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How to Avoid Tax Lien Scams

How to Avoid Tax Lien Scams

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.

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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