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Buying Your First Tax Lien

By Edited Apr 1, 2014 4 3

It’s no mystery that I love real estate.  While in college, I was hungry to get started investing but didn't have enough capital to purchase a property.  Then in my Engineering Economics class, my professor mentioned that he was a landlord and also a tax lien investor.  I immediately stormed him during his office hours to extract all the information I could from him.  This was in the Fall of 2004, and I’ve been investing in tax liens ever since.  In my opinion, Tax Liens are an excellent addition to any investment portfolio and a great way to get started investing in real estate.  This article will spell out the basics you’ll need to buy your first Tax Lien Certificate.     

Tax Lien
  

What the heck is a tax lien?

When a property owner is unable to pay his/her taxes, the county still needs funds to pay law enforcement, firefighters, and other services.  Instead of immediately foreclosing on the property to obtain these funds, the county offers Tax Lien Certificates for sale to investors.  An investor will pay the county the amount in back taxes plus a small certificate fee (Typically $10).   This investment is backed by the property itself.  If the homeowner cannot pay, the lienholder may foreclose on the property and take possession of it (this is very rare, typically the homeowner will pay the lien off plus interest or the bank will pay in order to not lose their investment). These funds are used to pay for the above services, while the homeowner gets his/her finances in order.  The lienholder will earn interest on his money, for example 2% per month or 24% per year. 

Here’s an example

John has a single family home with a tax payment of $3,000 per year.  Unfortunately, John loses his job and cannot pay his taxes.  The county John lives in, Smith County, sells a tax certificate to an investor, Chris, for $3,000 + $10 filing fee or $3,010.   After 1 year, John has a new job and pays the lien in the amount of $3000 X 1.24% or $3720 to Smith County.   Smith County sends Chris a check in the amount of $3720.  Chris earns just under 24% on his money for the year (not bad).  The county was able to provide its citizens with the services they expect.  John was able to stay in his home.   This is a WIN WIN WIN.

24% sounds awesome, is that the standard?

The interest rates vary from state to state, so you’ll need to check with the state you’re considering to make sure it makes sense for you.  Iowa, for example, is 2% per month, or 24% per year.  Other states are far less favorable.  Do your research

Sounds too good to be true, what are the risks?

All investments carry risks, and although tax liens are generally considered low risk, they are no exception.  Here are some things that can go wrong

  • You can buy a lien on a vacant lot that is polluted with nuclear waste.  Upon paying the fees and subsequent payments, you eventually foreclose and take ownership of a property that is worthless as it is polluted and unbuildable
  • You forget to follow up on your liens and instead of starting the foreclosure process, you miss your window and lose your money
  • You travel to a far away state, and because of high competition, you are only able to buy a few liens.  The interest earned on these liens is less than the cost of your flight, hotel, food, etc
  • Your money can be tied up in these liens for over 3 years (not liquid)

Understood, I need to do some research.  Now how do I buy a tax lien? 

The first step is to decide if your state sells tax lien certificates  (not all states do).  If you are in a “Lien State”, contact the assessor’s office to find the details about when and where the sale is.  Some counties are lowering their costs by making the tax sale online.   You’ll need to register either way.  Typically, counties will publish information on the parcels available in a local newspaper a few weeks before the sale.  You may also be able to purchase a more easily searchable list (its not unusual to have several thousand parcels available) from the county for around $100.  Do you research, show up, either in person or online and start investing!

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Comments

Feb 25, 2014 2:53pm
jny986
Thanks for the advise. It would have been good if you could have also talked about what is involved with the foreclosure process.
Mar 23, 2014 11:12am
slimjim270
@EnterprisingInvestor -

Interesting article on investing in Tax Liens.

Curious, what happens if the bank (mortgage company) decides to foreclose on a property. Who gets their money first? The mortgage company or the tax lien holder?

The real estate market is a diverse market. This highlights you don't have to purchase a property to make money in the real estate market.

Thanks,

-Jim
Mar 23, 2014 2:41pm
EnterprisingInvestor
Hi Jim-

Thanks for reading. As a tax lien holder, you're first in line for payment AHEAD of the mortgage company. You get payment first

Chris
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