate auctions are held, there will always be properties that no one wants to bid on; these are usually plots of land in rural areas where no one has bothered to develop.

Finding Tax Liens Worth Investing In

Now that you know the difference between seminar scams and the real tax default property market, the next step is to start gathering the tools that can help you make the most out of your investing activity. With Marketplace Pro software, you can search for an active inventory of tax default homes that are about to enter lien certificate auctions. To a great extent, Marketplace Pro is the MLS for individuals looking to invest in tax liens and deeds. The information provided includes lien amounts, assessed value, market value, and property description. This software can make a difference between bidding on a nice three-bedroom home in South Florida instead of a shack built on swampland. Contact United Tax Liens today to arrange a demo of Marketplace Pro.

With the current real estate hiccup going on in the U.S., more and more people are losing their homes because they failed to pay their home mortgages. But what happens to the homes is something few people think about. This can be a very good real estate investment opportunity, and one can quickly earn profits in a very short amount of time.

The strategy in question is known as tax lien investing, and it can be a terrific way to diversify an investment portfolio and to realize potentially significant returns. However, it is not a form of passive investing; a lot of work is required to make it work, and nothing is guaranteed. Therefore, it is crucial to learn what you can about tax lien investing before attempting it and make sure that it's even something that makes sense for you.

Tax Lien Basics

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.