Investing in property tax deeds and liens is another way to grow your real estate portfolio.
You may have heard of acquiring properties through a tax deed sale or a tax foreclosure. Maybe you have heard about the great returns on tax liens. But how does it all work? It’s a complicated topic since each state and often each county within the state has their own set of rules, procedures and sale dates. But I’ll give you a high level overview of this real estate investment tool.
For both tax deed and lien sales, you are buying into a property that is delinquent on it's taxes.
For tax liens, the county has not foreclosed on the property yet, the owner is simply delinquent and the county wants to recoup their lost income. To incentivize investors they offer a generous interest rate, sometimes up to 18% or more, for you to pay the back taxes for the delinquent property. When the property owner pays back the county, the county cuts you a check for the amount you paid plus the agreed up on interest.
For tax deed sales, the owner is already so behind on their property taxes that the county has already foreclosed on the property. What you are bidding on at the auction is the actual deed to the property. The opening bid is typically the amount of back taxes and any late fees applied. This means you can get off market properties for pennies on the dollar free of any mortgage. The mortgage and other liens are extinguished as part of the foreclosure process.
5 STEPS TO INVESTING IN PROPERTY DEEDS AND LIENS
If you are ready to start investing in a tax foreclosed property here are my 5 steps to get started. Note these steps are more geared for a tax deed sale where you will be bidding to own the property but many of the same steps apply for liens.
Pick a location.
Note that the majority of the states offer either tax liens or tax deeds (some states offer a combination of the two). So the first step is deciding if you want to invest in either deeds or liens. This narrows down the available states to choose from. Once you have picked the state, you need to narrow down which county you are interested in. Each county will have different auction dates, rules, processes and ways of publishing their lists. I’ve found medium sized counties ~100-250k in population work best because they have a decent inventory to choose from and they are not as competitive as the major counties 500,000 and above. This should narrow down the list of counties considerably. Other factors to consider are the job market and stability of the area. What industries are supporting the area, are they stable or cyclical?
2. Do your research
With any tax foreclosed property, research is critical. There are a couple reasons for this, first is there is no warranty offered on this purchase. Unlike a traditional sale where a title company checks to make sure the title is clear and offers insurance against any findings, you are knowingly buying a property with a tarnished title. It’s up to you to understand what liens and judgments are in place and which will need to be cleared.
You are buying this property without seeing the inside. Ideally you can fly/drive to see the properties to verify their actual condition. Google maps is not good enough! If you can’t make it out to the property yourself, partner with a local agent to drive by and take some photos. You are allowed to see the exterior of the property to get a general feel from a public street (do not trespass!), but the inside will be a complete unknown. No home inspections here! While this may seem intimidating, just adjust your bid appropriately and have an exit strategy in place.
What kind of area are you buying in? Partner with a local agent to understand the neighborhood, crime rates, school quality. They will be able to give you priceless input and a good feel of what properties are worth and the feel for the local market.
Understand the bid process. Each county is different. Some are online some are in person. Do they accept cash, cashier's checks, or wire transfers? Some require deposits and that will determine you max bid. Read up on the county's website before you call with questions.
3. Pick a number & prepare to bid
Once you have done your due diligence, pick a max bid number and stick to it. It’s easy to get caught up in bidding wars and overpay. Also have at least 10 properties you have done your homework on. About half of them get paid off the day before the sale and are no longer available to bid on the day of. If you don’t win anything that day don’t worry, you may have picked a very competitive market (especially true if online). Keep looking and try again.
4. Take possession of property
Hurray you've won a property! Now it is time to start the work. Work with a law office that specializes in tax foreclosed properties and start the process of unclouding the title. This needs to be done before you can sell the property. Now that you own the property, you need to understand better what you have purchased. Proceed with caution as it may be occupied. Work to evict if necessary, and change the locks to prevent unwanted access while you rehab the property.
5. Rent or sell and repeat.
This is the point where you reap the fruits of your labor, there are lots of options depending on the price you paid and your desired exit strategy. Short term flip, rehab and rent, long term hold, it’s really up to you. Once you get one under your belt the next sales are less intimidating.Get ready for the next year’s sale or explore other counties. Keep on investing!
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