The Tax Lien Certificate Money Tree
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Tax Lien certificates can be a very lucrative and safe investment. A tax lien is a claim against an item by another party, which utilizes that item as security for repayment of a loan or other claim. A tax lien is placed on a piece of property by the government when the owner fails to pay their property taxes.
Most counties have a Real Estate Tax Lien sale once a year. At these sales, primarily investors bid on the tax liens that have been placed on parcels of real estate. The bidding per tax lien begins at a high interest rate (18% in Champaign County, IL) and decreases per bid. The investor who bids the lowest interest rate before time expires gets the lien. The property owner then owes the new tax lien owner the amount of the lien plus the interest (interest is accrued per 6 months in Champaign County). If the property owner continues to default on their real estate taxes, the original tax lien owner is given first priority on the purchase of the subsequent liens. After 3 years of defaults (the time may vary per county) by the property owner, the tax lien owner has the right to foreclose and obtain the property.
Gain an advantage at Tax Lien Auctions
Tax Lien auctions move at a very rapid pace. There can be 2,000 tax liens to auction off or more, thus there is no time wasted. In my experience, I’ve seen parcels sold as quick as 1 second and they typically take no longer than 5 seconds. I know this sounds ridiculous, but I’m not joking. Therefore, if you’re going to bid you better know what you’re doing and be prepared.
Most counties publish a list of the tax delinquent properties in the local newspaper shortly prior to the auction. However, as a registered bidder, depending on what company facilitates the auction, you are provided with an electronic document (PDF, Excel Spreadsheet, etc.) that gives you all of the parcel information in a condensed form. The information typically provided is the:
- Parcel Number
- Property Owner Full Name
- Property Address
- Property Mailing Address
- Property Type
- Property Assessed Value
- Tax Delinquent Amount
Depending on your investment motives, the problem with the list supplied is that it doesn’t offer enough information. If all you are worried about is earning interest on your invested money, then you’d be good to go with this basic list. But if you’re an investor that wants to maximize their chances of foreclosing on and obtaining the actual property after 3 years of delinquency, then more work needs to be done.
Research Research Research
First off, if you want to foreclose on the property, I’m willing to bet that you don’t just want some vacant land. So you will need to reference the county assessors records to see what the assessed value is of the land AND the building. Needless to say if the building assessed amount is zero, there’s no 5/3/3 there either. You can do this online in most counties. If doing this manually for 2,000 or more records sounds tedious, that’s because it is. Don’t do it yourself. Automate the data compilation, I do. Or you can hire a virtual assistant to do this for you.
Also, knowing if a property has a mortgage against it is very valuable. If a mortgagor (a bank) realizes that the property that is collateral for their loan is going to be swiped from underneath them, you better believe that they're going to do something about it (one main reason lenders escrow taxes and insurance for their mortgagees). Most likely they will step in and pay the delinquent taxes. No house for you. This is why it's valuable to know which properties are free and clear. Mortgage information, or lack thereof, can be obtained per property at the county recorders' office. If you know that a specific property is free and clear, perhaps you'll take an extremely low interest rate on it the first year to win the bid. And then of course, purchase the subsequent liens if they come into existence.
It’s best to know which liens leverage the highest property value. You want to focus your bidding efforts on investing your money in properties that you will most likely get to foreclose on and if you do, you want the highest property value per your dollar. This is a simple formula that can be entered into a Microsoft Excel spreadsheet. I call it the Tax/Value ratio, simple take the delinquent tax amount and divide it my the market value of the property. The lower this ratio is, the better.
Overall, I think the tax lien game is overlooked by many and is ripe with opportunity. Even borrowing the money to invest in tax liens wouldn’t be a bad idea if you can get the money cheap enough. Most bidders at tax lien auctions don’t know what they’re doing, trust me. Do your research and you’ll be far ahead of competing bidders. This is as close to a money tree as it gets.