Tax Lien Investing

14 Replies

Hey guys!  It's been a long time for me since posting on BP.  I'm 19 and like most of my generation, I have a short attention span.  But it's good to be back.  On to the question:

I'm looking into tax lien investing, and I live in Texas.  I'm looking for some downsides to this niche so I fully understand it.  It seems like every source I go to says "you can't lose with tax liens!".  I know the gist of it:  there's a redemption period, in which if the owner repays his taxes, I would get my money + 25%.  However, what happens if the owner declares bankruptcy and the IRS decides to take the house?  Do I still get my money back?  Also, how can I inspect the property before buying a lien?  Is there a list of properties I can get?  

Also before anyone sends me the link to the BP article on "Investing in Tax Liens in Texas," just know I've read it and that is where my questions come from.

Thank you very much for taking the time of your day to respond to this.  I really appreciate it.

First of all I believe taxes is a tax deed state not a tax lien state. You are actually buying a property instead of just a lien against the property. 

You can absolutely lose money in tax liens. I have had many that I lost money on. If the total cost to acquire a property including legal fees, and subsequent taxes is more than the property is worth then you lose money if they don't redeem. 

I don't think IRS is a serious risk but in over 500 liens I have never run into an IRS lien so I don't know how it would affect you.  Bankruptcy is a risk. Mainly you money is tied up. You cost to acquire goes up over time. A judge could reduce or eliminate your interest. Fire is a risk. You could wind up owning an expensive pile of burnt sticks.

You do not get to inspect the interior of a property when buying a tax lien or deed. It is like a mortgage foreclosure auction. You don't see the inside so you assume the worst. I do inspect the exterior of virtually everything I bid on.  Most of my losses were properties i did not inspect.

Usually the best place to get tax lien or deed info is the county website.

How can I figure out if Texas is a lien or deed state?  I've been searching it on google, and I only see links that allow me to purchase liens or deeds.  Can a state be both a lien and deed state?  

Okay, so the point where you lose money is if the tax + penalty is not paid by the owner, and the investor is not prepared to cover any costs that come with the house.  Good to know.

How can a judge reduce or eliminate the interest?  Is that something that commonly happens?  

Good to know, in the future I will be inspecting the exterior of most liens I invest in.  I will begin to take a look at my county website and see what I can learn!

Thank you for your response, @Ned Carey   

Originally posted by @Omar Naguib :

Hey guys!  It's been a long time for me since posting on BP.  I'm 19 and like most of my generation, I have a short attention span.  But it's good to be back.  On to the question:

I'm looking into tax lien investing, and I live in Texas.  I'm looking for some downsides to this niche so I fully understand it.  It seems like every source I go to says "you can't lose with tax liens!".  I know the gist of it:  there's a redemption period, in which if the owner repays his taxes, I would get my money + 25%.  However, what happens if the owner declares bankruptcy and the IRS decides to take the house?  Do I still get my money back?  Also, how can I inspect the property before buying a lien?  Is there a list of properties I can get?  

Also before anyone sends me the link to the BP article on "Investing in Tax Liens in Texas," just know I've read it and that is where my questions come from.

Thank you very much for taking the time of your day to respond to this.  I really appreciate it.

In Texas, and that's all of the little I know about this, bankruptcy should pose no risk.  If they file before the auction, the property will not be sold.  If they file after the auction, they no longer own it so it is not relevant to the bankruptcy.

IRS liens against the property may survive the auction.  But again, as Texas is a deed state, only the liens filed before the sale are relevant.

Inspecting a property before the sale is generally not possible.  Most counties state in their auction postings that it is illegal to trespass on a property even if it is posted for sale.  You can drive by and see it from a public roadway but that is one reason why they usually sell at some discount. 

We buy them based on our best guess and once we get them inspected offer them to our investors. PM me if you would like more information on that

@Omar Naguib 

I have never been to your part of the country before. 

The best way to check into tax sale is to check into the tax commissioner web site under delinquent tax sale.

Since Amarillo, TX  lies into two counties, Randall & Potter county, you can check out both of their web sites.

http://www.prad.org/sheriffs_sale/RandallCountyShe...

http://www.prad.org/sheriffs_sale/PotterCountySher...

There are a lot of info that you can gather from their sites, 

 there are a sale coming up in Potter county Feb 3, 2015 &  March 3,2015. get the list & attend for the auction, familiarize & learn while attending the auctions. You will learn a lot while attending personally.

good luck

@Roy Oliphant  - I've researched the difference between tax liens and tax deeds, but I don't really understand it.  Could you give me the difference in your own words?  Because according to their definitions, I really like liens, but I'm unsure about deeds.  

@Tom Yung  - Thank you so much!  That helped a lot, and I was able to see what properties would be on auction and when.  I really appreciate you looking that up for me.  I think this will get me started in the right direction!

@Omar Naguib  

In a tax lien state, you are buying a right to collect a debt (lien).  If the owner does not pay by the expiration/redemption period, the you then have the right to initiate legal foreclosure and sue for the property.

In a tax deed state (such as Texas), the taxing entities have already performed the foreclosure and the you are buying the actual property subject to the right of redemption.  This puts you in a much stronger position and lowers your effective costs later as there is no need to pay for the foreclosure process.

Georgia is a tax deed state but mostly uses a non-judicial foreclosure process so you are buying something much closer to a lien in most of those auctions.  Just mentioned this as an example of how different things can be state by state.

As always, real estate is local and you must know how things work in the location you are investing; even when investing indirectly with liens or loans.

So am I correct in assuming that the main goal you are after when buying a lien is the 25% ROI (though the real estate is a nice plus), but the primary goal of a tax deed is to receive the real estate? That's what the definitions sound like to me.

And if I'm correct here, then tax liens seem a lot safer to me. Would you advise someone to avoid investing in tax liens out of state?  

Tax liens you are fronting the delinquent tax money for the owner and they have a set time and interest rate to pay it back. If they don't pay it back by then end of the redemption period you can take the property. The interest and time limit varies by state. About half of the states do this.

Tax deeds are when the state holds the tax lien and the time period to pay it back has passed. Now the state auctions off the property to the highest bidder in order to collect the tax money due.

Texas is an exception. I believe, in Texas, the properties are auctioned off and you receive a Sheriff's deed of you win. You take control of the property, can make necessary repairs and rent it out/collect rent from the current tenant. However, the home owner can still redeem on the property and get it back, but you get your money back plus a penalty that they have to pay plus the cost of the repairs needed to make it livable/up to code. The amount of time the owner has to redeem depends on whether it is their primary residence or not. Keep in mind Texas is really weird and does things differently than other states. I did some research on Texas but that's as far as I went.

A good rule of thumb on tax liens is to make sure the land is worth more than the lien, that way if there is a fire you aren't screwed. Also, get.a picture of the property if possible to make sure it's still standing and not a disaster.

Hey Ned, I've seen from your site that u are active in investing in tax leins certificates. So, you primarily look for those that you believe will not be redeemed, or do you also look to invest for the interest rate? I would like to start TLC investing, for those likely not to be redeemed, to get my feet wet. Which state would you recommend and what online options are there?

@Brian Christensen   I only invest in MD because I know how to do the research here an know the laws inside and out. My goal is to acquire properties through foreclosure. If fact the way i have structured my business I do not make any money unless I foreclose.

The best place to find out about auctions is county websites. Also check out Grant street group and ************** they are both companies that run online auctions for various counties around the country. There are others too, I just don't know them offhand. Google is your friend.

i couldn't recommend what states to invest in because what I know is MD. Fierce competition can make some states that look great on paper, IE: high interest rates, not that great.

@Brian Christensen   If I could Vote more than once for @Ned Carey post I would (I'm from Chicago - voting more than once is how things get done).  

Here are links to some of the online tax lien auctions.  Note, there are states that have tax deed auctions online also.  Be careful, just because it's easy to buy online doesn't mean it isn't dangerous.  Your due diligence for out of state liens/deeds/properties is extremely important.  I've seen parcels in Florida for sale that when you look at the county site satellite photo with the parcel lines drawn in - the parcel is in a lake!

Grant Street Group software online tax lien auctions:  http://www.grantstreet.com/auctions/tax-lien-aucti...

RealAuction.com software tax lien auctions: http://www.realauction.com/county-tax-lien/

********** - tax sales: http://www.**************/help/index.cfm?fuseAction=TaxSale

Take your time and go through the sites to see the rules for opening accounts, payments, deposits, and then also review the tax lien statutes for where you are investing.  

Just to give you an idea of how long it took for me to feel comfortable with investing in a new state - I took almost 3 years of studying the Florida statutes, looking at the results of two years of auctions, and then taking a trip to the areas I was interested in investing before I ever placed a bid.  I guarantee that there are still nuances I haven't come across that could affect my investments.

I have a BP blog article on the nuts and bolts of just opening an online tax lien auction account that I wrote in late 2013.  Basics for Online Tax Lien Auction process

Good luck with your investing.

That is awesome and appreciated. Thanks so much. I have been reading about TLC and like the security if they are redeemed and just taking the interest. I plan on mostly buy and hold with a mix of tax Lein certificates. Do you have books on the subject you recommend? I just purchased: profit by investing in RE tax Leins by Loftis. 

Do you have a strategy of just investing for interest only or just in hopes of acquiring property?

@Jerry K.   invests mainly for interest. I invest mainly to get the property to resell for profit.

The books that I have seen are general in scope. I don't know that more books will advance your knowledge that much.

Participating even at a small level to test, will help you learn more. Also as said county websites, auction websites will have more specific information. A tax sale attorney in the area you want to invest can also help with specifics. Many will gladly give an initial meeting or phone call for free in order to gain a new client

(I'm from Chicago - voting more than once is how things get done).

That's funny Jerry. But this isn't Chicago. You have to wait until tomorrow to vote for me again. 

Yea, I forgot Real auction, also there used to be Tax Lien Certificates online (TLC) but I think they may have become Real Auction.

Aftet reading this thread I am intrigued. Interesting to learn about different avenues in the RE business. 

Yasmine Bisumber, Real Estate Agent in FL (#3340998)
(954) 744-0013

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