Tax Lien Investing: What It Is & How to Find Properties | BiggerPockets Blog

Real estate offers a variety of investment options. Tax lien investing is another way for real estate investors to make money, and while it’s a little different from the usual buying, selling, and selling, there are some similarities. Some tax lien investments convert into real estate ownership if the property owner fails to pay property taxes on time.

Finding homes with delinquent property taxes is more difficult than searching for a standard investment property. You have more hurdles to jump and factors to consider. Here are the steps to take and the pros and cons to consider.

What are tax liens?

A tax lien is a county legal claim against a property when the owner of the property does not pay the required tax bill. Tax lien property cannot be refinanced or sold without first satisfying the tax lien, because the tax lien is a legal claim.

Tax liens take precedence over any other liens on the property, including a mortgage. Property tax liens are involuntary, compared to a mortgage liens, which is optional because you choose a mortgage to buy a home. Back taxes can turn into a tax lien sale, giving investors the option to buy back taxes and earn a flat rate of interest.

Tax lien vs tax lien certificate

A tax lien certificate is a legal document from the county that shows the amount of local property taxes due and any penalties. Investors receive a tax lien certificate when they are the winning bidder for the local government in a tax lien auction.

Real estate investors can purchase tax lien certificates to pay off tax liens, and the certificate entitles the investor to pay back from the property owner by the expiration date.

Tax lien certificates allow the investor to collect the full amount owed from the property owner in addition to the interest and fees mentioned. If the owner fails to pay, they can start foreclosure and own the home.

How does tax lien investing work?

To invest in tax liens, you should find properties that have unpaid property taxes. This is a matter of public record but may require some work.

When the county places a lien on the property, it issues a tax lien certificate, which individual investors can purchase, aka invest in. You are essentially buying the property owner’s tax debt.

Tax lien auctions can be cash-based, awarding a certificate to the highest bidder, or interest rate-based, awarding tax lien certificates to the bidder willing to accept the lowest interest rate. In either case, the investor pays the tax debt, and the homeowner has a payback period to pay off the debt.

How to find real estate tax delinquent

Locating properties with delinquent property taxes is more difficult than finding income-producing properties. But once you understand the process, it becomes easier for private investors to find properties that are tax delinquent to turn a profit.

Remember that you will not always obtain property ownership with tax lien certificates. If you purchase the certificate and the landlord pays the amount due before the expiration date, they satisfy the lien and keep the property, and you walk away with a profit.

However, if the homeowner fails to pay the amount owed, you may have the right to start a foreclosure and take possession of the property. For this reason, consider following these steps.

1. Look for property listings that are tax delinquent

Lists of tax delinquent property are public records but still require some digging. Many counties post the information on their website, making it easy to find. You’ll just need time to get rid of the listings on the county’s website.

Other interrupts archive information, which takes a little more work, including browsing the actual files yourself. If this is the case in the county you’re interested in, consider hiring a listing provider who can do the research for you to help you make the most of your time.

2. Find owner information

You can narrow down your property owner information once you have access to tax lien property listings. The listing should contain the property title and owner information. Always check that the owner’s mailing address is correct to make sure it remains the same. You can usually search tax records to verify this.

You will need the owner’s information to contact them to determine their willingness to sell the property and/or pay their tax lien. They probably won’t be happy to hear about their unpaid tax bill, so get ready for tough conversations.

However, you may come across eager sellers who want to sell their homes for the right price and extricate themselves from unpaid taxes.

3. Assessment of the area

Before investing in tax-deferred properties, check out the area. Outline your plans with the property, such as renting it out or flipping it and selling it if the landlord doesn’t pay their taxes. This will help determine which tax lien certificates are the best buy.

For example, if you don’t see the property as making you a profit, investing in a tax lien certificate may not be worth it because owning the property may be more of a burden than investing. This often occurs in areas where property values ​​are declining or rental demand is low. Some tax lien investors don’t want to be upset about real estate ownership. They are simply interested in the proceeds from unpaid taxes.

To evaluate a property and an area, consider the area’s average rates, rental income, cap rate, and cash return. Ensure that the money you will invest in the property and property taxes will create an opportunity for a solid return.

If you are adding the property to your real estate portfolio, make sure it is located in an area where rental homes are in high demand and there is potential for profit when the home is sold.

4. Find other perks

It is possible that if the property has tax liens, it may have other liens as well. If you take ownership of the property, you will be responsible for all liens, which can result in losing money on the purchase.

You can determine if a property has liens by visiting the county recorder’s website. Most records are available online for free, or you can visit the county recorder’s office in person.

If there are other liens besides the owner’s existing mortgage, reconsider buying because the liens travel with the property, not the owner. If you have to foreclose on the mortgage, you become liable for the other liens that exist, which reduces your earnings.

5. Contacting real estate owners

If you are looking for motivated realtors with unpaid taxes, use our list of tax lien properties to send them letters. Write a short, sweet, and to the point letter and tell them what you have to offer. The owners are probably already in distress because they could lose their homes, so they only want the facts when evaluating offers.

Make sure your letter states your intent in the first two lines, oozes empathy, and provides clear contact information, including your name, phone number, and email address.

If your landlord wants to know more about your offer, they’ll want easy access to your contact information. They may be ready to make a spontaneous and quick decision or they may need a lot of information from you to make the right decision.

Although your message should be nice and direct, it should also create a sense of urgency. Let property owners know this offer is for a limited time. Since they risk losing their home, they may jump into a rush if they don’t have other options ready.

6. Eliminate unmotivated landlords

Not all delinquent landlords will be in a rush to sell their homes. They may explore other options or hope that something will come along that will allow them to keep their home.

When you contact realtors on the phone, ask questions about the value of the home and the price they are asking. If the asking price is close to estimated valuethey are not motivated and will likely have other options to meet their tax liens, and you would be better off investing in a tax lien certificate than trying to buy the home.

7. Preparing for the auction

You can also find tax lien property at public auctions. If the property is foreclosed on by the county, they may sell it at auction, but be prepared to pay property taxes as well.

If you choose to go the auction route, make sure you are prepared to bid. Unlike a normal sale, you must act quickly, and often put a significant amount of cash into accepting your offer.

Before attending the auction, set your budget to ensure that you don’t bid for more than you can handle. Also, be prepared to get the remaining money within the time limits of the contract. If you need to finance the property, complete as much of the mortgage process as possible.

Before attending the auction, set the rules. Some counties allow individual investors to inspect the property prior to auction, or may pay an inspector or contractor to appraise the property.

Pros of Buying Lien Tax Properties

Purchasing tax lien certificates or tax lien ownership has many benefits.

Higher return on investment

Many tax lien properties have a much higher return on investment (ROI) than traditional investment properties.

If you purchase a tax lien certificate, you will receive penalties and interest on your investment. You will know the exact amount you will earn in the auction and can determine if it is a good investment.

But if you purchase a home from a homeowner in distress, you may be able to purchase the home for a much lower price, and earn home equity faster.

Low competition

Most real estate investors focus on fix and flip or rental properties. Buying tax lien property is more difficult, especially if you need mortgage financing, so it reduces the amount of competition.

Build a diversified portfolio

You can build a diversified portfolio with tax lien certificates and tax-free properties that you buy and rent. Diversifying your portfolio reduces the risk of total loss and increases the rate of return.

Cons of Buying Tax Lien Properties

Like any investment, there are downsides to buying property tax lien certificates, including the following.

Owners don’t always pay their tax lien

You’d think homeowners would be eager to pay the outstanding amount quickly, but not all homeowners can have coverage Delayed property taxes. This could force you to go through the foreclosure process, which is a long and complicated process and leave you with property you may not have wanted to own.

Payment may take some time

Each county has different lengths for its tax lien certificates, but you can sometimes wait up to three years for the funds. While you’ll earn a rate of return on tax lien investments, you’re tying up your money for the long haul.

The property may be in poor condition

If you end up being foreclosed on a mortgage due to unpaid property taxes but haven’t done your due diligence to appraise the property, you may find that it’s in a much worse situation than you thought. There is no guarantee that you will make money on your investment, especially if you have to spend a lot of money to fix up the property before you rent it out or sell it.

Tax lien investing: final thoughts

Buying tax liens can be a great way for experienced investors to diversify their investment portfolios. It can take some getting used to because there is no guarantee that you will take possession of the property, and you must invest the capital for up to three years before you see a return, either through taxes paid or taking ownership of the property.

If you do enough research and get involved in tax lien investing in areas where real estate has the potential to help you turn a profit, it can be a great investment. Whether you are taking possession of the property or paying back taxes, you will earn a decent return on your investment and diversify your portfolio.

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Note by BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.