There are two categories for tax investors: long-term investors, and those interested in high-interest investments: and short-term investors looking to acquire the property.
What type of investor are you?
The kind of investor you are is determined by your resource constraints: the cash you set aside to invest, time available, ability to travel, etc. Try answering the following questions.
- How much money do you have currently dedicated to this strategy?
- Where is that money located? I.E. Checking, Savings, etc.
- Will you need access to that money in the next 12 months?
- How much time can you honestly devote each week to this strategy?
- Are you willing to travel regularly?
The answers to these questions will determine what investing profile you are.
Profile 1: Tax lien certificate investor. These investors try to generate high-interest returns through tax liens. You can invest through live or online auctions. Travel is unnecessary. This investor can use their self-directed IRA or 401k accounts to invest. Tax liens will not take too much time to invest; they are simple and do not require much research. Liens require you know the basics of each investment before bidding. You do not have to fly anywhere to evaluate tax liens since most redeem and tax liens are usually less expensive than tax deeds so that investors can get started with little capital.
A tax lien certificate is a lien placed on your property for not paying your taxes. Every time your property taxes come due, the state will issue what is known as a tax lien. If you pay your taxes on time, the lien is removed. If you don't pay your taxes or pay them on time, the town or county will auction off the tax lien certificate to investors. That investor will then pay the taxes to the property tax owner.
The county or state of the home's location usually conducts tax lien sales auctions. For a home to qualify, it must be considered tax-defaulted for a minimum period of time, depending on local laws. Instead of bidding on an amount for the home, the interested parties can bid on the interest rate. The investor who bids the lowest rate wins the auction and is issued the tax lien certificate.
After an investor wins a bid for a specific tax lien certificate, a lien is placed on the property. A certificate is issued to the investor detailing the outstanding taxes and penalties on the property. But it's worth noting that not all states and counties have tax liens. Some states, 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 typically ranges from one to three years. The certification process allows the investor to collect unpaid taxes plus the applicable prevailing rate of interest, ranging from 8 to more than 30 percent, depending on the jurisdiction.
Profile 2: Tax deed investor. Most tax deed investors will have to travel to evaluate properties and make purchases at the auction. Most tax deed states require the investor to attend the auction to make a purchase. Tax deeds can be purchased through self-directed IRA accounts, and typically require more money and time than tax liens. It is essential to evaluate each investment before pulling the trigger since you will own the property shortly, so they require more time.
A property tax is any tax paid on a piece of property. Taxes are paid by the owners of real estate—individuals or corporate entities—and are assessed by the municipal government in which the property is located. The taxes collected are used to fund various municipal programs, such as water and sewer improvements, law enforcement and fire service, education, road and highway construction, public servants, and other services.
Property tax rates vary by jurisdiction. When property taxes are left unpaid, the taxing authority may sell the property's deed or title—and therefore, the property—to recover the outstanding taxes. The taxing authority—usually a county government—must go through a series of legal steps to acquire a tax deed. These include notifying the property owner, applying for the tax deed, posting a notice at the property, and posting a public notice of sale. The exact steps that must be taken generally vary following local and municipal laws.
Profile 3: Over-the-counter tax lien investor means the investor is buying tax liens after the auction. This investor spends most of their time doing online research and finding deals. This investor is not interested in attending auctions to bid against other investors and is content with the opportunities left post-auction. This investor is also interested in the full promised interest rate since some auctions require investors to bid down the interest rate. An investment that starts at 18% may end up much lower if buying at the auction. When buying over-the-counter, the investor gets the full interest rate every time. Time and money constraints are similar to Profile 1.
Profile 4: Over-the-counter tax deed investor. This investor is constrained by similar things as Profile 2 and is interested in building lots, vacant land, raw land, etc. With the struggling economy and lack of investors, investors see more over-the-counter single-family homes, so those do not get excluded completely. Most new and advanced investors look for single-family homes, which is wise. Down the road, please do not pass up great deals because it lacks a white picket fence. For example: Building lots can be fantastic investments; it is possible to make significant profits. They usually require less capital but can be flipped easily. You could buy a lot between two homes with power and sewer set up for one of the property owners.
Tax liens are similar to tax deeds, but there are some subtle differences. While tax deeds transfer ownership of the property itself to a new party, tax liens are a legal claim against the property when the taxes aren't paid. Tax liens provide a relatively cheap investment for investors with a guaranteed return. Liens can cost anywhere from a few hundred to a few thousand dollars and pay simple interest that accrues monthly. Here's how the process works. A government body places a lien against a property if its owner defaults on their property taxes. These liens, which prevent owners from doing anything with the property, including refinancing or selling it, are sold off at auction rather than the property itself. Interested parties can invest in these tax liens by bidding for them. The return is based on a maximum rate of interest allowed by the municipality.
When a property owner defaults on their property, the municipality sends a notice advising them of the upcoming tax lien. If the owner doesn't bring the taxes up to date, the tax lien is then put up for auction. The lien is transferred to the highest bidder, who pays the outstanding tax amount to the municipality. To remove the lien, the property owner must pay the new lien owner the due amount plus interest.
Profile 5: Pre-sale tax deed investor, or short sale tax deed investors. This is illegal in some states, so check before you do it. These investors are aggressive with significant investment funds. They are short-term investors who look for quick returns. When the tax sale list releases a couple of weeks for the tax deed sale, the investor contacts property owners to offer another solution. If the property owner is interested, the investor evaluates the property and offers cash for the property owner, and the county for the delinquent property taxes and fees. If the market value and payment to the property owner and county is valid, go for it. This could be an excellent solution for popular or competitive tax deed counties.
Profile 6: Limited time and resources investor. For investors that lack time and money. This process starts small and slow. These investors look for tax liens to go to foreclosure and make a lot of money from a small investment. There are ways to do that, that takes a little more time and research.
Profile 7: Redemption deed investor. This investor has time, money, and travel ability. This investor has an interest in large returns and potential ownership but is willing to wait if needed. This investor must do a lot of due diligence to ensure good investments. This is a great strategy.
You do not need to focus on just one strategy or profile since you might fit into more than one and do more than one. You will need to adjust your time and money to accommodate. Think about these profiles concerning the answers you gave to the questions earlier. Where do you fit and what do you want to do. If you have constraints, raise money, save money, free up time, etc. to fit another profile.
After finding what profile you are and the investment you want to make, go through the reference materials for states on our website to see what states you can invest in and how they work. After you know which states, you can download the lists from the website.