Investing in Properties that owe back taxes.

19 Replies

Occasionally I see people who invest in Tax Liens or you hear on the ratio 'Invest in government guaranteed tax foreclosures blah blah guaranteed 1,000,000% return on investment'.

But I am interested in what/how people invest in this area.

I know that if someone does not pay their local taxes the city can foreclose on them. But besides this step one I do not know how people make money with this whole process. I know there are primary and secondary liens etc etc.

If someone can point me into a non-bs (non-sell me something or some service) direction as to how an investor makes money when people stop paying there taxes that would be greatly appreciated.

Thank you!

I don't have a whole lot of experience with this but have done a bunch of research in TX.

Tax liens always take first position. When the property is sold I believe those liens are dissolved. They would have had their chance to get the property back when the tax lien was initially filed.

The way to make your money back that I have been considering, is to do bare minimum for the neighborhood to get the house rented. Keep it rented for a few years to let the redemption period laps and then flipping. In Texas, the redemption period is 6 months unless there was a homestead exemption on the house in which case it becomes 2 years. I don't know what Colorado's redemption period is.

Be careful. I know someone here in TX who was planning a flip and waited the 6 months and got the house ready. The title company wouldn't give clear title because they were concerned that the owner or heir may claim that the house should have been homesteaded even though the paperwork was never filed. I am not sure about the legality involved in this and the guy was eventually able to find a title company that would supply insurance and clear title but something to be aware of.

@Ryan Blake took my answer on this one . Great advice!
I too am from Texas so have been hesitant to purchase due to 2 year rule. Not to mention where I’m at the tax lien property is junk

@Bethany Rankin I was all for it until I talked to someone and he told me that whole fiasco he went through even without a homestead. I think the only real safe bet is to just rent the property and then flip it when the renter leaves.

[[I am going to Bandera to do the whole "tourist" thing. What is there that I need to see? I will have 2 four year olds and a 2 year old. Thanks.]]

Thank you for the input so far. 

It sounds like you get the property rent/sale ready and then flip it and put it on the market.

Is paying off the taxes the "buying liens" terminology I hear thrown around at times?

I want to throw out a few scenarios to you guys and see what you respond so I can make sure I am understanding things.

John Smith owes the bank $100k and didn't pay back taxes for 2016/2017. I 'buy the tax lien', what rights do I have to the property? Obviously the bank will want the $100k it is owed, and John Smith doesn't want to move out.

I assume if no one is living in the property and no money is owed to another lender then the property becomes mine, much like a foreclosure. Do I have the right to fix and flip the property (I assume so after the above comments) or can I develop the land etc?

What about the 'government guarantee'?

Sorry if this is getting into the weeds, but these are just the questions that come to mind when I here the idea of tax liens being thrown around.

(edit)

Obviously some of this depends on the local laws but I am looking for a general sense or direction.

@Michael Randle

#1...chances are if there is a loan on the property it won't go to auction.  Most people escrow taxes so lender pays them. 

#2...occasionally you might see one go to sale....then a couple of things happen from what I see....either #1 they pay a day or two before the auction or morning of the auction and the property does not get sold at auction.   #2 what I imagine happens is if it does get sold at auction, then the bank/lender sees the deed change and challenges the sale and will load you up with lawyer talk forcing the sale to be cancelled.  You get your money back, but don't get the house or the big % you thought.

In Texas you don't want to make repairs until the redemption period is up....as you may not get that money back.  So that could be 6months-2years depending on the status of the house.  Sorry don't know about CO specifically.

The gov guarantee here is virtually non-existant..... Yea..they tell you and in theory you get 25% or 50% redemption premium...but that is only if someone redeems.  No redemption, no %....I've heard something like 10% get redeemed, but from what I see at the sales, I'm surprised if much of anything gets redeemed.  

Think of it this way.....if you got notice after notice after notice that your taxes are due and you are getting ready to loose your property....then you get served by the sheriff for the court date....the lawyers come visit you in person and you still don't pay....it is probably not all that common that after the sale you have that +25% or +50% to get your property back.

Typically what we see go to sale here is vacant land, often crappy land....you know the 5ft by 1000ft strip beside a railroad track....landlocked land you can't access...and older houses...houses that are paid off and abandoned after death or kids couldn't pay the taxes, or people moved away.  Occasionally you'll find a gem....and there are of course all kinds of exceptions.

There is money to be made, but it takes a fair amount of time, effort, and there is of course risk.

Michael,

In SC you buy the tax lien at auction. Bidding starts at taxes owed. 12 month redemption period. Up to 12% interest on your investment. 1st position so it wipes out mortgages and other liens except state and federal liens. If property is not redeemed county mails you the deed to the property and you own it, no more redemption from previous owner possible, no forclosure needed. I get new houses every single year. One year I got 5 houses for pennies on the dollar. Back before this got so popular I could get a habitable house for $2500.00. It has gotten more competitive but still much cheaper than any other method I know of. I also use my self directed ROTH IRA to buy liens and it has exploded in value over the last 5 years. Because I am doing this in my Roth I never have to pay taxes on the explosive gains I am receiving.

My team and I purchase tax foreclosure properties all the time in Texas. Most of our properties are pre-foreclosure - meaning we either give the homeowner the loan to pay off their delinquent taxes are the buyer of the property out right.

@Michael Randle re: your example.

Buying a "tax lien" can be a property tax loan under our property and tax codes.  There are very precise requirements under the codes you must comply with, but if you do, you step into the shoes of the taxing authorities, including their priority.  That means you have a higher priority lien than even a mortgagee.  Foreclosure is under the judicial process, and can take months.  

If you do foreclose and if there is a mortgagee, they are wiped out so long as they are given notice of the suit.  @Bruce Lynn is correct - most of the time they will step in and cure the defaulted taxes.  They also pay the costs of the suit and court, and the statutory interest on taxes.


I worked one of these where the lender stepped in and paid the taxes, court costs, my attorney's fees, and interest before I got an order of sale.  She wanted the house, but was almost as happy having the interest.  I had another where I represented the former owner in getting the excess proceeds (property was sold at sheriff's sale for much more than taxes).  Mortgagee was a Countrywide spinoff that woke up and claimed all of it 10 years after they stopped asking for payment on the mortgage.

Yeah, this kind of file can get interesting.

Originally posted by @Bruce Lynn :

@Michael Randle

#1...chances are if there is a loan on the property it won't go to auction.  Most people escrow taxes so lender pays them. 

#2...occasionally you might see one go to sale....then a couple of things happen from what I see....either #1 they pay a day or two before the auction or morning of the auction and the property does not get sold at auction.   #2 what I imagine happens is if it does get sold at auction, then the bank/lender sees the deed change and challenges the sale and will load you up with lawyer talk forcing the sale to be cancelled.  You get your money back, but don't get the house or the big % you thought.

In Texas you don't want to make repairs until the redemption period is up....as you may not get that money back.  So that could be 6months-2years depending on the status of the house.  Sorry don't know about CO specifically.

The gov guarantee here is virtually non-existant..... Yea..they tell you and in theory you get 25% or 50% redemption premium...but that is only if someone redeems.  No redemption, no %....I've heard something like 10% get redeemed, but from what I see at the sales, I'm surprised if much of anything gets redeemed.  

Think of it this way.....if you got notice after notice after notice that your taxes are due and you are getting ready to loose your property....then you get served by the sheriff for the court date....the lawyers come visit you in person and you still don't pay....it is probably not all that common that after the sale you have that +25% or +50% to get your property back.

Typically what we see go to sale here is vacant land, often crappy land....you know the 5ft by 1000ft strip beside a railroad track....landlocked land you can't access...and older houses...houses that are paid off and abandoned after death or kids couldn't pay the taxes, or people moved away.  Occasionally you'll find a gem....and there are of course all kinds of exceptions.

There is money to be made, but it takes a fair amount of time, effort, and there is of course risk.

 I would just add that "necessary" repairs can be made if for safety or to prevent further damage. So you can replace the roof if you want and be reimbursed for that cost.

Thank you all for the information and I am kind of getting a clearer picture of who/why people would go down the tax lien road. Although I do not see how the guru's promise the 15% government insured returns, I am starting to see how people COULD make money with them.

So when I buy a tax lien I am the first hold collector on a property when it is sold. This also gives me the ability to evict a tenant that is in the property. (All based on the local laws of course).

Or I could buy a property with a tax lien and fix it up to stabilize, re-sell or add to my portfolio. (again based on local laws).

Am I missing any fundamental issue that might throw a wrench in my logic?

I have purchased two properties in Texas (Angelina county) that went through the tax foreclosure process. One was a city lot in lower quality neighborhood which had a home that burned down in 2014. The previous owner did have the homestead exemption in place, but the judgment date was more than 2 years from my date of purchase. This lot went through a sale, resale, and struck-off auctions and was not sold. My VERY low bid was accepted by all of the taxing jurisdictions. I rented a skidsteer for 1.5 hours to clean up the lot a bit and then sold it shortly thereafter for a wonderful profit. The second property was purchased at a struck-off auction. It was a 1/2 acre city lot. My wife and I cut and burned trees and brush, and, using the skidsteer and borrowing a dump trailer, I demolished an old 800 sq ft home and dumped debris at landfill (also buried some on the property). We made good money on sale.

Deals are available, but you must do your diligence before purchasing. There are risks!

As @Brandon Turner has shared the investing triangle with the BP community, there are 3 needs for investing - money, knowledge, and hustle. Knowledge in this niche can be very valuable!

@Michael Randle

Is paying off the taxes the "buying liens" terminology I hear thrown around at times?

No, you cannot simply pay off someone else' taxes and have any rights, you just did them a favor for no reason.  Tax liens are sold at pubic auction, and you must compete to buy them. 

Tax lien vs Tax Deed - Important Difference

TX is a "tax Deed" state unless I am mistaken. They do not sell tax liens. They sell a tax deed, a subtle but important difference.  Both could be called "Tax Sales" but a tax deed gives you  ownership rights. A tax lien only gives you the right to collect the taxes. However with a tax lien, you can foreclose and take the property if the owner does not eventually pay.  Many if not most states that sell tax deeds give the owner a period of "Right of redemption" where they can reclaim the property by paying the tax deed holder both the lien and interest and or penalties.  You'll have to ask  TX tax deed experts the particulars on TX law.  

So when I buy a tax lien I am the first hold collector on a property when it is sold. This also gives me the ability to evict a tenant that is in the property.

No a tax lien does not give you that right to evict until you complete a foreclosure. A tax deed does give you that right, depending on a specific state's laws. 

Or I could buy a property with a tax lien and fix it up to stabilize, re-sell or add to my portfolio. (again based on local laws).

If you "buy a property" with a tax lien" the tax lien gets paid off when you buy the property. If you buy the tax lien against the property, they you can do what you say after you foreclose and take the property.

Investing in back taxes on properties is location specific.  So, the simple answer is to research where you wish to buy them and find a niche, try your plan on a few, perfect, and go full throttle when its perfected.  

To give a few variabilities to get you started, some states may earn 50% interest, others can be bid down to nothing, some morgages stay after deed issues while others, all juior debts to the county taxes are eliminated (including mortgage).  So, easiest way to get acurate info, go to county tax office you wish to invest in and simply ask, someone will give you answers, then its simply research and invest!  Best to you!! 

@Ned Carey , Thank you for the information. I am in the MD area right now, closing out my CO properties so looking to invest in something again. I have read you invest in Tax Lien/Deeds in Baltimore. How are you liking/disliking it?

It sounds like it is VERY area specific as to the local laws, I saw up to 3 years for right of redemption in AZ. So FL that allowed you to do year round buying. I guess the quote I am taking away, from the county clerk in AZ none-the-less "You are playing a game with the government, and the government makes all the rules."

P.S. I do not know how this got onto TX specifically, not looking to invest there at this time. No offense to the lone star state (waves Dallas cowboy flag).

@Michael Randle I love doing tax lien in Baltimore City. I hit it big on  my first two liens, now I am addicted. A lot of people like gambling too, but that doesn't  make it a good investment.  This last sale was one of the most competitive since I started.  It is a lot easier to lose money that to make money in this game.

@Michael Randle All of the counties in Colorado have what is considered county held certificates.  Because of the way the auctions are handled, the over bid for the tax lien is not paid back, it is best to purchase this way.  However, because of the competition in some of the greater areas, such as Denver and Boulder it is the only way to get a foot in the door.  What that being said you can look at the counties that have county held certificates at full interest rate and no competition.  See what you can find at the Treasurer's office listings and sift through them for something good with value.  The redemption period is 3 years and if you find something that is two years into the redemption period then you can start the foreclosure process.  It is pretty simple in CO because they have an administrative foreclosure process.  You may want to make sure you have a good listing to choose from.   Some of the easier ones are El Paso,  Adams, Arapahoe, Larimer and more that have these listings.  Let us know if you find anything that works out for you.