Investing in tax liens and tax deed certificates is an obscure and unconventional way of entering the real estate market. Lots of people enter the tax lien business and come out successful but there are even more who fail with their tax lien investments – needless to say, investing in tax liens is not for newbies.
How does it work?
When you bid on a home with an attached lien, you’re not really bidding for the property but instead you’re bidding to pay for the tax due. You’re entering as a third party who will settle the obligation to the taxing authority. In exchange of the payment you’ve made, the taxing authority will issue a tax deed certificate in your favour. Tax deed certificates entitle the holder to demand payment from the owner of the property whose lien the holder paid. The owner of the property will now be indebted to the investor/holder of the deed for the amount of the lien plus any interest accrued. Generally, tax deed certificates carry an interest rate that ranges from 3 percent to as much as 36 percent per annum.
Do your homework prior to auction day
It is important for an investor, regardless of industry, to always do some research prior to bidding. For those who are into tax lien investing, it is advisable to inspect some of the property to be auctioned. Most taxing authorities and courthouses release a list of properties that will be part of the auction so it’s not very difficult to inspect properties prior to auction day.
You should also verify the real estate properties you’re going to visit. There have been instances where the initial list of properties provided by the taxing authority do not reflect the available properties on auction day. Oftentimes, the tax lien has already been paid by the owner prior to auction day.
Interest rates differ from state to state, so it would be wise to verify in advance the exact rate of interest on tax liens offered by your state’s taxing authority.
Some tips on how to make money off tax liens
If you are really serious about investing in tax liens, you need to arm yourself with accurate and timely information on the real estate market. You can also survey some of your state’s taxing agencies and courthouses to get information on future and upcoming auctions.
You need to also learn about your responsibilities and limitations as a tax lien holder. For example in the state of Illinois, you only have four months to notify the property owner that you hold a tax deed certificate against their property.
It is also ideal to build a long-term professional relationship with several banks, in case you plan to leverage your investments and build a portfolio of real estate properties with delinquent tax liens. Hiring a real estate agent will also help you in a lot of ways but it’s not really necessary unless you already have a large portfolio of real estate properties.