Investing in Tax Liens for Substantial Returns

by Darwin on September 30, 2012

What if you could turn $1,000 into a $100,000 home?

Controversial as it might be, thousands of real estate investors are doing this every day of the week. It’s become a common topic in the media, which frequently runs stories like this one from CNN that profiles one person who lost her $85,000 home to an investor who paid only $836.39 for a lien on the property.

Investing in Tax Liens

State and local governments have outsourced the tax collection business. When taxes go unpaid, a lien is put on a home, and that lien is then sold to investors, who can purchase the lien from local officials.

Buying tax liens is big business. Here’s a quick rundown of how tax lien investing works:

1. A homeowner falls behind on his or her obligations to a local government. This can be anything from unpaid sewer bills to more commonly unpaid property taxes.

2. The lien is sold by the county to an investor.

3. The homeowner is now obligated to repay the investor for the cost of the lien plus interest and penalty charges.

4. If the homeowner does not repay the lien plus significant interest, the investor can use the legal system to foreclose on the property.

The process is neither pretty nor easy, but there are only two possible outcomes from owning a lien. Either an investor receives their investment back plus a hefty amount of interest (up to 25% per year), or the investor walks away with real estate acquired for pennies on the dollar.

The Business of Tax Lien Investing

Skilled tax lien investors make out like bandits in either case, generating a non-market correlated return with interest rates that credit card companies would be proud of. Alternatively, an investor might end up with a $100,000 home for a tiny initial investment that can then be sold or rented for long-term income – a true home run.

Here are few things to know about tax lien investing:

    1. There has never been a better time for tax liens. Where there is blood in the streets, there is opportunity. Given the state of the economy, cash poor municipalities are eager to receive their tax revenues, and homeowners are less likely to pay their bills. This makes for a booming business with plenty of opportunities.
    2. Not all liens have value. There are a lot of reasons that taxes go unpaid, and it is often because the property has no value. My area shows many vacant lots in a very old and “war torn” part of town. However, there are several liens on developed lots in areas where homes sell for $200,000 or more – a high price in the Midwest.
    3. Due diligence is a necessity. Real estate is complicated; you’ll need to be aware of the property and its condition, any potential environmental or zoning issues, and have a strong desire to do boots on the ground investigations of individual properties before buying a lien. Blindly buying liens is a surefire way to own worthless properties – properties that will cost YOU money in property taxes each year. Having a friend who is a local real estate agent would help tremendously.
    4. Tax lien investing is work. Local governments require perfect adherence to the process of collecting on a lien. Some counties require the buyer to send a collection notice at certain points in the process, publish public notices in local publications, or file foreclosure paperwork on a particular date in the future. This is not a business for the unorganized person.
    5. The big wins make it worth it. A 20% return on a $500 lien won’t make you rich, but collecting homes worth $100,000 or more for a $500 investment will. A seasoned flipper and lien investor I know reports that he tends to get repaid on 85-90% of his lien investments. The remaining homes are foreclosed upon and resold. Resold homes make it the business worth it; the interest on repaid liens is just a bonus for waiting to see whether or not they will have another home to sell.
    6. Lien investing is only partially passive. Auctions and sales of tax liens typically happen once or twice per year consistent with the due dates for taxes in your local municipality. Said another way, the “action” is crammed into a very short period. The remaining time is time spent waiting on payment or for foreclosure.

Getting Started in Tax Liens

Although better known as a get rich quick scheme (what’s up with get rich quick salesmen and real estate, anyway?) it is a very legitimate business.

I have always had an interest in tax liens after hearing about them. One day I dropped in on the county court and tax collection office. Fifteen minutes later I had a wealth of information – tax lien listings, sale dates, and an explanation of the process. The information – unlike what you’d receive from a “seminar” – is 100% free, as it is public. I assume virtually any county would be able to provide you with the information necessary, as it is in the municipality’s interest to sell as many liens as they can at the highest price possible,

Next year I think I’ll have to attend my first lien sale. I’ll try it out with $500 to see what I can buy, and maybe score a home at a discount. Why not?

 

Would you ever buy a tax lien?

{ 1 comment… read it below or add one }

Adam Hathaway October 1, 2012 at 9:49 pm

Tax liens are something I have been thinking about getting into for a few years now. What you are saying here is something that I have been hearing that is kind of keeping me away a bit. It is a lot of initial work for something that may not pan out anyway. I would be interested to hear your experience with the $500 initial investment. The reason being, I want to avoid looking at properties for 6 months and walking into an sale or auction only to not get any of the properties I have done all this work on.

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