Are tax liens as easy and simple as they sound?
New to Real Estate · Findlay, OH · Member since 2018 · 10 posts · 4 votes
(in response to the subject line)
Tax liens sound like a win win, if they pay off you win with high interest and if they don't you get a house for pennies on the dollar. This leaves out the fact that they are sold at auctions and they can be very competitive. In my area interest rates get bid down to 4% on good properties and lesser properties are often a loser if you foreclose on them.
Tax lien laws can be quite complex and the risk can actually be quite high if you don't know what you are doing. I see lots of big money jump in and get their clock cleaned.
That said I do it full time and I do OK. You can make good money but it is not easy.
As an example of #3, I bought a lien on a parking lot for a townhouse development. Many of the townhouses had rear garages and needed that land for access to their garage. Can't lose right? They need that land one way or another. Well actually I can loose. The parking is owned by a separate company from the townhouse HOA. The HOA has an easement allowing them access and parking on the land. If I foreclose on the parking lot they still get to use it.
You buy liens from the county (or sometimes city). Often the county website will have good info but it can be hard to find. It won't be on the first page! Or call the property tax dept and ask them. There is are tow forums here that discuss tax liens. We have many experts here that can help with more specific questions.
If it were easy and simple, everyone would do it.
@Mason Warnimont If you buy right, the return is good. For example, I usually only buy those first-year defaulted liens.
@Mason Warnimont It's very easy to get started however It's definitely not as easy as it seems when it comes to being successful. Just like flipping, and buy-and-hold investing the Lien business is also flooded with "Get rich quick" guru's promising easy fortune, this has caused this area of investing to also be flooded with a large population of uninformed buyers who are now your competition causing you to overbid or lose out to them on lien purchases. There are even online portals where people are flipping notes to unsuspecting newbies who don't know how to value a lien throughout the entire process, including cost of capital sitting on a note or trapped due to a homeowner bankruptcy case, etc...
The lien business will require a great deal of education as well, you'll need to understand the neighborhoods of the properties you're acquiring the liens on, you'll need to learn different State and locals laws since they will determine your ability to collect, the various ways the owners can get out of having to pay the liens which will vary by state, and county, what your numbers really look like if the Title is clouded causing you to pay off others before being free and clear, etc...
This is just my perspective on this line of business but others may have systems in place to help mitigate some of the traps of the business. I'll just say that every day we see over 100 post of successful property acquisitions on BP but rarely do we see a post regarding a successful lien payout, property get acquired, rehabbed, then flipped or added to a Buy-and-Hold portfolio. Hopefully those guys will chime in and share some strategy with you.
@Ray Johnson Thank you for the input! That clarifies things up for myself and hopefully others. I will look into all aspects (or most) aspects of tax liens and definitely get educated before diving in. Much appreciated.
(in response to the subject line)
Tax liens sound like a win win, if they pay off you win with high interest and if they don't you get a house for pennies on the dollar. This leaves out the fact that they are sold at auctions and they can be very competitive. In my area interest rates get bid down to 4% on good properties and lesser properties are often a loser if you foreclose on them.
Tax lien laws can be quite complex and the risk can actually be quite high if you don't know what you are doing. I see lots of big money jump in and get their clock cleaned.
That said I do it full time and I do OK. You can make good money but it is not easy.
As an example of #3, I bought a lien on a parking lot for a townhouse development. Many of the townhouses had rear garages and needed that land for access to their garage. Can't lose right? They need that land one way or another. Well actually I can loose. The parking is owned by a separate company from the townhouse HOA. The HOA has an easement allowing them access and parking on the land. If I foreclose on the parking lot they still get to use it.
You buy liens from the county (or sometimes city). Often the county website will have good info but it can be hard to find. It won't be on the first page! Or call the property tax dept and ask them. There is are tow forums here that discuss tax liens. We have many experts here that can help with more specific questions.
Each state has different tax lien rules. In Florida for instance, when you purchase a tax certificate, after two years you can force the property to be sold at auction (after buying back all other outstanding certificates), but your only privilege is that you are automatically entered as the first bidder for the price of your certificates. So your chances of getting a property on a tax deed are almost non existent.
Also, the taxes certificates are sold once a year at auction, where the winner is the lowest interest rate bidder. Many institution will bid all the way down to 0.25% and it is very hard to compete against them. They will get a minimum statutory 5% total interest for a certificate that could be in their hand for up to two years. So you don't get a lot of return for your money, unless they are redeemed very fast...
There are still some deals to get, but with a lot of hard work, to locate county held tax certificate that will give you a better return. But they are scarce as most of them are useless pieces of land in between highways. Also, some counties, while you can buy online at the annual auction, will require you to come in person to pay in cash to buy these leftovers.
I do have a small part of my portfolio in tax certificate, but I am doing it more for fun and to educate myself as I am not sure so far that my returns are worth the time that I have invested in it. But it is a good diversification with a very low risk.
@Mason Warnimont you need to repost or edit this question specific to your area. In my county things are pretty straight forward and simple. Other places maybe not so much. On a broader note generally tax liens pay a good interest rate and are low risk. But the owner can redeem the lien at any time prior to foreclosure. So you could buy a lien in November and get paid off in December. Even though the "APR" is high only one month's interest would be paltry...
Thank you all for the input! it is very insightful and helpful!
I echo everybody's thoughts. Tax liens are not "easy". Some states offer tax liens, some offer tax deeds. You need to learn the difference. Every state has different rules, and within a state there can be different rules by county and sometimes by city. Get comfortable reading legal statutes that govern how a tax lien sale takes place and what you as a tax lien holder must do or - not do - with your lien.
Basically decide if you are in it for the interest rate returns or if you want to get the underlying property. Tip - if you want property, look at tax deeds instead of liens - it's usually quicker. If you still want to use liens to get a property, look at states like South Carolina or Indiana where the redemption period is short. (See? You'll need to learn what "redemption periods" are from the statutes.)
It is like anything else, you don't know what you don't know. Best to read up on the topic, attend some auctions and get a mentor. It has become very competitive but I can't find a better niche that I can do as well as buying tax liens and getting houses this way.
I spend hundreds of hours of researching properties prior to the auction. So that I know what I am buying. I have learned this and many other lessons the hard way, but I have been lucky enough to always make money from it.
@John Underwood funny you say that about the research. Was at auction earlier this month. Old guy next to me keeps asking me questions. One was how much to bid on this or that. I told him research. He asked me what I do. I told him....which is a lot of research, hours of research and includes a drive by to any property I plan to bid on. He looked at me and said....wow ...that's a lot of work. I thought this was easy. He's like.....you do that for every auction. Me...yup..... and then he looked very discouraged and walked away.
@Bruce Lynn I love it, great story! Yet it is typical.
@Mason Warnimont Any success at the Ohio tax sales?
Do you guys have a system for Due Diligence? I understand research can be time consuming, but what exactly are you looking for in your Due Diligence process? Personally, I am more interested in Tax DEEDS at this time. Any insight to add to a Due Diligence "check list" would be appreciated! Thank you!
-Jeff
@Jeff Herber Yes....I have a system....first is paring down the properties....trying to eliminate the stuff I don't want....then with what is left start looking at the properties...again trying to pare down the list ...for the most part I don't like small lots in dead towns and don't like mobile homes...I don't like houses that are completely destroyed...no windows/no doors etc...I probably have some other criteria too....no landlocked, rare do I like anything with no address....all kinds of other issues...typically I don't like partial ownership....in my area they will sell 20% interest and such....unless it is dividable or worth the effort.
Once I do all that, then start looking at values and exit strategies.....so more parring down......
Then I look at title issues..liens etc....and trying to figure out why it is for sale.
All this starts when I get the lists 30-45 days before sale.
When I get a much smaller list, then I go see the property....and check bidding requirements....some of our counties require 5-10 day prior registration.
Then I call the county 1-2-3 days before the sale to make sure property is still in the sale. Plenty get paid or pulled before the sale...so I don't want to show up at the wrong county....
Depending on the property and what it is I may drive by again the morning of the sale to make sure it is still there or I haven't missed anything...that I have the right property, etc....
Then hope and pray about 30 minutes before the sale, that my competition has overslept, on vacation, at another county buying a piece of junk, or is out of money...and that I will be the winner that day.
I'm sure there are a few steps missing, but that's the basics.
Do you guys have a system for Due Diligence? I understand research can be time consuming, but what exactly are you looking for in your Due Diligence process? Personally, I am more interested in Tax DEEDS at this time. Any insight to add to a Due Diligence "check list" would be appreciated! Thank you!
-Jeff
Tax deeds are typically sold for a retail price because you get the property right away. Tax liens are more speculative as you have a redemption window and you don't know if owner or lien holder will redeem the property.
I use a similar method to what Bruce uses to eliminate undesirable properties then I drive by anything I might bid on and put my eyes on each and every property. This can be 900 properties. There is no substitute for not seeing these in person. Ask me how I know.
Thank you two for your insight. I’ve been diligently researching away. I have a few upcoming Sheriff Foreclosure Sales coming up in Indiana. I have been doing my best to research prior to the auction(s). I’m assembling a “Team,” that consists of a realtor right now and I will be reaching out to the realtor about a real estate attorney.
As for DEED auctions, I have been reaching out to the counties and inquiring about any outstanding liens. I’ve found I’ve been tossed from department to department with minimal information (via email). Are there any suggestions for approach and what type of information to request? I’m not quire sure how to investigate Title issues. Thanks again!
Thank you two for your insight. I’ve been diligently researching away. I have a few upcoming Sheriff Foreclosure Sales coming up in Indiana. I have been doing my best to research prior to the auction(s). I’m assembling a “Team,” that consists of a realtor right now and I will be reaching out to the realtor about a real estate attorney.
As for DEED auctions, I have been reaching out to the counties and inquiring about any outstanding liens. I’ve found I’ve been tossed from department to department with minimal information (via email). Are there any suggestions for approach and what type of information to request? I’m not quire sure how to investigate Title issues. Thanks again!
Try going down to the county offices. Talk to the Tax Collectors office or who ever runs the Tax Lien Auctions.