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Idle vs. Active Tax Lien Investing: Is One Better?

Idle vs. Active Tax Lien Investing: Is One Better?

Investing in the American real estate market can be a lucrative proposition for those willing to take the time to learn about opportunities such as tax lien investing, which is sometimes referred to as tax deed investing. You hear about house flippers, real estate investment trusts (REITs), mortgage bonds, purchasing short-sale homes, and other investment strategies that have become popular over the last couple of decades. Still, you do not know that much about tax lien certificates and their profit potential.

One of the reasons tax lien investing is not widely discussed is because it is not directly tied to a market. The plots of land and residential structures that become available to tax lien investors do not normally pop up in systems such as the Multiple Listing Service (MLS) used by the National Association of Realtors, but this does not mean that they are not available to the public. Revenue collection agencies manage tax lien certificate auctions at the county level; they are sometimes called sheriff's sales. They are usually conducted at courthouses and under the supervision of court-appointed individuals. 

Tax lien investing is possible in many states, but today we're discussing Florida. There's a reason why large investors are taking advantage of investing in the Sunshine State, and we are here to tell you why. In general, there are two types of tax lien investing: active or idle. Not all states allow you to choose between the two, but Florida happens to be one of them. This presents an advantage to dynamic investors. There is also the undeniable fact that Florida is home to several attractive housing markets where investors can get more bang for their buck.

Before we get into discussing the merits of active and idle investing as they apply to tax lien certificates, let's break them down to their very basics. If you're looking to collect interest on the capital you used to invest, we recommend the idle approach. On the other hand, active investing tends to focus on property acquisition, which means that you can acquire a home or a piece of land if you play your cards right. There's no right or wrong approach between the two, but it's essential to decide what best fits your investing goals.


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.

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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