How To Buy Tax Lien Homes

Investing in tax lien homes is a unique chance to get real estate at a low cost. This guide is for people who want to understand how to buy tax lien homes. Whether you're new to real estate or an experienced investor, we'll cover the basics of buying tax lien homes, including research, auctions and the responsibilities that follow.

What Does Investing In Tax Lien Properties Mean?

A tax lien is a legal claim against an individual’s property when they fail to pay their taxes. The lien is filed by the government and protects the government’s interest in all the individual’s property, including real estate, personal property and financial assets. Once a lien is placed on a home or property, that item is used as collateral for the loan in case the borrower can’t repay their debt. In that way, taking out a lien on a property helps guarantee the loan will be repaid.

Once the government places a tax lien on a home, it also creates a tax lien certificate, which can be bid upon by investors. If you win the auction and pay the property’s back taxes, you can either foreclose on the home or have the current homeowner pay back what they owe plus interest. The process generally looks like this:

1. Tax Lien Certificate Creation:

• Local governments impose property taxes to fund services.
• If a homeowner doesn't pay, the government creates a tax lien certificate.
• This certificate lists the owed tax, interest and penalties.
• Failure to pay can lead to government foreclosure on the property.

2. Auction Of Tax Lien Certificate:

• In 28 states, the government auctions tax lien certificates to private investors.
• Bidders compete to acquire the certificate at a tax lien auction.

3. Investor Bidding:

• Bids can be cash amounts or interest rates.
• Highest cash bid or lowest interest rate bid wins the certificate.

4. Investor Ownership:

• Winning bidder gains control of the tax lien certificate.
• This doesn't grant ownership of the property but the right to claim it through foreclosure or upon the homeowner's tax payment.

5. Payment By Investor:

• Winning bidder pays the owed taxes immediately.
• Homeowner has a limited time for redemption before potential foreclosure.

6. Repayment Or Foreclosure:

• Homeowner pays, and investor recovers the investment plus the bid interest.
• If homeowner doesn't pay, the investor can initiate foreclosure.
• Some states have a foreclosure deadline, and inaction can lead to losing the right to collect the investment.

Note: Foreclosure is rare as most homeowners settle their tax bills before it reaches that stage.

Should You Buy Tax Lien Homes? Pros And Cons

Investing in tax liens can come with certain benefits, but it’s important to acknowledge potential associated drawbacks. Learning more about the advantages and disadvantages of tax lien investment can assist you in determining its suitability for your financial goals. Just like the broader concept of real estate investing, investing in tax lien homes has it’s pros and cons. Let’s take a look at some possible pros and cons.

Reasons To Invest In Tax Lien Homes

• Affordability: Purchasing tax lien certificates doesn't require a large upfront investment. With just a few hundred dollars, you can acquire these certificates without the need for a substantial mortgage down payment.
• Diversification: You can spread your investments across various communities by purchasing multiple certificates. Given the modest investment, exploring tax lien certificates in different areas becomes possible.
• Predictable Returns: The set interest rate ensures a known return on your investment. For instance, in Florida, the interest rate ranges from 0% – 18%, eliminating uncertainty about your potential earnings. This fixed return might even exceed returns from many other current investment options.
• Passive Initial Investment: Getting into tax lien investing usually needs thorough research initially. However, you can opt for a more hands-off approach. By reaching out to a National Tax Lien Association professional or a fund manager, you can passively invest without attending auctions or dealing with complex details.

Potential Drawbacks To Buying A Tax Lien Home

• No Guarantee Of Redemption: The property owner might choose not to pay off the tax lien, leading to a potential foreclosure. While this can result in acquiring real estate at a significantly lower cost, the foreclosure process can be complicated and prolonged.
• Research And Preparation: Before diving into tax lien investing, extensive upfront research is necessary. Familiarize yourself with local properties and conduct thorough investigations into the specific property with a tax lien. Check for any additional liens that could affect your claim on the property.
• Time-Consuming Tasks: Beyond the initial research, owning a tax lien certificate involves ongoing responsibilities. Stay vigilant about deadlines, communicate with the property owner, and, if necessary, be prepared to navigate the foreclosure process, which demands time and expertise.
• Expiration Dates: Tax lien certificates come with expiration dates. Failing to receive payment or initiate foreclosure before a specified deadline results in losing your right to do so.
• Property Concerns: Assess the property's condition before bidding on a tax lien certificate. If you end up owning the property through foreclosure, the costs associated with rehabilitation or selling may impact your profits.
• Competition Challenges: Profitable tax liens can be challenging to find due to competition, especially from large institutions. Individual investors may need patience and resilience to navigate potential failed attempts before successfully investing in a tax lien certificate.

How To Purchase Tax Lien Homes: Helpful Tips

Whether you're an experienced investor or new to real estate, these helpful tips cover the essential steps, from the beginning to auctions and the responsibilities afterward. The goal is to give you the knowledge to make smart decisions in tax lien property investment.

Tip 1: Finding Tax Lien Homes

To find tax lien homes, you can start by researching local real estate markets. You can access tax-delinquent property lists or databases through local government websites or county tax collector departments. Begin by reaching out to the county tax collector's office in your target area. Ask about their procedures for obtaining property lists, whether through online platforms or in person. These resources often provide comprehensive property lien details, including addresses, overdue amounts and auction dates.

You can also get ahold of auction schedules for tax-delinquent properties. These outline when and where auctions take place and list the properties up for auction. And keep an eye on public notices published by the county or local newspapers. These notices often contain information about upcoming tax lien auctions, making them valuable investor sources.

Tip 2: Note The Redemption Period

The government places a “redemption period” on tax lien homes. This is the amount of time the homeowner has to pay back their owed taxes, and it can be as long as several years. The Internal Revenue Service states:

“The time period for a redemption after a foreclosure sale, with respect to either a non-judicial or judicial foreclosure, is 120 calendar days or the period allowable for redemption under State law, whichever is longer.

IRS redemptions can benefit both the government and the taxpayer. The goal of redemption is for the property to be resold for an amount substantial enough to pay off the foreclosing instrument and apply funds to the taxpayer's liability.”

Tip 3: Tax Lien Certificates Expire

Failing to either foreclose on the home or have your investment repaid before the certificate expires (usually after the redemption period ends) can mean surrendering any chance at profiting from the tax lien certificate investment. If your certificate expires, you lose the right to collect unpaid taxes, and your investment is gone. To keep your rights, you must buy new certificates. Otherwise, another investor could claim the property, raising your investment and potential return.

The Bottom Line: Buying Tax Lien Homes Is An Advanced Investment Strategy

While purchasing tax lien certificates is a valid real estate investment strategy, it is also an advanced one that requires knowledge and experience. Use the insights from this article and remember that success comes from careful research, smart decisions and understanding the aspects involved. Whether you're interested in affordability or potential profits, approach this opportunity with a clear understanding of responsibilities.

Are you ready to take the next step? Start your home buying journey today.