If you're interested in real estate investments but lack the capital to purchase property, then tax liens may be the next best thing. Liens can be placed by private companies or government agencies for unpaid services or taxes related to the property. Before a legal sale of the property takes place, the lien must be redeemed. Tax liens are assessed by the state government when a property owner defaults on his or her property taxes, which gives the state the right to sell the lien certificate or property deed through a sale, auction, an online site, or the mail to recoup its money.
Lien Certificate vs. Property Deed: State Choice
Each state creates the system and rules for the lien process. In a tax-deed-sale state, the state places a lien on the property and then waits for several years. The property owner receives several notifications; if the taxes are paid then the lien is removed, but if the taxes remain unpaid the government sells the deed to the property at a public sale or auction. The benefit for investors is the ability to purchase property at discounted rates.
Tax-lien-certificate states are full of potential profit. According to www.RogueInvestor.com, "Tax lien certificates are probably one of the safest, most lucrative and undiscovered investing methods in the world." Instead of the government hanging on to the lien and waiting for payment, it puts the opportunity in the hands of investors. After placing the lien, the county in which the property is located sells the certificate at its next sale or auction. Some states sell the lien for the delinquent amount while others allow bidding to begin at that price. The investor purchases the lien and is guaranteed one of two benefits. For the first scenario, let's say the property owner comes up with the funds within a redemption period, usually a few years. The investor collects the overdue tax monies plus interest (which is determined by the state—it currently ranges anywhere from 8 to 36 percent) for the period he carried the loan. In the second scenario, let's assume the property owner cannot repay the investor for the taxes within the redemption period. Some states tack on additional penalties – which the investor receives. In other states, the investor collects payment by taking ownership of the property. So the investor either collects interest plus penalties or the actual property; both are very profitable options!
A few states use a combination of the two processes. For instance, Texas sells the actual property deed to an investor, but there is a six month redemption period (if it's not a homestead or farm). During those six months the deed to the property is in the investor's name. The original owner has the redemption period to pay the taxes plus interest, which is a 25% flat fee. If the owner does not pay, then the investor takes possession of the property. Better yet, the property values in Texas have not kept up with the growth in population. So if you're willing to hang on to the property for a few years, then you're in a great position to make a considerable profit.
Benefits of Purchasing Liens and Deeds
When you purchase property deeds you can request the addresses up for sale or auction, thus you know exactly what you're buying. Doing the research is imperative to know the estimated value and potential resale amount. If you can purchase a property for 40% of it's actual value and flip it for 75% of its worth within a few months, after taxes you still have an amazing return to add to your retirement portfolio.
As mentioned above, tax lien states have one of two payoffs – a percentage of the lien amount or the deed to the property. It's possible to purchase a $2000 lien and end up with a $50,000 piece of property if the owner doesn't pay within the redemption period. You might also know of an area, like Texas, that is experiencing growth so property values stand to increase. If you have the time and money, the potential investment is more than worth the effort.
Do the Research
First you need to decide what your goals are and then research where to buy. Remember there are live auctions, online, or mail opportunities. Some states have their sales annually and others periodically. Within a state, each county chooses when to have their auction. A great comprehensive resource is The Rogue Investor, either the book or online at www.RogueInvestor.com. Michael Williams has done the bulk of the necessary research and offers terrific advice to both lien certificate and property deed investors. Keep in mind that each state has a different system so careful research is necessary. Many states require the purchaser to be present at the sale or auction so check into locations that you travel to or have family in so you can take advantage of interest rates and prices in other states.
The next step is to determine how much capital you need. Building on the Texas example, an investor would need a relatively low amount. If the property is worth $50,000, you could expect to spend 40-50% of the market value – $20,000-25,000. Again, research is necessary to find out the going rate in your market of interest. In a deed sale, the investor will take immediate ownership of the property. Usually there are fewer deeds up for bid, so the prices tend to be higher but still offered at a substantial discount of the market value.
If you have additional questions, Michael Williams suggests observing an auction or sale. Contact your local county government to determine when and where the next one occurs, observe it, and ask questions afterwards. The tax collector can offer insights from an insider's point of view. Although he or she probably won't give advice, the information could be priceless. Williams' book, The Rogue Investor, has excellent questions to ask the local tax collector if you need somewhere to begin.
For the investor who has a sizeable amount immediately available and wants to own property, then tax deeds are the way to go. Investors with a small portion of money and looking to build their portfolio or who don't want the hassles of owning real estate will benefit from tax lien certificates. Either direction you choose is a real estate investment – one of the safest, surefire ways to make your money work for you.
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