Top 25 FAQs About Tax Liens
It’s possible to lose money in any investment anywhere and any time. All investments have some risk, even certificates of deposit. However, as a rule, tax lien certificates are considered very safe investments.
Anyone who has the cash to pay the auctioneer.
No, you are only paying that property owner’s delinquent taxes. You are not foreclosing on them.
Possibly, although it’s rare for a property owner to forfeit their real estate. In Arizona, for example, 99% of all property owners pay (redeem) the taxes due to the county. The county in turn pays you interest plus a high rate of return. Nationwide, 95% of all tax lien certificates sold are paid (redeemed) by the property owner.
- People die and no one pays the tax, though heirs may pay the taxes later.
- People run out of money – they become unemployed and have money problems.
- Some people won’t part with the money until the last minute. They are making more by investing elsewhere.
Not exactly. They send multiple notices via mail and put announcements in the public records and the newspapers. That’s all they are required to do.
The county will forward tax notices to the last-known address. Additionally they will advertise the tax sale. Often, heirs or family members step forward to pay the taxes.
There’s no restriction. you can bid and purchase as many as your finances will allow.
You will give your money to a government agency – there are no brokers or intermediaries to pay.
The property owner pays you when they pay their delinquent taxes. The government agency (the county or municipality that collected the money from you) will contact you and ask you to return your tax lien certificate. Upon receipt they will send you a government check.
No! You only do business with the government agency.
Statistically there is less than a 5% chance that you’ll ever go through the foreclosure process. An attorney or government employee would do this service for a small fee as it is all controlled by the statutes of the state involved.
When the county or municipality collects from the property owner, they will notify you. Upon receipt of your certificate they will pay you.
First, you are not buying real estate. You are purchasing a lien on the real estate. Should you ultimately foreclose and get the property, then you own real estate.
Here is how the process works. The county will publish a tax lien sale in the newspaper and public records. Buyer/bidders should research the public records (plot maps, assessment parcel and subdivision maps). The buyer/bidder should also purchase local maps and drive by the subject properties. the drive-by inspection would provide additional appraisal data. Title companies and appraiser, and real estate agents will provide more in-depth information. I explain exactly how to do all this in my training webinars and courses. Sign up above for our next Free Webinar training.
Yes, you can put it in your safety deposit box or other place for safekeeping.
Yes, you can assign or transfer the certificates to anyone you want.
No. The properties could be vacant land or improved property. Often large commercial properties are available in the tax lien sale.
Improved property has the advantage of quick re-sale in many cases. Additionally, improved property will often have mortgage liens. Mortgage holders rarely let properties go to tax sale. Properties with mortgage liens almost always assure you of re-payment of your investment.
That’s possible – but highly unlikely. Specialists find that certificate holders get the property in only 1% to 5% of all tax lien sales. We cover this process in detail in our training course.
No, each state and county uses its own rules. The state legislatures write the statutes. However, they are subject to local (county and municipal) interpretation. Tax lien buyers should research each county before purchasing their tax lien certificate, and should become aware of the local rules.
You, the previous year’s certificate holder, can buy the subsequent year if the property owner does not. This is like buying another safe high yielding C.D.
You aren’t required to pay more than one year’s taxes. However, it would probably be wise to note when the next payment is due and pay those taxes also. You’ll get your money back when the certificate is redeemed, plus an exceptional rate of return. If you can’t pay the subsequent tax lien, the county will issue a new certificate that they will sell at auction.
No! That’s why you should buy more than one lien certificate. Different certificates will pay off at different times.
In some counties, leftover or unbid certificates will be available before the auction – sale.
More FAQs About Tax Liens & Tax Deeds
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A tax lien gives you a guaranteed rate of interest in an investment secured by real estate. You have no rights to the property. A tax deed gives you ownership of the property.
With a penalty you get the full amount of return regardless of when the person redeems. Even if the person redeems the day after you bought the tax deed, will still get the full amount of the penalty. Interest is paid over time – usually per annum. If the interest rate was 12%, it equals 1% per month; if the person redeems in 6 months, you get 6% interest.
Some counties have competing bidders bid down the interest rate. So for example if the interest rate is 16%, I might hold my bidder card up and say 16. If you wanted the same certificate, you might hold your bidder card up and say 14. The interest would continue to be bid down until all the bidding stopped. Whatever interest rate is last bid is the interest rate that will be paid. Bid down the percentage of ownership in the property you would receive if you were to get the deed to the property. In that case, you become a “tenant in common” with the property owner. If you were to get the deed you would own only that percentage of the property that you had bid at the auction. The advantage to this bidding technique is that the interest rate always stays the same. Bonus bidding, where a county charges more than what the back taxes are. You may or may not get all of the bonus money back when the person redeems and you may or may not receive interest on the amount above what the back taxes are. For example, if the back taxes are $1,000, I bid $1,500, the county could keep the $500 and I might get interest only on $1,000. Other counties will give you interest on the bonus or give it back when the owner redeems. If you are attending an auction where the county uses bonus bidding, make sure you thoroughly read and understand the auction rules. If you have any questions, ask the county officials to explain the rules to you. Know the rules! In rotational bidding, either the bidder number or the parcel number or both are randomly picked. If the selected bidder wants the certificate on the selected parcel, they get it and the next numbers are called. If the selected bidder does not want the certificate on the selected parcel, they pass and the next bidder number is called. This process continues until a bidder buys the certificate or every bidder passes on it. That is how the whole list is worked. In this type of bidding, the interest rate always stays the same. Pick bidder numbers in a fair and impartial manner. This means if more than one person is interested in a certificate, the county might put all the bidder numbers in a hat and whichever number is pulled out wins the bid. This type of bidding is another way to keep the interest rate intact.
There are pros and cons to both options. Buying at the auction you (along with all the other bidders) get first crack at the liens you want to purchase. The disadvantage is there is usually competition at the auction, so you may get into a competitive bidding situation – bidding down the interest, etc. The advantage to buying after the auction, called buying ‘over-the-counter’ is that you won’t be bidding against anyone else. The downside to buying over-the-counter is that some of the tax liens have already been purchased at the auction, so you will have less to pick from. In the end, whether you buy at auction or over-the-county usually comes down to your personal preference.
It’s a county sale of certificates they have been holding and now want to get back on the tax rolls by selling a deed. The county takes back lien certificates that never sold at auction or over the counter. Sometimes the county will hold onto them and do a sale once a year, some counties will sell the properties as they get them. Often at the resale, the county will auction the deed for whatever they can get for it. In many cases at a resale any city or county liens that were on the property are wiped out as well. If it was a deed that never sold at auction, it could be called either a resale, surplus land list, strike-off list or some other name. It’s the county’s way of returning property back onto the tax rolls.
Property taxes are always number one, because the government (the county or the municipality) was there first as the landowner. Liens are recorded along with deeds at the county records office. (It could be called Land Records, Recorders Office, Registry of Deeds). The rule to remember about liens is: First in time is first in place. The first recorded lien has the highest priority, but it is still after the property taxes.
If the IRS has been properly notified, they have 120 days to respond. Check the file in the tax collector’s office and make sure there is a return receipt card from the certified mail notice to the IRS. (If it is a mortgage foreclosure auction, check with the attorney or trustee handling the auction.) If the signed card is in the file, it means the IRS was notified. The IRS then has two options: They can take the property and give you your money back with a nominal amount of interest. Or, they can do nothing and the lien drops off the property at the end of the 120 day period.
The Homestead Exemption is designed to protect homeowners from losing their homes. It varies from state to state, but it usually applies to a primary residence. Here are some of the things a homestead exemption can mean. It can lower the amount of property taxes a homeowner needs to pay. It can lengthen the redemption period giving the homeowner more time to pay their back taxes. It can protect the value of the property so that if the property goes to deed auction, the minimum bid must be an amount higher than the back taxes owed. (For example, in Florida the deed auction minimum bid would have to be 50% of assessed value plus the back taxes.)
The deed is generally called a treasurer’s deed or a tax collector’s deed. There is usually some indication on the deed, whatever its title, that the deed came from a tax foreclosure process.
In most cases, the foreclosure must be done by the tax lien certificate holder. Check with the county officials to be certain. The county may also specify the steps you need to take to make the foreclosure process comply with the state statutes.
The process of getting a deed from a tax lien varies from county to county and from state to state. In many cases, you will be required to notify all interested parties (the owner, tenants if any, any other lienholders) that you are applying for the tax deed. This notification gives them all a chance to come forward and pay the taxes before the deed is issued. Exactly how you notify people and for how long is up to the county. You need to get the rules for the foreclosure process from the county officials to know how the process works where you are investing.
Title insurance protects you and a mortgage holder from any disputes over the title of a property. Before a title company issues a title insurance policy, it will research the history of liens on the property, called the chain of title. Once the title insurance company is confident that the chain of title is clear, meaning previous liens had been satisfied, deeds were properly drawn up, and there is no question about the ownership of the property, the title company will issue an insurance policy. If sometime down the road there is a dispute about the title, it is up to the title insurance company to resolve.
Title insurance companies are sometimes reluctant to issue title insurance for a property purchased at a tax auction. They are not 100% comfortable that the government has done all the due diligence required to notify all interested parties before the sale. Here are some options to think about when selling. If you bought a property for pennies on the dollar, and are selling it at an under market price, your buyer may not care about title insurance, because they are getting such a good deal. If you are going to keep the property, either to live in or as a rental or rent-toown property, after the passage of time, the title will be considered “quiet” and you would be able to get title insurance. Check with your state for the exact amount of time required.
Quiet title is a legal action. You hire an attorney to do a quiet title action, where the attorney would prove to the court that they had properly notified all interested parties in a property. If no one comes forward and claims an interest in the property, then the judge would declare the title “quieted” and you could get title insurance if you needed it.
There is a title insurance company that specializes in insuring property acquired through a tax deed auction or tax lien foreclosure process. If you’re interested in working with them, contact our office at 321-449-9940 and we will have them get in touch with you.
If you have any questions about the auction rules, or to be sure you are clear on how the auction process works, you can refer to the state statutes that apply to the tax auction or a mortgage foreclosure process. The state statutes specify how the state deals with delinquent tax payers, including the length of time a property can be delinquent, whether there will be a lien or deed auction, the redemption period, the amount of interest, etc. Remember that it is up to the county officials to interpret how to apply the statutes in their county.
You can go to your public library and ask the reference librarian for help in finding the statutes you need. Many states have their statutes online now. Check the official state web site and see if the statutes are available. Most counties have a county law library that is available to the general public. Ask in your county office building where the county law library is.
If you still have questions about the auction process, many counties have a county attorney whose job it is to insure that all business that the county conducts is done lawfully. If your county has a county attorney, call them and ask them to clarify what you don’t understand.
Wait until as close to the auction as possible. People will be redeeming (paying their taxes) right up until the start of the auction. You don’t want to waste your time looking at properties that have been redeemed already. Three days before the auction is a good time to start. Make sure you check and see what properties have redeemed so you can cross them off your list before you start driving around looking at properties.
Whenever you buy anything at a tax lien or tax deed auction, you always want to think about what you would do with it. What is your exit strategy? You may need to do a little more research if you are buying vacant land, but you may have less competition if most people at the auction are looking for single family residences.
With vacant land, you could do a couple different things. You could sell the land and carry back the note – you would get a down payment and then finance the property, just as a bank does, for 3, 5, 10, or even 15 years (or any number that works for you) and you would set the interest rate. That would allow you to get some money up front and then a regular steady monthly income for the life of the loan. Another option with vacant land is to partner with a developer and build a house or houses on the land and then split the profits. In some cases, the land may have something of value that you can sell. For example, you may have acreage covered with timber that you could sell or there may be minerals that are valuable.
Raw land has no utilities on it. Improved land has utilities (electricity, water, and/or sewage) on it or close by. For the most part, improved land will have more value, because it can be built out with little extra expense. In order to build on raw land, you would need to get all the utilities brought in.
Make sure you check the zoning regulations so you know what you could do with the land if you owned it. If you wanted to put a house on it or sell it as a buildable lot, you would want to know that it was big enough to put a house on. Zoning regulations would tell you what kind of a house you could build (single family, multi-family, etc.). Zoning regulations would also tell you if you could use it for commercial purposes.
The first question you want to ask is, is the mobile home on private property or in a mobile home park? If the mobile home is on private property, you want to make sure that the value of the land would still allow you to make money even if the mobile home was pulled off the property. If the mobile home is in a mobile home park, you are purchasing the lien only on that mobile home. You need to be very careful doing your research so that you are very clear on the value of the mobile home. Generally, a mobile home on private property tends to appreciate in value; a mobile home in a mobile home park tends to depreciate in value.
You always want to think about your exit strategy. Are you going to keep the time share for your own personal use? Or do you want to sell it? Time shares are notoriously difficult to sell. You may be able to rent out the time share. If that is your strategy, make sure you find out what the yearly maintenance fees are first and then determine if you can still make a profit before you buy the tax lien or deed.
A map of a town, section, or subdivision showing the location of the streets and the boundaries of individual properties. Plat maps are useful for verifying that you are looking at the property you think you are looking at! Plat maps are especially useful for finding properties that have no address, like vacant land.
In most cases, you do not have to. Some people feel that you protect your interest if you purchase the next year’s certificate. Other people would rather spread their money out over more certificates rather than buying two years on one property. If you purchase the second year’s tax lien, then no one else could purchase it and attempt to pay forward on your lien to take it over. Your first lien is still the highest priority lien because it was purchased first in time. Therefore, you would also be the first to start the foreclosure process.
Remember that your goal is to make money. If you buy a commercial or industrial property, what will you do with it? Can you sell it? The reason that we recommend residential property is because everyone needs a place to live, so you can more easily sell housing. Not everyone needs a strip mall, convenience store, or industrial park.
Be careful about environmental issues. If hazardous waste exists on a property you own, even if you did not create the hazard, you are still responsible for cleaning it up. Check with the Environmental Protection Agency (EPA) in your region to see if there are any known issues with the property. If the property was a former gas station, auto repair shop, or an industrial facility that handled any kind of chemicals, you would be wise to stay away from it. You are much less likely to find hazardous waste or toxic materials on residential property.
Your best bet is to work with the people living there. Be empathetic, firm, and non-confrontational. Understand that people who have just lost their house to a tax auction are probably having other financial difficulties as well. The last thing you want to do is harass the people, making them angry and have them take out their anger on the house you now own. Start by talking with them and get a sense of where they are at. Maybe all they need is a little bit of time to get their possessions together and move. If that’s the case, be as flexible as possible, set a firm deadline, and let them get out. If it seems that they need more incentives to get out, then maybe money will get them moving. Here are a couple techniques to use. Ask them if you pay a mover to move their possessions will that help them get out. (If they’re not sure where they’re going or what to do with their belongings, offer to pay for one month’s storage and have the movers take their stuff to the storage space.) You could also use cash as an incentive. For example, ‘If I give you $500, could you be out in a week? If you’re out in 2 weeks, I’ll give you $250.’ Use whatever amount of money you think is appropriate. Maybe they need a bus or plane ticket somewhere. All of these options are cheaper than getting a lawyer involved or having an angry property owner trash your new house.
First, make sure that you check to see which properties have been redeemed.You don’t want to spend time researching properties that are no longer available. Next, find an area of the city or county that you want to invest in and concentrate on researching properties in those areas. Finally, decide on what types of properties you want to bid on (single family home, vacant lots, etc.). That should narrow your list to a more manageable size.
Some counties sell lien certificates that didn’t sell at the auction by mail. You need to check with the county where you want to invest and see if they have leftovers that you can purchase by mail. It is a good idea to pick a place where you want to invest and go see it once before you buy through the mail. Identify the areas of the county that you like and where you would feel comfortable owning property. Once you identify the areas that you want to invest in, look for tax lien certificates in those areas. Then you can make an arrangement with a friend, relative, or realtor to drive by the individual properties before purchasing the certificates on them.
Usually bidding starts at the back taxes plus any penalties or fees that are owed. Some counties start closer to the assessed value. Remember to ask for the auction rules and if the rules do not specify what the minimum bid is, ask the county officials. Also check to see if there is a homestead exemption on the property and if so, find out if it affects the minimum bid.
If a person files Chapter 13, which is a personal reorganization, the court and their attorney work out a payment plan that the person must comply with every month. As long as the person is meeting the obligations of the payment plan, they are protected by the court and no creditor can foreclose on them. That would mean that a county could not auction a tax lien certificate or auction the property at a tax deed sale, so properties with owners in compliance with a Chapter 13 payment plan would be pulled from the auction and you would never see them available for purchase. (The same would be true of a lending institution that wanted to foreclose on a mortgage or deed of trust. As long as the owner is in compliance with their Chapter 13 payment plan the Sheriff’s or Trustee’s Sale couldn’t take place.) However, if the person doesn’t meet the requirements of the Chapter 13 payment plan, the creditors are free to take action. If you have already purchased a tax lien and the person files bankruptcy, as a secured creditor you are protected by the bankruptcy court. You would be first in line to be paid. You may not get the full amount of interest, but you will get all of the principal you invested. If a person files Chapter 7, which is liquidation, the court and their attorney sell off all of the person’s assets to satisfy their debts. Again, if you had a tax lien certificate on the property, as a secured creditor, you would be first in line to be paid. Chances are, if the person is in Chapter 7, the property won’t go to a tax deed sale. The bankruptcy attorney would rather sell the property in order to get the most money possible to pay off debts.
You will see different addresses when the property owner does not live at the property. The county needs the property owner’s mailing address to mail the tax bill. Make sure you are clear which is the property address and which is the mailing address. You want to drive by the right property.
And if there is a redemption period for the deed when do I start my coverage? You want to put insurance on a property when you take title to it. Once you sell the property, just cancel the coverage. If you want to get insurance during a redemption period (the time during which the homeowner can still pay their taxes), you will need to check with your insurance company to see if you can get coverage at that point.Your best bet, is to buy the property right, so that even if something happened to the house and you didn’t have insurance, your could still make a profit, just by selling the land. Your best bet, is to buy the property right, so that even if something happened to the house and you didn’t have insurance, your could still make a profit, just by selling the land.
Although the state statutes specify how delinquent taxes are to be handled, it is up to the county officials, to interpret and implement the statutes. That is why you will find variations within the same state.
There really is no “best” state. A lot of what makes a place good to invest, depends on your personal preference. Do you want to invest in liens or deeds? Do you want to use your investing as a way to travel with business deductions or would you rather invest where you live? Do you want to buy at an auction or would you prefer to buy over the counter? The answers to these questions will help determine the best place for you to invest.
Yes! In fact tax liens and deeds are a great investment for your retirement account. With tax liens, as long as you keep reinvesting what you earn, your account will continue to grow with secured, government-guaranteed returns. Investing in tax deeds gives you the opportunity to make some great gains in your retirement account, relatively quickly. The tax lien certificates or the tax deed will be made out in the name of your IRA and sent directly to the custodian of your account. You just need a custodian for your IRA that will let you self-direct your investments. If you are not sure who to use for that, contact Ted Thomas’ office (321.449.9940) and we will put you in touch with someone who can help you.
Yes. You need to check with the county officials in the county where you intend to invest to see what they require. Some things a county may require include: your tax ID number, a certificate of registration in that state (if you company is headquartered in a state other than where you are investing). Before you go to the auction, be clear on what the requirements are.
Often when you are bidding at a tax deed auction, you will not be able to see the inside of a property, so you want your bid to let you be able to still make money if the inside of the house is in the worst possible condition. Ted Thomas doesn’t like to go over 20% of assessed value. Some of us will go a little higher than that. For a house that on the outside looks great, is in a good neighborhood, in a real estate market that is pretty active, you might be willing to go as high as 50% or 60% of assessed value. The key is spend what you are comfortable with and not more. Make sure that you’re going to be able to make money on the deal. Determine the maximum you will spend before the auction starts and stick to that number, no matter how heated the auction gets!
No, you have no rights to the property. When you purchase a tax lien, you are really just lending the county the money it needs to fund its operation, in place of the homeowner who hasn’t paid their taxes. The homeowner still owns the property.
Every county is different. Some will let you pay with a personal check, some only take cashier’s checks, some take cash, some take all of those. Get the rules ahead of time and if it doesn’t say in the rules how you need to pay, call the county and ask them.
The county will notify you when a homeowner comes in and pays their taxes, called redemption. You will need to return the certificate to the county and they will send you your money.
In most cases yes. Always check the rules and if you have questions ask the county officials to be clear. Sometimes if there is a city or county lien on the property that lien will stay on after the auction. An example of this would be if the lawn was overgrown and the neighbors complained. The city would send someone out to mow the lawn and bill the property owner. If the property owner doesn’t pay the bill, the city will put a lien on the property. In some places, that lien would stay on after the tax sale and you would be responsible for paying it off before you could get the deed.
There are many reasons someone doesn’t pay their taxes. It could be the owner moved away, forgot to give the county an updated address and don’t realize they haven’t paid their taxes. It could be that the owner died and the heirs are either unaware or no one wants to take responsibility for the property. It could be a divorce situation, or an illness in the family. It is hard to understand why, but thousands of properties go up for auction every year for non-payment of taxes.
You can never know for certain who is going to redeem and who won’t. There are a couple of factors to consider. If there is a mortgage on the property, the lender will usually step in to protect their interest and pay the taxes on behalf of the homeowner. Occasionally, banks slip up and don’t get the money to the tax collector on time, but if they are efficient, they will pay the taxes. So if there is no mortgage on the property, there is no one else to step in for the homeowner and pay the taxes. 47 That may increase the odds that the property will not be redeemed. If an owner doesn’t live in the property, they may be less likely to redeem than if it was the house they actually lived in.
Usually not, although some counties will arrange specific viewing times for properties they are auctioning off. Ask the county if they are going to let people into the property prior to the auction.
You really don’t need to, you can sell it on your own. Here is a great ad that you can run in the paper: Foreclosure Bargain Must Sell Appraised Value $100,000 Must Sacrifice $75,000 555.123.4567 Use whatever dollar amounts are appropriate. If you’re offering enough of a bargain, you will get lots of responses!
After you run the ad, when people call to see the property, rather than setting up individual times to have people come look at the house, do what we call a buyer’s conference. Pick a time when you are going to be at the property and tell everyone who is interested to come at that time. For example, you could say, ‘I’ll be at the house Sunday from 1:00 to 3:00.’ Don’t tell people that everyone will be coming at the same time, just let them all show up. What happens? You have created a competitive environment, where people are afraid that someone else will get this bargain property. They will want to make an offer right then. Take all the names, in order, of everyone who wants to put money down. That way if the first person has a problem with their financing, you just call the number two person on your list.