Did you know over 18 U.S. states regularly auction off properties at as low as 1/10 of the market value? Find out how to navigate Tax Liens properties without losing your shirt.

Tax Lien properties are one of the most overlooked niches in U.S. real estate.

Generally, these have the potential to be very profitable investments, so long as you do your homework. With more hedge funds and commercial groups taking to Tax Lien property acquisition, you can be outbid on the top profit deals so it’s important to approach Tax Liens with some experience buying and selling U.S. real estate.

What Is a Tax Lien?

When a homeowner doesn’t pay property taxes, the city or county has the authority to place a lien on their property.

A lien is a legal claim against the property for the unpaid amount that is owed on the property taxes. Property that has a lien cannot be sold or refinanced until the taxes are paid and the lien is lifted. Similar to how other properties that are bought and sold at auctions, property tax liens are as well.

Origin of Tax Liens

I gotta admit, I find the process of U.S. Tax Liens somewhat amusing.

Considering that the basis of American Independence was to free themselves of the British Crown imposing taxation on settlers and using Tax Liens on properties if they didn’t pay taxes, it’s sorta ironic that it is used in modern practice. The settlers didn’t like that, they wanted the option to pay in trade (grain, livestock, wears). The crown foreclosure of properties for unpaid taxes ultimately resulted in fury and rebellion. And yet, the modern practice is continued with the U.S. government.

So essentially a Tax Lien a certification placed on a property for the back-owed property taxes and any penalties that a homeowner hasn’t paid. When you buy a Tax Lien property, you become the lien holder and pay the total amount owed. Then the property owner repays you that same amount over anywhere from 6 months to three years, plus lien interest as determined by the state.

Be forewarned: tax lien certificates do come with an expiration date. Each state has specific processes to follow once you become the lien holder, so be sure to do your market research prior to buying.

How to Buy Tax Lien Properties

Today, a total of 18 states have authorized actions of the counties’ tax lien position to the public. Counties aren’t selling the property; you’re buying their lien for unpaid property taxes. This lien is an enforcement right held by the county.

The lien does not grant full ownership rights to the property, the lien gives you two specific money making opportunities:

1) Collect the amount you paid in unpaid taxes and penalties plus interest from the owner (usually interest rates are around 16% to 24%).

2) If the amount is NOT paid back within the agreed timeline, as the lien holder you have the right to foreclosure the tax lien and take the title.

However, your tax lien certificate can expire so you want to keep an eye on the dates, the value of the property and find out if there are any other liens on the property in the event that the homeowner doesn’t pay and you have to foreclose. It’s rare, but it happens.

Buying Costs

The starting price for the tax lien is made up of delinquent property taxes, penalties, assessments, and any other charges or fees that vary state to state. Usually, the starting price to purchase liens are as low as 1/10 the market value of the property but you need cash, not credit to buy.

Tax Lien properties are put to public auction with listings available in local newspapers only 3 to 4 weeks before auction. It’s a good idea to check with the local county office or website because in some cases the listings will be made available online or the office will send investors a fax of the listings.

Your Challenge (Should You Choose To Accept It)

Now here’s where it gets really interesting. Time to determine your maximum bid and consider all your potential outcomes.

Here are the steps to take so you know how to analyze a Tax Lien U.S. real estate property.

  • IRL Viewing: Someone’s gotta get a look for you so you need to have a good power-team on the ground in your market. This is when you’ll have a pre-assessment to see if the property is dilapidated (hint: you don’t want that since your investment security is locked into the property re-sale value).

  • Market Value Assessment: You have to determine the real market value of the Tax Lien property in question. You can go online and do research (use vetted websites, like the county clerks’ office or secretary of states website).

    One factor in your favour is that environmental risk is mitigated by federal law if the property is toxic. In that case, you retain lien status even if you foreclose (no ownership = no liability!). Keep in mind that title check is vitally important. If there are any other liens that supersede the tax lien, you have no security if the homeowner doesn’t pay back the tax and interest amounts.

Once you have that sorted, you’re ready to work out your maximum bid.

Your exit strategy for tax lien properties should always be based on the repayment. If you bid based on what you “think” you can make off a property, you increase your risk exponentially.

Keep the odds in your favour.

There are two scenarios that can happen and you need to do the legwork before the bid to make sure you don’t waste your time. Basically, twice the work all outlined for you below.

  • PLAN A: The homeowner pays back the tax and fine amount plus interest to you.

What You Need: Interest rates vary state by state so you need to find out exactly how it works in the market you’re looking at. You also want to get an idea of the whether the homeowner is likely to pay or not. This is the first set of numbers that you’ll use primarily to decide your maximum bid.

  • PLAN B: You don’t get repaid and have to foreclose the property.

What You Need: You need to know if your property is sellable after the fact. Get a clear idea of the operational costs of the property, ask the local power, water, gas companies to create a second set of numbers so you’re prepared if you do have to foreclose. You won’t get exact numbers but they’ll give you the quarterly estimates. This is for a worst-case contingency plan that you need to prepare for.

Golden Rule: Stick with the first set of Plan A numbers to determine your maximum bid!

And, if there are any properties attached ‘FDIC’, just say no… these are more hassle than worth and hard to foreclose.

How to Bid at Tax Lien Property Auctions

There are two types of bid processes for tax liens and these vary state by state.

  1. Bid Up Process: In the Bid Up Process, the price of the lien increases based on competition for the lien. In these auctions, the price paid for the lien may bid higher and the interest rate for repayment of the tax lien is fixed. Alabama, Georgia, Indiana and Montana are some examples of states that use the Bid Up Process.

  2. Bid Down Process: Arizona, Florida, Maryland are some examples of states that use Interest Bid Down: During this auction format the interest rate earned on the tax lien certificate is bid down. The winning bidder is the person who accepts the lowest interest rate payable on the lien. The price paid for the lien is fixed and will not rise due to bidding.

Lights, Camera… Action!

Auctions are held online and in person. Once you’re in the auction, you’ll experience the frenzy of the moment and get a rush of adrenaline.

The action is almost like a private club. Experienced auction buyers will either bid you up to make you over pay or overbid themselves knowing they will lose money but just to make a point that newbies have to earn their stripes. Just watch an episode of storage wars and you’ll understand.

All that careful research will seem to go out the window – but whatever you do, don’t get so swept up in the moment that you go against your numbers. Remember the research? Remember Plan A and your maximum bid?

Just stay calm, cool and collected armed with your numbers.

The Bottom Line

You always have to balance out risk and potential profits with your real estate investments. With tax liens you have interest profit or foreclosure to work in your favour without any landowner or maintenance liabilities while you hold the lien. But there are some risks you need to account for.

For example, your tax lien may come into conflict with another lien on the property. You should check to be sure there are no liens before you bid on a property, but if the owner declares bankruptcy after you acquire the lien, trustee fees would supersede your lien.

Overall the decision to use the Tax Lien strategy takes considerable commitment of your time within a tight timeframe and requires access to cash, not credit. If you have experience in real estate and haven’t looked into this option, it can be profitable but it is not without challenges.

Steve Martel
Steve Martel is a serial entrepreneur with over six multi-million dollar revenue-generating companies, with two worth over $10,000,000.00 each. Steve is a real estate wealth expert, a strategic business advisor, consultant, coach, and philanthropist. He directly influences more than 100,000 entrepreneurs annually and has helped the acquisition of over $350,000,000 of real estate in the past 3 years alone.