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What Are Tax Lien Sales: Understanding Past-Due Property Taxes

What Are Tax Lien Sales: Understanding Past-Due Property Taxes

When local governments need to collect past-due taxes from property owners, they have a few ways of doing so, and one of them involves asking investors for help in this regard. The agencies that engage in these financial practices are often property assessment and revenue authorities at the county level. In most cases, these agencies would prefer not to deal with the burden of managing property taxes that have fallen behind payment schedule; however, the reality of revenue collection is that some cases can only be settled through the sale of tax lien certificates.

As with various other activities related to debt financing, property tax liens offer investment opportunities. In the United States, there is a market for deed investing; moreover, since tax liens are attached to properties, many real estate investors choose to enter this market. Real estate investors often participate in tax lien investing because they have a chance to become lien holders of properties, which means if the owner wants to get their property back, they must pay back the investor with interest accrual whenever applicable. 

Tax lien investors also stand a good chance of becoming property owners if they are willing to go through the foreclosure process. Most newcomers to the world of deed investing assume that they will be able to take ownership of free-and-clear properties by simply paying off outstanding taxes, but this is not exactly how it works. The first thing to know about tax lien investing is that sales of lien certificates are promulgated by state law. Not all U.S. jurisdictions conduct tax lien auctions. Below is a complete list of states that have tax lien sales:

  • Alabama
  • Arizona
  • Colorado
  • Florida
  • Illinois
  • Indiana
  • Iowa
  • Kentucky
  • Maryland
  • Mississippi
  • Missouri
  • Montana
  • Nebraska
  • Nevada
  • New Jersey
  • New York
  • Ohio
  • South Carolina
  • South Dakota
  • Vermont
  • West Virginia
  • Wyoming

The District of Columbia also holds sales of tax lien certificates. States that are not included in the list above either do not sell lien certificates to third parties or do not follow a statewide process. In Alaska, for example, boroughs have leeway in making rules applicable to the management of overdue property taxes. Prospective investors should not assume that all states follow the same procedures. Some states are more attractive to invest in than others. In Iowa, lien investors bid on a percentage interest, so this can be defined as a deed investing state.

The most common tax lien mechanism consists of bidding on a certificate and collecting payments from morose homeowners who do not want to lose their properties. Let's say you register for a tax lien certificate auction in Florida, where the interest rate on overdue property taxes is 18%. Bidding auctions may result in lower interest rates, but you will have to pay for the tax due amounts, penalties, and interest accrued to the auction day. If you win the auction and pay for the certificate, you have effectively bailed out the homeowner, who is now indebted to you. 

Tax certificates are legal instruments created by revenue collection agencies; you do not have to worry about their validity. Let's say you are the highest bidder in the auction of a 10% lien certificate imposed on a lovely Florida beach home. The owner has 24 months to adhere to the repayment schedule, and you have a good opportunity to capitalize on the 10% interest rate, which is a lot higher than you can usually get these days on Wall Street. If, for some reason, the homeowner does not adhere to the repayment schedule, you could be in a position to foreclose and ascertain ownership interest on the title. Still, the percentage will depend on the lien position you end up holding minus other liens that may be attached to the property.

Risks Associated With Tax Lien Investing

If you're interested in tax liens as an investment, you'll want to make sure you're completely educated on the process before diving in. This is the most salient risk of deed investing; to protect yourself, you should contact the National Tax Lien Association to see what they can tell you about the seminar provider. 

Investing in anything without being educated and knowing what you're doing is a great way to lose a fortune, which certainly extends to tax lien and deed investing. United Tax Liens, the developers of Marketplace Pro, offer guides for prospective tax lien investors who wish to explore their options in this market, and it goes over various risks you should be aware of. The basic principles of investing apply to tax lien certificates: You should only invest what you can reasonably afford to do away with, which means you should not tap into your emergency cash reserves. 

Understanding the kind of risks you may encounter is crucial because you can learn to spot them and avoid them; for example, when conducting due diligence on a property owner, you should proceed with caution if you find out she is a real estate attorney who specializes in foreclosure defense.

In this case, you may have to fight an uphill legal battle if the owner ends defaulting on repayment of the certificate.

How to Get Started With Tax Lien and Deed Investing

Here are a few key aspects of tax lien investing for you to think about:

* Know what your goal is: Do you want to own the properties you're bidding on, or do you want to collect the interest the lien will generate? You may not always be able to foreclose and acquire the property easily. 

* Understand what you want before committing to investing: A lot of valuable properties will have the owner redeem the property before the sale or will have the mortgage holder (if there is one) step in and outbid you to protect their interest in the property. The losses are not substantial in this case, but some investors tend to get burned out when this happens. 

If there is a mortgage on the home, and you manage to get your hands on the lien, some states will allow the mortgage holder to redeem the certificate. In this case, liens you have on a home with a mortgage is a really solid bet that you will get paid back, with interest, on the lien. Not all mortgage servicing firms are easy to deal with, but all of them are backed by investors who shudder at the thought of placing their first-position lienholder status at risk. 

Whatever your tax lien investing goal may be, you can always count on losing if the property does not hold intrinsic value. This means staying away from dilapidated homes in blighted neighborhoods with a high crime rate. For example, a small home in the middle of the New Mexico desert is not something you should be interested in holding a tax lien for. A house with multiple claims on title from heirs, grubby relatives, creditors, and gold diggers is probably not worth the hassle. Let's face it: There is always a reason why folks are just letting their properties go. Sometimes it's because they aren't worth anything, and even the county revenue collection agency may be aware of this but will decide to go through with the lien certificate auction.

* Do as much diligence as you can on properties before you bid: You have to understand this is a county, borough, township, or parish process. Every jurisdiction will have requirements, dates, deposits, fees, and other intricacies for their auctions. If you try to spread yourself too thin, you won't be successful.

You should always stick with what you know. Pick a few counties to focus on at first and build your experience. Try attending a few auctions to get your feet wet; doing so will not only make you familiar with the process but also give you a chance to meet the sheriff's deputies, court officers, and clerks who handle auctions. Some jurisdictions will have a fair amount of paperwork and red tape for you to deal with, and it is always better to go through this process when you have already made key acquaintances. 

* A Note on Tax Deeds: If you want to own the property right after the auction, then you'll want to look for states that sell tax deeds at auction. Deeds are different from tax lien certificates in the sense that the jurisdiction knows that no one will step forward to invest unless they can get on the title, which is why they offer deed interest opportunities.

Learn More About Tax Lien Investing With Marketplace Pro

Did you know Marketplace Pro is similar to a Multiple Listing Service (MLS) platform for tax lien properties? Contact us to schedule a demo today so that you can learn how the software can help you find hidden investing gems around the country.

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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