Tax Liens for Newbies

7 Replies

I heard about tax liens on a BP podcast, and they sounded interesting but I'm still a little confused.

What are they exactly?

Where do you find some?

How hard are they to invest in?

What are some legal things to know?

I'm a newbie whose just interested in a different type of investment and thankful for anyone who can give me a little rundown.

@Jed Forster Lots of questions and they were the same questions that I had when I was a newbie.  I have been investing in tax liens since 2013.  It was after loosing confidence in myself after licking my wounds from the housing market crash.  I still had a passion for real estate and thought I would "stay in the game" if I invested in tax liens.  I had no idea what I was doing and I paid a $500 premium for back taxes of $150 owed. I didn't know what it meant, nor did I care.  I knew that I bought my first lien and was excited, that was in Piscataway, NJ.  The lien redeemed and I think I made 2% on my money invested.  Not exciting at all to say the least, but hey, it was a win.  Better to be in the positive than the negative.

It is my opinion that tax liens and deeds are part of a legal process.  You need to keep up with the liens/deeds that you own, make sure they are recorded, affidavits (if required) are filed with the tax collector and you are tracking your redemption periods.  

Each state has a different process, rules and regulations.  There are tax liens/tax deed/hybrid states and you need to know what is required of you and the property owner before you just jumped in.   I was lucky enough to run into some really nice tax collectors that took time out of their day to talk to me.  Know that other investors may not be as kind and asking questions during an auction is not the place to start asking attendees.  

Everything sounds and looks easy when you hear about it.  You need to do your due diligence on the properties that you are interested in.  I have taken some risks.  Risks that have made me 30% or more on my money after a couple years and risks where I don't think that I should have bought the lien but have it.  I am in the process of going through my first foreclosure on vacant land.  I should have title to the property in a couple of months.  

When I started foreclosure I was confident, but when I talked to a friend of mine, who isn't a real estate investor and doesn't even understand tax liens, I have lost all my confidence and feel that I just threw good money after bad.  I am too far in the process to back out and need to just move along.  My gut instinct and the homework I done says I will be ok.

I say this because tax lien/deed investing is technical.  It isn't as everyone says or the courses make it seem.  It isn't buy a lien and get a property dirt cheap.  It is buy the lien, pay the subsequent taxes, sit and wait.  Then pay an attorney to foreclose on the property.  Yeah you get a property less than market value, but you have to have that money backing you up to get there.

Also, know that you are competing against hedge funds and other financial institutions who are bidding up the premiums like crazy, most likely knocking you out of the game, which leaves the properties behind that they aren't interested in, which are the riskier plays.

I had as many as 35 tax liens at the peak and I currently have 20 liens in my portfolio with 3, soon to be 4 rental properties.  Between all the redemptions, I have had hundreds of liens throughout the 8 years I have invested in them.

I suggest you look online for information specific to your state that you are interested in investing in.  I stick to NJ because that is what I know.  There is a book titled "Tax Liens" that talks about NJ tax lien investing.  Whatever you do, don't buy those stupid courses that cost a ton of money.  
  

A tax lien is a county lien against a property for unpaid property taxes.

The county has an auction to sell the liens. Some ate in person, some are online.

They are harder to invest in now than in the past.  There is usually fierce competition at these auctions that drive up prices. You need lots of cash available to buy these.

In my state of SC you buy them and then forget about them. You will either get your money back plus interest or a deed will show up in your mailbox. 

You need to know what your bidding on and I drive by every property that I might bid on. It takes alot of time to properly research the properties on the list.

Originally posted by @Jed Forster :

I heard about tax liens on a BP podcast, and they sounded interesting but I'm still a little confused.

What are they exactly?

Where do you find some?

How hard are they to invest in?

What are some legal things to know?

I'm a newbie whose just interested in a different type of investment and thankful for anyone who can give me a little rundown.

 The first thing you need to understand is that there is a big difference between tax lien and a tax deed. It looks like Wisconsin is a tax deed state. If you are interested in tax liens you would have to bid in a different state.

Tax liens are exactly that a lien. You bid on the amount of back taxes owed on the property. Different states have different methods for bidding. If you win a tax lien,  you do not take ownership of the property nor do you have any rights to access it or use it. The owner will have a set amount of time, usually 3,4,5 years, to redeem the property from you. During that time you will make interest on the money that you have spent for the property taxes. If the property is not redeemed during the set period of time then you can start a lawsuit to take ownership of the property. 

There is a whole lot more to it but that is a pretty simple summary. Also every state Is different and has different sets of laws governing tax sales.

A good book to read is the 16% solution.   It explains the concept simply and gives some rules for different states.

Originally posted by @Will Sifert :
Originally posted by @Jed Forster:

I heard about tax liens on a BP podcast, and they sounded interesting but I'm still a little confused.

What are they exactly?

Where do you find some?

How hard are they to invest in?

What are some legal things to know?

I'm a newbie whose just interested in a different type of investment and thankful for anyone who can give me a little rundown.

 The first thing you need to understand is that there is a big difference between tax lien and a tax deed. It looks like Wisconsin is a tax deed state. If you are interested in tax liens you would have to bid in a different state.

Tax liens are exactly that a lien. You bid on the amount of back taxes owed on the property. Different states have different methods for bidding. If you win a tax lien,  you do not take ownership of the property nor do you have any rights to access it or use it. The owner will have a set amount of time, usually 3,4,5 years, to redeem the property from you. During that time you will make interest on the money that you have spent for the property taxes. If the property is not redeemed during the set period of time then you can start a lawsuit to take ownership of the property. 

There is a whole lot more to it but that is a pretty simple summary. Also every state Is different and has different sets of laws governing tax sales.

Thank you Will for your information, so since my state is a tax deed state, would I then own the property if I purchase one or how does that exactly work, thanks in advance for any input. 

Originally posted by @Jed Forster :
Originally posted by @Will Sifert:
Originally posted by @Jed Forster:

I heard about tax liens on a BP podcast, and they sounded interesting but I'm still a little confused.

What are they exactly?

Where do you find some?

How hard are they to invest in?

What are some legal things to know?

I'm a newbie whose just interested in a different type of investment and thankful for anyone who can give me a little rundown.

 The first thing you need to understand is that there is a big difference between tax lien and a tax deed. It looks like Wisconsin is a tax deed state. If you are interested in tax liens you would have to bid in a different state.

Tax liens are exactly that a lien. You bid on the amount of back taxes owed on the property. Different states have different methods for bidding. If you win a tax lien,  you do not take ownership of the property nor do you have any rights to access it or use it. The owner will have a set amount of time, usually 3,4,5 years, to redeem the property from you. During that time you will make interest on the money that you have spent for the property taxes. If the property is not redeemed during the set period of time then you can start a lawsuit to take ownership of the property. 

There is a whole lot more to it but that is a pretty simple summary. Also every state Is different and has different sets of laws governing tax sales.

Thank you Will for your information, so since my state is a tax deed state, would I then own the property if I purchase one or how does that exactly work, thanks in advance for any input. 

 I have no experience with tax deeds, just tax liens. I am sure some of the other posters here do and they will help you out. I wouldn’t want to give you incorrect info.