Tax liens are placed on property when the owner of the property fails to pay their local taxes on the property. When this occurs, the property becomes held by the local government, preventing the owner from selling or otherwise transferring ownership of the property to anyone. The only way for a person to regain ownership is to pay off the required amount as indicated by the tax lien certificate. Like many forms of debt, a tax lien is a debt that can be bought or transferred to another entity with the purchaser becoming the collector of the debt. In the case of tax liens the investor that purchases a tax lien either collects the debt owed or takes over the property.
This is where making money on tax liens comes in for investors looking to make money or acquire property at below market value. When the local government places a tax lien on a property, the owner has a certain amount of time to pay off the lien amount before the lien becomes available for sale. When it becomes available for sale, investors can purchase the tax lien certificate from the local government. Once purchased, the original owner can either pay the investor the amount of the tax lien or if they fail to pay, the investor receives the title and the property becoming the legal owner of the property.
There are quite a few websites that offer directories linking investors to properties that have a tax lien on them. Some of these websites charge money for their national directories, so it is important for investors to look in their local area for tax lien sales before considering paying for directory services. Most tax liens are public records, so investors looking for them should be able to find them easily. Like sheriff sales, many tax lien auctions are listed in local papers or available at the town or city hall.
Therefore the best place to start when looking for tax lien purchases to make money on is the local government offices in the area where you plan to invest in tax liens. Only after the local area search has been exhausted, should one look to national directories that as mentioned earlier may charge money for database access or take a piece of the profit if you should purchase a tax lien found through the directory. Savvy investors know that every dollar counts and spending money on something that can be done for free isn’t the wisest idea especially if the profit margin ends up being slim on the end result of the investment.
Also since tax lien purchases are a pretty popular thing with real estate investors there are surely others out there looking to make money off new investors. The ‘get rich quick scheme’ companies that sell CDs, books, and programs that claim to help people get rich with little effort have plenty of products promising great riches from buying and selling tax lien certificates and properties. If you are new to investing in properties and tax liens, you can be sure these companies will try to sell you anything and everything.
Stay away from these get rich quick schemes and products and focus on researching and learning as much as you can about tax liens, investing, and flipping properties for profit. If you have friends or family that are into investing or property selling, talk to them. Do your research before buying any investment including tax liens and keep an eye on the market as the market will dictate prices and demand of properties and available tax liens.
An advantage for an investor that stays local in their search for tax liens purchases is that the investor can take the time to fully research and investigate the property. They have easier, physical access to many public records, property history, tax law information, and home market value information for the area. Perhaps most importantly, a local investor often has access to the actual property and while not all properties will be available for full touring, nothing prevents a local investor from looking at the property and any buildings on the property from the street.
Tax lien purchases are popular with real estate investors because the investor will either get back their money when the tax lien is paid off to them by the original property owner or they will make out greatly if the owner doesn’t pay and then the investor gets the title and property at well below market value. Purchasing property through a tax lien can be an excellent investment because often the property will be turned over to the investor at well below market value. The investor can then keep the property or flip it for a nice profit.
With all investments however there comes risk, and while tax lien purchases are relatively safe, there is still risk involved. The problem arises when a tax lien certificate is presented for sale or auction. Local governments vary greatly on the requirements they place on what needs to be disclosed when selling off tax liens to investors. This means that an investor may get a great deal on a tax lien only to discover that another creditor has already claimed the property or the IRS has placed a claim on the property due to the original owner failing to pay federal taxes. Another creditor may have made a claim due to outstanding debt and the only way for them to collect is to seize the property and sell it off.
An investor that finds that they have purchased a tax lien for a property with other claims on it, may hope that the owner simply pays off the tax lien because if they fail to do so, the investor will now own the property and any obligation to a creditor or the IRS that may have put a claim on the property itself. This can make the property less profitable, lead to a lot of legal and financial paperwork hassles, and hurt the investor’s future confidence in purchasing tax liens.
Another potential downfall of tax lien purchases is that the state of the property may not be disclosed at auction or sale of the tax lien. It is the responsibility of the investor to research and investigate the property prior to purchasing the tax lien. This may include researching town records, home records, tax records of the property, and even visits to the property itself. An investor who fails to research the property on a tax lien may get stuck with unwanted bills, have to pay off creditors, or find a property that needs tens of thousands of dollars in repairs and work done to it.
But these pitfalls aside, the savvy inventory can make money on tax lien purchases. This is due to the simple fact that almost always, a tax lien purchase is connected to a property that if handed over to the investor, is done so at a price far below market value. This means that the expenses of paying off creditors with prior claims or repairing the property may still fall below the market value price even when combined with the price paid for lien. Which leaves the investor in most cases with a property that can still turn a nice profit.
Keep in mind that one reason tax liens are popular with investors is that the risk is relatively low and that basically the investor will either get their money back or get a property they can sell for a good profit. Most tax lien purchases end in a win-win situation for the investor. Due to this, seasoned investors will grab up great deals when they see them, leaving some tax liens that may have undesirable property or claims on them. This means you might work hard and research a tax lien purchase, only to discover it has been purchased or been paid off before you have a chance to purchase it. This can and will happen sometimes, as you become better at investing in tax liens, you’ll be able to do your research quicker, know where to go for details on properties you want, and eventually be able to buy tax liens you want before someone else gets to them first.
The right to own a property with a tax lien on it is the primary reason for investors purchasing them in the first place. You aren’t guaranteed the property, but as mentioned earlier you’ll in most cases be making a relatively low risk investment in that you’ll either get the property or get your initial investment back. Some skilled investors may even take to buying tax liens and then reselling them to other investors, although for new investors this can back fire. It is best for new investors to spend time researching the best areas to buy tax liens in the current market, learn how to find good properties, and determine the chances of ending up with a sellable property or just a return on the initial investment.
