United Tax Liens Blog

How Does Buying a Tax Lien Work

How Does Buying a Tax Lien Work

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

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

Basic Steps

Next are the necessary steps an investor takes:

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

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

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

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

Quickly Narrow the List

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

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

  • Investment Cost
  • Property Value
  • Property Type

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

Due Diligence

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

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

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

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

Make the Investment

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

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

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

What Is a Rate of Return (RoR)?

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

Understanding a Rate of Return (RoR)

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

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

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

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

How to Exit

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

About The Author


United Tax Liens is a group of experienced, active investors providing everyday people with access to one of the best Real Estate Investment vehicles available today.

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