Today we are going to explore how to make good money in a scary economy, by learning how to buy a tax lien certificate. First I’m going to explain what tax liens are and how they work. Next, I’m going to explain why tax lien certificates are better than many other types of investments, and why now might be the best time ever to get involved in investing in them.
Lastly, I’m going to give you a rough outline that will give you a much better chance at successfully and profitably getting involved in tax lien certificates. At the same time, I’m going to show you actually how to buy a tax lien certificate, or at least cover the basics and then tell you how and where you can learn more. Now, if you are interested in making double-digit interest rates of profit on your investment, in an economy that’s not offering much in the way of profitable opportunities, then keep reading.
Let’s start at the beginning. Basically, a tax lien certificate is a local government-issued investment that allows investors to buy the debt that homeowners owe on their property. Tax lien certificates have a long history in this country, going all the way back to the founding of the nation. They are what I call a win-win investment because they allow investors to profit while enabling local and county governments to continue functioning. This is because every local government in the country depends upon the local property taxes for revenue, which they in turn use to run not only the local government but all of the services that are often taken for granted.
You see, no income from property taxes means no money for schools. It also means no money for firefighters, garbage collectors, emergency services, and all of the other vital services that hold neighborhoods together. So when someone doesn’t pay their property taxes, it creates a deficit in the county’s budget that needs to be made up for.
What the local governments generally do is hold an auction. Sometimes it’s yearly, sometimes it’s monthly, sometimes it’s at irregular intervals, and sometimes it is in person. More and more counties are switching to online auctions. This all depends on where we are looking. How to buy a tax lien certificate depends almost entirely upon where you buy it.
Once the auction is held, and the certificates are sold, the money that the investors buy them with goes back into the local government’s budgets, and they can continue functioning. The investor generally gets an impressive return on their investment, and everybody wins. The terms of the certificate and the rate of return depend on a number of factors, such as which state, which county, and the type of auction, but double-digit rates of return are not uncommon.
Now, let’s look at some of the ways how to buy a tax lien certificate. Before we go there, let’s look at why I feel so strongly that this a great investment, especially when compared to other investments.
Stocks vary widely, and sometimes wildly due to market pressures, company performance, even investor confidence. Tax lien certificates offer a guaranteed rate of return regardless of what the market is doing. Bonds offer a safe investment, if you feel little to no profit is worth the safety. Here is a basic breakdown and comparison of how tax lien certificates stack up against some other investment options.
Next, let’s look at how attractive tax liens start looking when you compare tax lien certificates vs. CDs, for example. The results are compelling. CDs are averaging, at the time of this writing, around 1% or less, depending on the length of time involved. See here or here.
That means that CDs don’t even keep up with inflation. You would actually be losing value on your money in many cases, hardly my definition of a good investment. So if tax lien certificates regularly return over 15% interest, we can all agree, there is no comparison.
In our first blog, we answered the question, “Are tax lien certificates a good investment?” With a resounding, “Yes, and often they are great investments!” Let’s get to what everybody wants to know, how to buy a tax lien certificate, and make some serious money.
When answering that question, as with many good things, there is no easy answer. That answer depends because it varies from state to state, and from county to county.
How to buy a tax lien certificate: Where they are offered
First of all, we would have to determine if the state that you are interested in sells them or not. About half the states do. So you are probably are asking, “What are the best states to buy a tax lien certificate?” Well, answering the first question, here is a list of tax lien certificate states.
Here is the list of states that offer tax lien certificates of some type: Alabama, Arizona, Colorado, Florida, Illinois, Indiana, Iowa, Kentucky, Maryland, Mississippi, Missouri, Montana, Nebraska, New Jersey, North Dakota, Ohio, Oklahoma, South Carolina, South Dakota, Vermont, West Virginia, and Wyoming. The District of Columbia is also a tax lien jurisdiction.
Just like the “best of” lists about everything else, it depends on whom you ask and how you define “best.” Even if we were to define best by the highest percentage of interest offered, that wouldn’t be the be-all-end-all. That’s because there are other factors involved.
Some of the factors involved are how large is the state, how many properties are behind in taxes, and how competitive are the sales? So for example, tax lien certificates Florida are available in abundance, and there is a variety of property types, and accordingly, the market is competitive.
That competitive nature means that while there are lots of opportunities, tax lien investing in Florida requires some serious study and preparation.
Before we even go into the factors that should be considered when bidding on an individual property, let’s start with asking where the auctions are held, and how to buy a tax lien certificate when attending them.
How to buy a tax lien certificate: Where can you buy tax liens?
So you want to know how to buy a tax lien certificate? First things first right? Tax liens are offered at auctions, either in person or online at the county level. Even if the county has been offering tax liens at auctions in person, you are going to have to check again. Right now, because of the C-19 virus, counties that had auctions in person have either suspended their auctions, or they have gone to online platforms.
So check with the county that you are interested in, and find out what their tax lien status is currently. I personally believe that even after C-19 is no longer an issue, most counties are eventually going to end up holding auctions online.
Before you can even bid at an auction, there is a whole checklist of things required to do. So anyone interested in actually buying tax lien certificates absolutely needs to do their research and find somewhere to get fully educated and familiarized with all the details of the individual county they are interested in.
How to buy a tax lien certificate, nuts, and bolts…?
Okay, so if you want to know how to buy a tax lien certificate, you may wonder where is the best state to buy them. Though it would be easy to think that the best way to decide is with a list of tax lien interest rates state by state, let me tell you here and now, that is not necessarily the best way to decide. Here is my reasoning. Let’s look at tax lien investing in Florida. In Florida, the return of interest offered on tax liens is 18%. But…
In many auctions, bidders compete for who is willing to take less of a percentage of interest. So even though the bids start at 18%, one never knows what interest rate they will be bought at.
The way they would arrive at a lesser interest rate depends upon the actual auction and the competitiveness of the auction. Do you want to know how to buy a tax lien certificate? Well, that depends not only on the state and county that you are in but also on the individual auction that you attend.
How to buy a tax lien certificate: Where you are trying to buy it?
So while in every state the rate of return offered varies, one never knows what the actual percentage rate will be. In most cases, at whatever point in the bidding process the buyer purchases the certificate, their interest rate on the tax lien certificate is locked in. While that percentage may vary, it is guaranteed.
Sometimes the auctions are bid up, sometimes they are bid down. Sometimes there is a scenario where the bidder gets a percentage of the value of the home. Lastly, in places like Texas, tax liens are bid up, then if the lien is not paid off (redeemed), the lien holder can end up as a deed holder with a chance at being the property owner. So can you buy a property by paying back taxes? In some places, yes.
Tax lien investing course: my recommendations…
Before we finish up our exploration of how to buy tax lien certificates, let me share something very valuable with you. Word is getting out. Tax liens are becoming known as one of the best investment opportunities in the country. With that, tons of information is getting passed around, some good, some not so much. Prior to deciding that you know how to buy a tax lien certificate, and go out and try to do so, I would like to offer you some friendly advice.
Tax liens are investments. Like all investments, they involve some degree of risk. This implies that while the opportunity for profits is there, and is alluring, you have to be careful. How to buy a tax lien certificate is no different from buying any other investment in at least one major aspect. The same basic criteria and techniques that would apply for any investments apply here. You see, no one can give you a quick and easy way to make tons of money doing anything. If that’s what they are promising, you know their credibility is shot.
What I would like to briefly cover is something often referred to as price point. This factor has a huge influence on how to buy a tax lien certificate because you need to have in mind how much you have to spend, but more importantly, you need to know the point where the certificate ceases to be a good deal. In this case, it means that you need to know how much interest you need to make in order to make it worth your time.
In a reverse-bidding situation, bidders are competing against each other for who is willing to take less interest. You need to know before you go into the auction, what is the minimum rate of interest you need to make. This is to protect yourself from the very real phenomenon that can occur in an auction situation, when bidders get excited and continue to chase the thing being sold, even to the point where they buy it, and it’s a terrible deal.
Remember, everyone’s financial situation is different. This means another bidder may just need to have some of their assets tied up, whether it be for tax purposes or otherwise, and they might not need to make as much profit as you do. So with this in mind, please remember even before you attend an auction, to have a clear plan of how much you will invest, and what your individual needs are. Make sure you don’t pass your price point, no matter how excited you are. You may encounter many different scenarios in different types of auctions.
If you wanted a tax lien certificate that yielded a specific interest rate, for a specific time, and then you ended up with a percentage of a property. Then you find that the property would have to be foreclosed and sold before you got your money back, you might be very unpleasantly surprised.
In another case, if at the time you bought the certificate, you assumed you would get your principal and interest at a specific time, but the property owner filed bankruptcy, this could be another unpleasant surprise. That’s because bankruptcy can delay the repayment of all encumbrances, including the tax lien certificate.
How to buy a tax lien certificate is not easily answered with a simple formulaic answer. Investors’ needs are too diverse, and there are too many scenarios for even a series of books and videos to adequately cover all of them. What I strongly suggest to anyone who wants to get involved in this exciting investment opportunity is to find a reliable source of information and to study, study, and study some more before jumping in. I can think of no better source of information than the team at Ted Thomas.
I have tried to illustrate how there is a lot to learn about each of these scenarios. There is a whole vocabulary to learn as well. If you want to learn how to buy a tax lien certificate, you must know the difference between buyer’s bid/bonus bids, premium or overbidding, reverse bidding (like we read about in Florida), and a portion of the property bids. It’s beyond the scope of this blog for me to even try to go into each one of these terms and scenarios.
For more in-depth information about how to buy a tax lien certificate, there is only one place to go. In my opinion, the people at Ted Thomas.com are by far the best source of information out there to prepare you how to buy a tax lien certificate.
I recently had a friend tell me they had seen an ad for a 16% tax lien certificate and asked me if he could buy one in Florida where he lives. I answered that the answer was yes and no. I explained that in many states the rate of return offered could even be higher, depending on several factors.
As previously stated, if he was buying a tax lien certificate in Florida, and the bidding for property started at 18% and went down to 16%, and that bid won, then he would end up with a guaranteed rate of return of 16%. So even though I’m not aware of a specific tax lien advertised as what he had mentioned, he would effectively end up with exactly that.
I also mentioned how in order to be able to purchase such a tax lien, he had better do some serious study, as it was not a case of drive up to the auction and write a check. Again, each county has specific rules and prerequisites. Some are annual, and some are monthly. Taking advantage of the fantastic opportunities that tax liens present, is dependent upon investors doing their research, knowing the rules, and following them.
Hopefully, I’ve answered some basic questions about the rather complex question, “How to buy a tax lien certificate?” If the prospect of making 15%, 20%, or even more in interest has you ready to take action, then check it out.
Once again, I recommend Ted Thomas.com, as it’s where I learned most of what I know. Ted not only has an amazing amount of information available for every one of the three thousand and seven counties in the country, but he also has coaches available to walk you through the processes involved. Stop worrying about what the economy is doing, when it’s going to turn around, and start making amazing profits now.