Make Your Bid At Auction
Attend the auction on the given date and time. Be sure to bring any required identification if the auction is in person. Online auctions require all paperwork and deposits to be submitted at least four days before the auction is scheduled to begin. Winning bidders can pay the auction balances with a cashier’s check, wire transfer or electronic funds transfer.
Properties are sold & as is. California strongly recommends you visit and view potential properties in person before bidding on them at auction.
Following Through On Your Investment
If you win the bid, thats just the beginning.
Youll 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 youll 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 doesnt 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 youll have the opportunity to pursue a foreclosure on the property. But youll need to follow local guidelines on notifying the current property owner.;
Check For Other Liens
The process of clearing a title after a tax deed sale will wipe away certain liens, including open mortgages on the property. However, there are certain liens it will not extinguish including:;
- Municipal fines.
- Code violations.
- Other tax liens.
Some counties will provide a lien search prior to the sale to help bidders conduct their due diligence on the property. This information may also be available in public records, but some code violations may not be recorded yet. Its a good idea to call the local municipality code department to find out if there are any recorded or unrecorded liens.
Foreclosure Is Rare And Still Has Risks
If the homeowner doesnt redeem the taxes, youll eventually get the right to foreclose on the property in order to take ownership of it. Foreclosure is time-consuming and costly. Its also a long process that can take many months or even years.
Youll need cash reserves to hire legal counsel for the proceeding and cover any associated filing fees. Plus, after all this time has passed, the value of the property could have dropped substantially, which could negate your investment returns.
In the event that you do take ownership of the property, you might find that there are major defects to the property that make it nearly worthless. Large projects like roofing, plumbing, electrical, or foundation work could make for a property thats hard to sell or refinance.
Also, if the property has not been cared for, it could be encumbered with municipal fines, citations, and judgments you could be responsible for depending on when you take ownership of it. Another issue could be obtaining a clear title to the property, which could take more time and money to clear up if there are issues.
Finally, if a property owner declares bankruptcy, your ability to foreclose on the home due to delinquent property taxes may be delayed or lost altogether. This is a risk that you may not foresee and that could cancel out your investment returns.
How To Profit From A Lien
Investors who are interested in locating tax lien investing opportunities should get in touch with their local tax revenue official responsible for the collection of property taxes.;There are currently 2,500 jurisdictions cities, townships, or counties that sell public tax debt.
Investors who purchase property tax liens are typically required to immediately pay back the full amount of the lien to the issuing municipality. In all but two states, the tax lien issuer collects the principal, interest, and any penalties; pays the lien certificate holder, and then collects the lien certificate if its not on file. The property owner must repay the investor the entire amount of the lien plus interest, which varies from one state to anotherbut is typically between 10% and 12%. If the investor paid a premium for the lien, this may be added to the amount that is repaid in some instances.;
The repayment schedule usually lasts anywhere from six months to three years. In most cases, the owner is able to pay the lien in full. If the owner cannot pay the lien by the deadline, the investor has the authority to foreclose on the property just as the municipality would have, although this happens very rarely.
What Does It Mean If You Have A Tax Lien
If you have a tax lien, it means that the government has made a legal claim against your property because you have neglected or failed to pay a tax debt.;In the case of a property tax lien, you have either neglected or failed to pay the property taxes that you owe to the city or county where your property is located. When this happens, your city or county has the authority to place a lien on the property.
Buying Tax Lien Properties And Homes
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 higher interest rates.
But what are tax lien properties and how can you buy one? Lets take a closer look.
What Is Tax Lien Investing
Tax lien investing is the process of purchasing tax lien certificates. When a homeowner doesnt pay their property taxes, the county places a lien against that property for the tax debt owed. A lien prevents a property from being sold or refinanced unless the taxes are paid.
The reason purchasing tax liens is referred to as investing is because the lien holder can earn a return via collecting interest on their initial tax lien purchase. Because of the potential returns, tax lien investing can be attractive to both individual and institutional investors.
Tax lien investing isnt for the casual investor, however. The rules and regulations vary from state to state and get even more nuanced at the county level. In order to earn a reasonable rate of return on tax lien certificates, youll have to educate yourself on exactly how they work for the region youll be investing in.
Tax Lien Investing Cons
Lack of recurring income:;For some investors, the fixed payment aspect of buying tax liens can be viewed as a drawback. When receiving a fixed payment, it may not align with some investors financial goals, especially if they are looking to create avenues of residual income over time.
Possibility of subsequent liens: Even though tax lien investment requires very little up-front capital, they can require more capital as the process moves forward. This is because, as the initial lien holder, you will be required to purchase any subsequent liens.
Competition:;The other slight disadvantage is the amount of competition you will likely face, usually from money managers and fellow investors, in your pursuit of tax liens to purchase. The best remedy for this is to know your geographic market well and target low-cost liensin the $100-$200 range.
Neglected Properties: Be cautious of distressed properties or areas with environmental damage. Investors may not want to get involved in areas with chemicals or hazardous materials on the property. These could signal cases where the owner is simply unable to pay the outstanding taxes, and investors will not see any returns.
How A Lien Affects You
A lien secures our interest in your property when you donât pay your tax debt.
Once a Notice of State Tax Lien is recorded or filed against you, the lien:
- Becomes public record
- Attaches to any California real or personal property you currently own or may acquire in the future
- Is effective for at least 10 years
- May impact your credit
When a lien becomes public record, you may not be able to:
- Buy, sell, refinance, or transfer property
- Get a personal or business loan
- Get or keep a job
Although we donât notify credit bureau agencies of the recording or filing of the Notice of State Tax Lien, they may get the public record from either the county recorders or California Secretary of State and may include it on your credit report.;
How To Buy Tax Liens
Learn About Tax Liens And Real Estate Auctions:;There are two ways to profit from tax lien investing: through interest payments or taking ownership of the property. The entire process should be handled with care and under the guidance of a real estate attorney. Actually, purchasing a tax lien is typically done at a real estate auction. Take time to really understand the real estate auction process before you attempt to bid on any tax liens.
Tax liens are assigned by county, so it will be helpful to narrow down your target area before looking for investments. This website offers a list of counties in the U.S. by state. Note that areas with financial strain may be more willing to offer deals on tax lien properties. Check out public records to find the financial status of counties near you and find which areas represent the most promise.
Scout Different Properties:;Auctions do prevent buyers from seeing the inside of a property prior to sale. Since you will not have seen the property without the homeowners consent, you may not be aware of the propertys condition. However, if you get into a bidding war and overpay, you may take ownership with negative equity before you even unlock the front door. Thats why its important to do your homework and scout out potential properties before you attend an auction.
Tips For Tax Lien Buyers
Buyers also need to do their due diligence on available properties. In some cases, the current value of the property can be less than the amount of the lien. The NTLA;advises dividing the face amount of the delinquent tax lien by the market value of the property. If the ratio is above 4%, potential buyers should stay away from that property. Furthermore, there may also be other liens on the property that will prevent the bidder from taking ownership of it.
Every piece of real estate in a given county with a tax lien is assigned a number within its respective parcel. Buyers can look for these liens by number in order to obtain information about them from the county, which can often be done online. For each number, the county has the property address, the name of the owner, the assessed value of the property, the legal description, and a breakdown of the condition of the property, and any structures located on the premises.
Don’t invest in tax liens with the expectation that you will get a property out of it; about 98% of homeowners redeem the property before the foreclosure process starts.
The Winning Bidder Pays The Balance And Handles Foreclosure Proceedings
What happens next for investors isnt something that occurs on a stock exchange. The winning bidder has to pay the entire tax bill, including the delinquent debt, interest and penalties. Then, the investor has to wait until the property owners pay back their entire balance unless they dont.
Most homeowners have a so-called redemption period whats generally one to three years before theyre required to pay the taxes plus interest in full. But if the homeowner doesnt return the tax debt, the tax lien investor is the one responsible for kickstarting the foreclosure process, which would allow the investor to assume ownership of the property.
If you win a lien at auction, you must also learn your responsibilities. For example, in Illinois, within four months of purchasing a lien, youre required to notify the property owners that you possess the lien and can foreclose if they dont repay, says Joanne Musa, a tax lien investment consultant and founder of TaxLienLady.com. Then another letter must be sent before the end of the redemption period.
Alternative Methods Of Investing
If the risks and administrative hassle of investing in property tax liens doesnt seem worth it to you, there are other ways to earn a solid 3%, 5% or even more on your hard-earned money.
For one, you could invest in tax lien certificates with the help of a servicer or buy into a fund that invests in tax liens. This method is more passive and could yield less returns than a more hands-on approach but its still a way to invest in this asset class without being materially involved in the day-to-day aspects of managing a tax lien investment operation.
If youre not particularly committed to investing in tax lien certificates, there plenty of other asset classes that can offer decent returns including:
Certificates of deposit
Where To Obtain Tax Sale Information
Information on upcoming tax sales may be obtained from the individual counties. Most of the counties have Web sites and post their tax-sale information there.
Starting at least three weeks prior to a county tax sale, the tax collector must publish a list of the properties three times in a newspaper of general circulation within the county.
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How Can I Invest In Tax Liens
Investors can purchase property tax liens the same way actual properties can be bought and sold at auctions. The auctions are held in a physical setting or online, and investors can either bid down on the interest rate on the lien or bid up a premium they will pay for it. The investor who accepts the lowest interest rate or pays the highest premium is awarded the lien. Buyers often get into bidding wars over a given property, which drives down the rate of return that is reaped by the winning buyer.
Buyers of properties with tax liens need to be aware of the cost of repairs, along with any other hidden costs that they may need to pay if they assume ownership of the property. Those who then own these properties may have to deal with unpleasant tasks, such as evicting the current occupants, which may require expensive assistance from a property manager or an attorney.
Anyone interested in purchasing a tax lien should start by deciding on the type of property they’d like to hold a lien onresidential, commercial, undeveloped land, or property with improvements. They can then contact their city or county treasurer’s office to find out when, where, and how the next auction will be held. The treasurers office can tell the investor where to get a list of property;liens that are scheduled to be auctioned, as well as the rules for how the sale will be conducted. These rules will outline any preregistration requirements, accepted methods of payment, and other pertinent details.
Investing Passively Through An Institutional Investor
Tax lien investing requires a significant amount of research and due diligence, so it may be worth it to consider investing passively through an institutional investor who is a member of the NTLA. Approximately 80% of tax lien certificates are sold to NTLA members.
If you’d like to become a member of the NTLA, it costs $500 a year . For institutional investors, membership fees range from $2,000 to $10,000, depending on the size of their investment portfolio. Institutional investors can generate returns that range from 4% to 9% a year. The NTLA can help match up interested investors who become members of the NTLA with institutional investors who focus on tax lien investing.
National Tax Lien Association
Since tax lien investing involves a significant amount of due diligence, it can be beneficial to passively invest through a National Tax Lien Association institutional investor. Studies show around 80% of tax lien certificates are sold to NTLA members. The cost for an NTLA membership for investors with less than $1 million is around $500. Based on their investment portfolio size, an NTLA membership fee can range from $2,000 $10,000 for institutional investors and offer a 4% to 9% range of returns per year.
Where And How It Works
A tax lien sale is a method many states use to force an owner to pay unpaid taxes. It gives homeowners a chance to pay those taxes along with high penalty fees. Twenty-nine states, plus Washington, DC, the Virgin Islands, and Puerto Rico allow tax lien sales.
Each state uses a slightly different process to perform tax lien sales. A;typical process works like this:
- A property owner neglects to pay his or her;taxes.
- A waiting period initiates. State laws vary on the waiting time before the tax collectors intervene; it;can range from a few months to a few years.
- The unpaid taxes are auctioned off at a tax lien sale.
- The highest bidder gets the lien against the property.
- The tax collector uses the money earned at the tax lien sale to compensate for unpaid back taxes.
- The homeowner has to pay back the lien holder, plus interest, or face foreclosure.