If you’re looking for a quick explanation and discussion of read the tax lien investing First Part
After you know the when and the details of the terms for a tax lien certificate or deed sale, you need to get the list of unsold tax liens (or deeds) and begin investigating the properties that they represent. Don’t worry if you end up with a list of many thousand properties, this would actually be a very good problem to have as you would pretty much have a guaranteed tax lien to purchase somewhere in that list, because after you get the hang of reading the details then skimming the pages will become similar to skimming through actual real estate sale listings. This will make tax lien investing much easier.
The first thing to do, once you manage to obtain one of these tax lien investing golden lists, is to look at it in small pieces and take one step at a time. Realize that you don’t even need to look at every item on the list. You only want to find the few properties needed to cover the capital you have for investing in tax liens. To be honest, that will probably not even get you 10% into the list! Hopefully that is enough motivation to turn that first page.
Fortunately, there are many counties that have tax lien listings available via the web. But from my experience these will be rather picked through. But you may get lucky, so don’t just ignore a list because it is available online. The internet may be enough to get you moving on your tax lien investing career.
Every property that is in default of it’s taxes will have an identification number. It is important that the basics of these tax lien lists may carry over between counties, but the details may vary so use this as a guide and not an end all reference of what you will encounter when tax lien investing.
To reduce the tax lien list, begin weeding out the properties you have no desire to pursue. Start by removing the properties whose tax lien certificates you cannot afford or with a price that would force you to put too many of your eggs in one basket. It is typically more intelligent to purchase multiple tax lien certificates than it is to place all your money into one. Tax lien investing is just like regular investing. You want to diversify.
For example, if you have $500 to invest, why include properties with certificates of $1000 or higher?
The reason for not putting all your money into one tax lien certificate is simple. Even though nearly all tax lien certificates redeem, there is a chance that it will not happen. In which case you lose your return and entire investment. And by not redeeming I do not mean that you gain ownership of the property. If the debtor declares bankruptcy then everyone loses. If you only have $500 invested in a bankruptcy instead of $10000, then the loss is substantially easier to take. No investment is without risk, and tax lien investing is no different.
This kind of loss can and, if you invest in enough and for long enough, will happen. So be prepared by spreading out your tax lien investment dollars.
Once you have a reduced the available tax lien list, use the identification number (may be called any myriad of things ranging from Tax ID to Real Estate Number) to do the following:
1) Get the description of the property
2) Get the address of the property so you can look at it in person
3) Get the owner’s name (and subsequently contact information if needed)
4) The tax assessed value (approximate worth of the property)
5) If any repairs are needed or other liens against the title exist
It would be wise for you to treat tax lien investing like buying a home instead of a tax lien certificate. To start, you would look at comparables. ‘Comps’ will give you a general idea of what the property would be worth in marketable condition. Make adjustments for repairs (new roof, foundation repair, etc.) and come to your adjusted value of the property. Is the potential worth of the property high than the amount of the tax lien investment? If so, you probably have a winner.
When considering these properties keep in mind the end product and what you may want to own or end up repairing. Are improvements are something you are even willing to do? Do you want residential, multifamily, commercial or other types of properties? What locations are more desirable?
Answering those questions should now have produced a pretty tightly reduced list of tax lien certificates you can purchase for investing. With this reduced list, try to focus on properties where the worth far outweighs the amount owed. The reason is because this is a win-win situation. The owner will be more likely to pay back the debt instead of losing the property. And if they are not able to pay it back, you get a property that can be sold for more than the price of the certificate.
Purchasing tax lien certificates for these properties will almost guarantee you a good return. In the case of the latter, the return will be deferred to a later date and may be taxable, but will still be a return.
Now you need to make sure you know how bidding takes place in the state you have chosen for tax lien investing. If you do not, then you better find out. In some cases the bidding starts at a set amount and then gets bid down by would-be investors.
Meaning, if the percentage for a state were 10%, then bidders would bid 9%, 8%, 7%, etc. The lowest bidder would gain the tax lien certificate at the bidding rate. In competitive areas the rates have been reported at .5%. That’s a pretty low ROI and far less than desirable. Such a low ROI makes tax lien investing seem like a bad idea.
What happens then is that when the redemption takes place, the debtor pays the full percentage rate, but the certificate holder only gets the bid percentage and the state keeps the rest. Definitely not a worthwhile investment in my opinion.
Sometimes a state will auction off ‘ownership’ of a property that the tax lien is against. Assume that a tax lien certificate is worth $1000, then it cannot be sold for more than that amount. Then the bidders bid on how much of the overall property they would like to own in case of foreclosure. The smallest bidder will become the tax lien certificate holder.
In other words, someone has a winning bid of 1%. Then they get the tax lien certificate and if the property goes into foreclosure than the holder gets 1% of the auction value. Assume a property sells for $100k and you own a $1000 certificate on the property that you bid 1% to own. One percent of 100k is 1000. You break even.
However, if the property does not foreclose, then the statutory amount applies to the tax lien certificate. In other words, if the debtor repays the amount, then the holder of the tax lien certificate gets the whole percentage dictated by the state. Which is far more likely, and thus a far more desirable bidding structure as the risk is far less even when you bid for the lowest percentage allowable.
In some states you can bid up how much you are willing to pay for a tax lien certificate. In other words, if the certificate is worth $1000, bidders can offer to pay 1100, 1200, 1300, and so on. No matter how much is paid for the certificate, however, the interest rate will only apply to the face value of the tax lien certificate.
So if you buy a $1000 certificate for 1100 with a 15% rate, then certificate will become 1150 once paid off. But since you paid 1100, you only net $50. So your realized ROI is 50/1100 = 4.5% I think you can see how this system can quickly bid you right out of your money and literally into a loss if you are not careful with the numbers when tax lien investing using this bidding structure.
Understanding these bidding structures is VERY important to make sure you are getting the return on your money that you are looking to achieve. It is very plausible that bidding and winning a tax lien certificate could net you far less than desirable if you partake in an auction you do not understand. As should be obvious from some of the above examples.
I recommend you attend a few auctions before you actually attempt to participate in tax lien investing. This should gain you familiarity and confidence in the process.
Finally, if done properly, you can invest in tax liens with a rather small amount. A small amount being a few hundred dollars. It does not take a lot of money to begin investing in tax liens. All that is required is a little education (these articles should be enough) and a little experience. The experience is up to you.
Good luck in your future tax lien investing endeavors!
