Buying your first tax lien certificate can be a very intimidating subject to tackle. That's why we are here to help concisely explain the ins and outs to you.
What is a Tax Lien Certificate?
A tax lien certificate is a certificate of claim against a property with a lien on it due to unpaid property taxes. Tax lien certificates are typically sold to investors through an auction process.
When property taxes are due, the municipality will issue a tax lien. When you pay your taxes in proper time, the lien is removed. If you don't pay your taxes, the town or county you reside in will auction off the tax lien certificate to investors. That investor will then have to pay the taxes on behalf of the property tax owner.
A property's location will usually dictate tax lien sales auctions. For a property to meet the criteria, it must be considered tax-defaulted for a minimum period. Instead of bidding on an amount, parties who are interested in the property will then bid. The lowest rate will win the auction and will then be awarded the tax lien certificate.
Once You've Bought a Tax Lien Certificate
After an investor receives a winning bid for a specific tax lien certificate, a lien is placed on the property. A certificate is issued to the investor that will detail any remaining taxes or penalties on the property. It is important to note there are only certain states that offer tax lien certificates. Some states, like California, only perform tax sales on a defaulted property, resulting in the winning bidder becoming the property's legal owner in question. The term of tax lien certificates will typically range from one to three years, roughly. The certification enables the investor to collect unpaid taxes with the applicable interest rate, which can vary from 8 to more than 30 percent, depending on the jurisdiction.
States that Sell Tax Liens
If you are interested in tax liens, the first thing to note is that only certain states sell them. 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
Yearly, counties sell more than 6 billion in new tax liens: whether it is a single-family home, a business, or vacant land, every property owner in the U.S. has to pay property taxes to the county.
Property owners sometimes fail to pay property taxes, so the county places a lien on the property and sells a tax lien certificate for the same amount owed to them by the property owner. This way, the county receives the needed funds to function. If the owner pays their delinquent property taxes plus the penalty, the county sends that money directly to the tax lien owner.
In this program, we have taught countless students how to participate in the primary market, purchasing tax lien certificates from the county through their live auctions. Buying on the primary market is still viable, but a new opportunity has surfaced through the Tax Lien Buyers Club with our direct buy certificates.
Banks, broad companies, hedge funds, and large institutional investors invest a great deal of money yearly in tax lien certificates. They follow the model we teach our students but invest hundreds of millions annually.
Mainly, these large investors buy tax lien certificates for the interest earned the first 2 years. Most of their tax liens get paid off during that 2 years. Most institutional investors have no interest in taking ownership of the properties. Can you imagine trying to foreclose and own thousands of properties every year? It is too much for them to handle, so they focus on the interest earned by tax liens. This is where we come in. We negotiate and purchase the tax lien certificates that remain through our relationships with these large investors and brokers. As the new owner, we can continue to hold them, collect interest, receive redemption checks, or start the foreclosure process.
A few years ago, we began letting our students purchase tax lien certificates from our private inventory. The students would then collect interest or start the foreclosure process as the new tax lien holder. What began as a few exceptions here and there became a large marketplace where students could only build entire investment portfolios from our inventory. While we still teach our students how to participate in the primary market, our direct buy certificates have set off as an opportunity for investors to get into foreclosure-ready tax lien investments.
How They Work
There are three parties involved in every tax lien transaction: Property owner, county, and investor.
When the property owner does not pay the property taxes, the county sells a tax lien certificate to an investor. We see more and more large institutional investors, hedge funds, large corporations, and banks buy as many tax liens as possible. This is primarily true in large markets such as Miami or Chicago.
Some states where counties do not hold a public auction, sell their entire portfolio using an RFP (request for proposal) to sell the whole portfolio to one investor. Counties like this model since they can sell everything in one deal, making it easier for them.
Large investors can sometimes bid to buy the entire portfolio in one swoop. They like it since they want to buy as many as possible and obtain more certificates, essentially doing the same work it would take to buy one tax lien certificate. These investors usually hold their lien certificate for only 2 years and then liquidate all remaining certificates.
Due to our well-established relationships with large investors, we purchase as many matured tax liens as we can. These are certificates that continually make interest and usually are past the redemption period. This means that most of our certificates are ready to foreclose. We can hold the certificates to earn more interest or start the foreclosure process to take ownership of the property, instead of waiting years for the redemption period to expire.
A few years ago, we started allowing some of our students to purchase tax liens from our private inventory and started allowing more students until it became one of our students' favorite ways to buy tax lien certificates.
Purchasing Direct-Buy Certificates
When clients buy tax lien certificates directly from us, we must speak to one of our portfolio management team members. These portfolio managers interview the client for how much money they want to spend on tax liens, whether the client wants property or interest, how much experience the investor has with real estate, etc.
The portfolio manager will dive into our current inventory to find certificates they believe will fit the client's criteria. Then they send the certificates along with a simple agreement to the client and call to discuss the portfolio, answer questions, and replace certificates when necessary. If the client approves, the client signs the contract and arranges payment with the portfolio manager.
When the agreement is signed, and payment is received, our administration team will start the assignment process, filling out transfer documents, communicating with the county and servicer, and possibly requesting additional documents from the client, depending on what the county requires. Our administration team will do most of the work, but the client must review and sign some of the documents.
From that point on, the client is assigned all interest in the tax lien certificates. This means all redemption checks go to the new certificate holder, and that the client can take ownership of the property they want. Our clients have loved purchasing through us since they can avoid the county, auctions, competition, and work with the counties. They love the help through the process to answer questions, complete agreements, interact with the county and servicer, and all the hard work. It is a simple way to foreclose ready tax lien certificates.
Purchasing Direct-Buy Certificates
Buying a tax lien certificate can sometimes prove to be a lucrative investment. Some of the certificates have a low price point so that you can buy some of them for a few hundred dollars. If you compare that to a standard investment like a mutual fund, it will often come with minimum investment requirements. Because of this, you have more leeway in diversifying your cash flow so that you can purchase more than one certificate at a cheap price. Finally, the rate of return is pretty consistent, so you're not going to have to worry about the market's volatility.
Some drawbacks of tax lien certificates include the investor's responsibilities to pay for the tax lien certificate in full within a concise time frame, usually 72 hours.
Tax lien certificate investors also have to undergo significant research to ensure that the underlying properties have an accurate assessed value.
