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.

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

What is a tax deed?

All real estate is subject to property tax. When a property owner falls behind on their real estate taxes, a tax lien is placed on the property in the form of a tax lien certificate.

Depending on the state, the owners have a few months to a few years to pay the taxes due. Eventually, if the taxes remain unpaid, the city or county will sell the property through a public auction as a means to recoup the back taxes owed to them.

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

How can I invest in tax deeds?

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

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

Sell the property as-is

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

Rehab the property

Let's say the property is in an area where fix-and-flip activity is high, and you determine the property's after repair value is $125,000. Rather than selling it as is for $70,000, you put $35,000 into the property and are able to sell it for $125,000 four months later. Your total cost into the investment is roughly $85,000 (accounting for the purchase price, holding costs, rehab, and clearing title), which nets you about $30,000 after deducting 8% of the sales price for closing costs and Realtor fees.

Fix it up and keep it as a rental

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

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

Where to find tax deeds for sale

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

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

Tax sales are typically held online through the county's auction software but may take place at the county courthouse in smaller or rural counties. Depending on the county or municipality, tax sales can be conducted daily, weekly, monthly, quarterly, or as rarely as once a year. Most counties advertise the sale process and how to register as a bidder on their website. Otherwise, call the tax collector directly to find out the process for buying tax liens or tax deeds. County websites also often have a list of pending tax deed sales or an auction calendar showing you the properties up for auction, when they go to auction, and the minimum bid. This list can be used to identify which properties, if any, meet your investment criteria such as location, property type, or size and what your maximum bid will be.

What you need to do before buying tax deeds

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

Determine property value

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

Determine your maximum bid

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

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

Check for other liens

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

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

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

The opportunity is there, but buying tax deeds can be challenging

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

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

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

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.