Category: United Tax Liens Blog

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.

There is a reason why vocabulary lessons were so important in grade school. They are the building block for understanding different concepts and ideas. Knowing the standard tax lien terms will help provide you with a deeper understanding of how tax lien investing works.

Redemption

Redemption occurs when the debt is settled. Whether another investor or the property owner initiates, it occurs when the debt has been paid off. When a certificate redeems, the investor earns their money back plus interest and fees.

Redemption Period

The redemption period is the period of time that protects a property owner from foreclosure. The property owner has a specific amount of time to pay their delinquent taxes before the property can be foreclosed on. This time period varies by state, but is typically around two years.

Face Amount

The face amount is the amount that the lien certificate started at. The face amount does not include interest or fees, but only the value of the lien.

Redemptive Amount

Unlike the face amount, the redemptive amount equals the lien's value, plus interest and fees accrued. Tax lien certificates are purchased at the redemptive amount.

Certificate Life

All lien certificates have an expiration date. Expiration dates vary by state, but some are as long as 7-10 years. The certificate life is measured from when it was issued, not when it was purchased. 

Roll-Up

Because there are often several certificates on a property, it's essential to understand the roll-up. The roll-up refers to all of the outstanding taxes on the property. To foreclose on the property, all of the delinquent tax years must be paid off.

Tax Deed Application (TDA)

When trying to foreclose on a property, a tax deed application must be filed. There is a fee to file the TDA, but the fees are reimbursed after the redemption check has been issued.

Tax Deed Auction

After the property owner has been notified of the foreclosure, the property owner has 30-60 days to satisfy their tax debt. If they fail to do so, the deed will go to a tax deed auction.

Working Capital 

Working capital means setting funds aside to use toward roll up and fees. Utilizing working capital as a part of your exit strategy may help you prepare for any additional funds needed to foreclose on the property.

Horizon Lien to Value (HLTV) 

Working capital means setting funds aside to use toward roll up and fees.

Using working capital as a part of your exit strategy may help you prepare for any additional funds needed to foreclose on the property.

Staying up to date on tax lien terms helps provide a solid foundation for your tax lien education. These terms are used frequently throughout our training materials, so take some time to familiarize yourself with them.

Due Diligence

This is a common but slightly misunderstood term used in real estate investing, referring to research. By focusing time on research, the idea is that risk will be mitigated due to factoring in crime rate, public transportation access, and general benefits of specific locations for a property.

Quiet Title Action

You can pursue an action to quiet title to show that you are the property's valid owner. This typically lasts between three and nine months, resulting in more than $2,500 in legal fees to settle title disputes through the judicial system.

Tax Deed Title Clearing

You can secure the help of a title clearing service, which will verify that the county's foreclosure procedure was executed correctly, eliminating any uncertainty on the title. Tax Title Services offers this quiet title alternative through our unique certification process, which certifies the completeness and accuracy of tax lien foreclosure due process to ensure no one can lay claim to your property title. We'll also match you with one of our nationally-recognized tax title insurance partners located throughout the country. 

Blemished Title 

Whether you've invested in a tax deed or a tax lien, your purchase may require additional time and money to ensure that it's truly yours. When you purchase a property through a tax sale, that property suffers a severe blemish on its title, meaning that the chain of title becomes unclear, and other parties who have owned the property in the past can claim an interest in the title. Additionally, you won't be able to secure title insurance for your investment. Without title insurance, you won't perform any real estate transactions with potential buyers to make a profit. If your buyers can't get title insurance, they can't get a mortgage, which means you can't make money off your investment.

Foreclosure

Buyers may look to foreclosures to land bargains on houses. Foreclosure happens when a borrower can no longer make mortgage payments, and the lender seizes and then sells the home to recover losses. Foreclosed homes are often sold for less than their market value. That discount could bring a home within reach, but the financing and the home's condition could present challenges. Before you bid on a foreclosed home, make sure you know the risks and the limitations.

Low capital requirement 

Tax lien certificate investing offers a much lower capital requirement than other forms of financing—it's possible to jump into this asset class for as little as a couple of hundred dollars.

Rate of return

The other significant advantage investing in tax liens gives you is a relatively standard rate of return. Unlike flip investments, which can be volatile, with tax lien investing, you have a solid understanding of what your return will be—without having to second-guess the market.

Lump Sum Payment

You are paid a fixed sum when the tax lien investment resolves, which means that it's easy to calculate precisely how much you'll be receiving and what your rate of return is. Also, because the payment is not in the form of an ongoing residual, you get all of your returns at once.

Subsequent liens

Even though tax lien investment requires very little up-front capital, they can (on occasion) need more capital as the process moves forward. This is because, as the initial lien holder, you will be required to purchase any subsequent liens. (New tax liens take precedence over old liens; sad, but true.)

ROI (Return on Investment)

Identify your financial goals before deciding to buy tax lien certificates to determine if the return on investment (ROI) is right for you. As I mentioned above, tax liens can be highly lucrative, depending on your location. Most states will limit the amount of interest charged on a tax lien certificate, though some states will have higher limits than others. The price of tax lien certificates can also vary by state, which could cut into an investor's potential profits. Always research your area before getting started.

Understanding the Basics of Tax Lien Investing

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

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

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

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

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

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

Judicial Tax Lien Foreclosure

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

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

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

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

Administrative Tax Lien Foreclosure

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

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

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

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

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

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

Tax Lien Foreclosure

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

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

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

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

Tax Lien Property Values

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

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

Additional Investment Requirements

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

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

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

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

There Are Risks In Every Investment

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

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

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

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

The Five Most Common Exit Strategies for Tax Lien Investors

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

1. Redemption

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

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

2. Quick Flip

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

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

3. Wholesaling

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

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

4. Fix and Flip

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

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

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

5. Fix and Rent

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

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

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

Overall, Choose an Exit Strategy Based on Research

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

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

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

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

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

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

Filing a Tax Deed Application

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

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

Initiating a Tax Deed Application

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

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

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

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

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

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

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

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

Once the Tax Deed Application is Filed

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

After My Certificate Goes to Auction

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

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

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

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

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

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

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

Direct Ownership and Peace of Mind

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

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

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

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

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

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

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

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

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

Affordability

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

Less Competition

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

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

Multiple Ways to Make money

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

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

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

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

Land is a Limited Resource

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

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

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