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Introduction
What is a tax lien?
A debt or
encumbrance resulting from failure to pay property taxes.
This debt can be sold to investors.
Example: Jerry Latepay
Scenario 1 (Tax Liens):
Jerry lives in a State like Arizona or Florida. Jerry is
late paying his taxes so the County or Municipality places
a lien on his property and sells it at public auction to
Mrs. Investor. Jerry eventually pays his taxes and Mrs.
Investor earns a nice interest rate.
Scenario 2 (Tax Liens):
Using the same scenario as above, Jerry never pays his
taxes and after the required amount of time (redemption
period), Mrs. Investor forecloses and takes ownership of
Mr. Latepay’s property.
Scenario 3 (Tax Deeds):
Jerry lives in a state like California or Nevada. After a
required period of time, the County forecloses and sells
the deed to Jerry’s property at public auction. Mrs.
Investor attends the auction and is the winning bidder.
Mrs. Investor takes ownership.
Benefits of Tax Liens
·
Relatively safe because it’s backed by real estate and the
local government controls the process
·
Potential for high interest rates
·
Stable interest rates
·
Not well known
Drawbacks of Tax Liens
·
Not a liquid investment
·
Rules are different for each state and sometimes even among
counties.
·
Requires cash
·
Bankruptcy could slow the process
·
Have to factor in travel expenses
Benefits of Tax Deeds
·
Opportunity
to buy properties for 50 to 90% below market value
·
Rental incomes
·
Mineral resources
·
Stable investment
Drawbacks of Tax Deeds
·
Not liquid
·
Risk – environmental
·
Maintenance and eviction
·
Must pay property taxes each year
Common Questions
Who can buy tax lien certificates?
Usually any adult, business or entity with a tax
identification number or social security number.
Will I get ownership of the property?
Maybe. More than 95% of the time a lien will be redeemed
and you will earn an interest rate. In a few cases, a lien
will not be redeemed and you can apply for foreclosures.
For deed sales, you will get ownership, possibly subject
to a redemption period.
When do I get paid?
You get paid when the property owner pays his/her taxes or
it is redeemed by an interested party, such as a mortgage
company. The County will notify you and you send in the
appropriate paperwork. The County will then send you a
check.
What if the certificate never gets redeemed?
You get to foreclose and potentially take ownership.
Can someone else bid for me at an auction?
In some cases, you can have an agent act on your behalf.
Some states will not allow this so please read through the
specific state sections.
What happens to the mortgage?
In most cases, the mortgage is extinguished. A tax lien
has superiority. In New Mexico, a mortgage lien is not
extinguished. In Pennsylvania upset sales, a mortgage lien
is not extinguished during the first upset sale.
Can I transfer tax lien certificates to someone else?
Yes. In most cases you can transfer liens through
assignment.
What are some of the best tax lien and tax deed states
for over-the-counter investing?
This depends upon where you live, your goals and many
other factors. Some states that have good over-the-counter
investing include: Arizona, Florida, Texas, Colorado, Iowa
and Arkansas.
Can I buy tax liens and tax deeds through the mail or online
without attending auctions?
Answer – Yes
Over-the-Counter Liens and Deeds
So how does an over-the-counter lien or deed occur?
Jerry Latepay example.
Over-the-Counter Tax Liens:
Jerry lives in a tax lien state and he is delinquent on
taxes. His tax bill goes to an annual sale and for
whatever reason no one bids on the lien on his property.
Jerry celebrates because he is living the “true” American
dream – all the benefits and no taxes. Jerry’s celebration
may be premature because many states will offer his lien
for sale on over-the-counter lists. So investors can buy
his lien and earn the full interest rate if he redeems.
Otherwise, the investor can still potentially foreclose on
Jerry’s property and take ownership.
Over-the-Counter Tax Deeds:
Jerry lives in a tax deed state and he is delinquent on
taxes. His tax bill goes to an annual sale and for
whatever reason no one bids on his property. Jerry
celebrates because he is living the “true” American dream
– all the benefits and no taxes. Jerry’s celebration may
be premature because many states will offer his deed for
sale on over-the-counter lists. Investors can buy his deed
and take ownership.
What are
the Benefits of buying through the Mail or
Over-the-Counter?
1.
Maximum
Interest Rate
2.
No Direct
or Immediate Competition
3.
No Travel
Costs? Well sort of…
What are
the Drawbacks of buying through the Mail?
1.
You are
buying leftovers
2.
More
screening is required to weed out the junk
3.
Not as
many liens or deeds
4.
Not as
many properties with improvements
How to
Screen through Over-the-Counter Lists
- Look
for the most fresh or current listings. Avoid liens or
deeds that have been on the list for many years. Rarely,
if every, will these be a good deal.
-
Search for key words in the legal or property
description
•
¼
interest,
•
Mineral
rights
•
Mine
•
Water
rights
•
10 feet
of lot 54 running
•
Electrical easement
-
Compare the price of the lien or deed to the assessor’s
value. Some counties will have this shown for you.
Screen out all liens/deeds that exceed the assessor’s
value
- Do
your normal due diligence – see Rogue Real Estate
Investor Collection for more information.
When is
the Best Time to Obtain Over-the-Counter Lists
Answer: Immediately after the annual or monthly sales. You
will usually have to allow 3 to 4 weeks for the County to
get the lists updated. Some are quicker and some are
slower. Why? Some people don’t follow through on paying
the County for liens or deeds obtained at the annual sale.
Power Point
Presentation from the 2005 National Real Estate Investing
Expo
Full
Document in pdf format with State information.
Happy
Investing,
Michael
Williams
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