An alternative to a traditional real estate investment, tax lien certificates are a popular way to acquire real estate at a budget price. Such liens attach to a property when an owner fails to pay the real estate taxes due. When this occurs, the government auctions the responsibility for payment of the tax to the highest bidder; after the winner fulfills certain conditions, he owns the property.
Before you attempt any tax lien certificate investing, learn how to find tax lien sales in your area. Depending on county officials, they may announce tax liens online, in the paper or on a list at the courthouse. Delinquent non-tax-paying individuals (or companies) are subject to tax liens. Follow your area’s specific process to attempt to purchase a tax lien. Some states have tax sales annually. In many counties in Georgia, you must show up at the courthouse the first Tuesday of each month. A county official announces the tax liens up for auction; the winners are the highest bidders, who must pay that day in cash.
When attempting to purchase real estate tax liens, some points to consider include:
- Realize that it takes awhile before you can recognize profit from a tax lien certificate.
- Know that if the homeowner does not pay you back after a year, the title to the house passes to you.
- Know the downsides associated with tax liens.
Action Steps
The best contacts and resources to help you get it done
Realize that it takes awhile before you can recognize profit from tax lien certificates
In many states, the homeowner has up to a year to reimburse you for paying his delinquent taxes. In Cobb County, Georgia, "the redemption price is the bid amount, plus any taxes paid by the purchaser after the tax sale, plus any special assessments on the property, plus a 20% premium of the amount for the first year or fraction of a year which has elapsed since the date of sale, and a 10% premium for each additional year or fraction of a year thereafter, plus the sheriff and advertisement costs."
I recommend: Don’t bid on any tax liens unless you have expendable money that you don’t mind being tied up for a year or more. Read up on various state and municipal guidelines regarding tax liens. Here are some from
Florida,
Maryland and
Alabama.
Retain the title to the property if the taxpayer doesn't reimburse you
Why do people bid on real estate tax liens? The potential exists to acquire a house far below its value. You cannot modify or improve the house during the one-year grace period, nor can you rent it, renovate it or evict current tenants. After all, you don't own the house yet. If the homeowner does reimburse you for paying off his tax lien you, you still earn a great rate of return.
I recommend: Research potential rates of return you can achieve through the use of tax liens. (Rates may change from year to year). Here are a few examples of returns you can earn in
New York and
Georgia.
Know the downsides associated with real estate investment tax lien certificates
You must have a great deal of cash to be able to buy a tax lien, as they usually sell for far more than the outstanding tax debt. If a property has an outstanding $2,000 tax lien, and you purchase the tax lien for $30,000 on a house that is worth $100,000, you may be able to get the house for one-third of the price. Obviously, you have to have a lot of liquidity, and you have to be able to do without the $30,000 for a long time before you realize any return. In many states, it is also your responsibility to foreclose on and/or evict the current owners at the end of any grace period.
I recommend: Here’s how to
evict a tenant. If you’d rather have a professional company do it for you, here is a list of nationwide
tenant eviction services.
Tips & Tactics
Helpful advice for making the most of this Guide
- Never bid on a tax lien certificate without visiting the houses or land first. Municipalities release lists of properties before the auctions so you can check them out. Do your research before undertaking any tax lien certificate investing.
The official source of Real Estate Investment Tax Lien Certificates is
the Real Estate Investment Tax Lien Certificates page at Business.com
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