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Buying Tax Lien Properties And Homes

5-Minute Read
Published on November 8, 2021
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With the recent volatility of the stock market and historically low interest rates, many investors are looking for new investment opportunities. Some are considering buying tax lien properties in order to reap the benefits of better interest rates.

But what are tax lien properties and how can you buy one? Let's take a closer look.

What Are Tax Lien Properties?

As a homeowner, you'll be faced with property taxes levied by the county each year. The average American household pays well over $2,000 in property taxes each year. With that, it's clear to see how this expense could become a burden to a family's budget.

If the homeowner cannot pay their property taxes, then the county will typically sell a tax lien to cover the expenses of the local government. At that point, real estate investors have the opportunity to buy a tax lien property.

A tax lien property has a legal claim against it due to unpaid property taxes. When a property has a tax lien, it cannot be sold or refinanced until the taxes are paid and the lien is discharged.

As an investor, you can purchase a tax lien from the county for properties with unpaid taxes. Depending on the actions of the homeowners, the property may eventually become an investment property. But in many cases, you'll simply enjoy the higher interest payments of the tax lien while the homeowner repays their debt.

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How Buying Tax Lien Properties Works

Buying a tax lien on a property gives the purchaser a legal claim on the property. The investor pays off the delinquent taxes owed to the municipality and is then repaid by the property owner – plus interest – during a redemption period. 

If the owner fails to repay what they owe, the tax lien you bought gives you a legal right to obtain the property’s title.

How To Buy Property With Delinquent Taxes

Here's what you'll need to know about buying a home in a tax lien sale.

Buying Tax Liens At A Public Auction

When a homeowner doesn't pay their property taxes, the local government or municipality will issue a tax lien certificate. The certificate amount is for the amount of taxes owed and penalties against the property. Typically, these certificates are issued once a year and an annual auction follows a few months later.

As a potential investor, you can sign up for the auction ahead of time. Plus, you'll have some time to do your due diligence on the properties before making a bid.

When the auction goes live, you'll be able to bid on tax lien certificates. The minimum amount that you'll need to bid is the outstanding tax and penalties. Plus, you'll include the interest rate you are willing to accept.

The maximum allowable interest rate will vary based on the state. For example, it could be as high as 18% in Florida. You should expect that most auctions will not stop at the highest allowable interest rate. Instead, you'll find the bidders who win are willing to accept a considerably lower interest rate.

A bidding war can sometimes occur between buyers, driving down the rate of return for the winning bidder.

Following Through On Your Investment

If you win the bid, that's just the beginning.

You'll need to take note of the redeemable aspect of the tax lien certificate. In most cases, there will be a redemption period that ranges from several months to a few years. The homeowner will be able to repay their taxes within this period to have the tax lien removed.

Also, consider whether or not you'll need to purchase subsequent tax liens issued during the redemption period. In some cases, the county may continue to issue tax liens each year that the owner doesn't pay their taxes. Depending on the local laws, newer tax liens may take precedence over your claim.

If the tax lien is not redeemed within the specified timeframe, then you'll have the opportunity to pursue a foreclosure on the property. But you'll need to follow local guidelines on notifying the current property owner.

Investing In Tax Lien Properties

If you're considering buying tax lien properties as an investment, then you'll want to learn how you can make money from the deal. Here's what you need to know about buying tax lien homes as an investment.

Paying Off The Lien

The first step is to pay off the tax lien by winning the auction for a tax lien certificate. You'll need to pay off the delinquent taxes before moving forward.

Setting Repayment Terms

Next, you'll need to familiarize yourself with the repayment terms. As the investor, you're entitled to the interest income associated with the tax lien. In most cases, you'll encounter a simple interest rate that's assessed on a monthly basis.

Depending on the interest rate and the terms allowed by the local government, you could see a return quickly. If the property owner cannot repay you within the payment terms, you could foreclose the property.

After the foreclosure process, you can buy the foreclosed property and treat it like a typical investment property.

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Tax Lien Vs. Tax Deed Investing

Tax lien and tax deed properties may seem similar, but they differ when it comes to their auction process and the buyer’s intent. At a tax deed sale, you’re bidding on the property itself, and ownership is transferred to the winner. A portion of the winning bid pays off the delinquent taxes, and the rest goes to the property owner.

If your state has a redemption period, the original owner could potentially reclaim ownership if they pay off their taxes within that time. If not, or if the state doesn’t have a redemption period, the buyer can foreclose on the property.

What To Consider When Investing In Tax Lien Properties

If you're thinking about buying tax lien properties, take a minute to consider the downsides. As with most investment opportunities, you'll find that buying tax lien properties comes with an inherent amount of risk.

Blind Purchase

When you buy any property at auction, you run the risk that comes with a blind purchase. Since you cannot see the property or an inspection report, you will be buying the home as-is, so you could be walking into a bad deal.

Foreclosure

If you're an investor attracted by the potential for higher interest rates, you could run into a sticky foreclosure problem. If you buy a tax lien property and the property owner cannot repay you, you might be forced to foreclose. Depending on your situation, you may or may not want the responsibility of a foreclosed property.

Short-Term Gains

When you win the bid for a tax lien, the government will set the redemption period. Typically, you'll see a range of a few months to several years. At the end of the redeemable period, your investment will no longer be able to make a profit.

That's because the property owner has repaid their delinquent taxes. As a short-term investment, you'll see limited gains without any long-term potential.

An Advanced Investment

Tax lien investing is a tricky skill to learn. Although there are seasoned investors that can bring in a reasonable profit, many novice investors can easily get in over their heads. With that, take the time to research this investment strategy before diving in.

The Bottom Line: Are Tax Lien Investments A Good Idea?

Tax lien investments can be a good idea for a seasoned real estate investor who is well aware of the local rules governing the investments. However, it is not a good way for a potential home buyer to secure a property for their primary residence. Otherwise, if you know what you're doing, it can be a good way to earn a profit.

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Victoria Araj

Victoria Araj is a Section Editor for Rocket Mortgage and held roles in mortgage banking, public relations and more in her 15+ years with the company. She holds a bachelor’s degree in journalism with an emphasis in political science from Michigan State University, and a master’s degree in public administration from the University of Michigan.