How to Purchase a Tax Lien Investment (2024)

Table of Content

How to Purchase a Tax Lien Investment

Delinquent property taxes

How to find tax delinquent properties in your area?

FAQ

What is a tax lien?

What is a tax lien on a house?

How much do you need to invest in tax liens?

Is tax lien investing profitable?

Which states have tax lien certificates?

How to find tax lien properties?

How do tax liens make money?

Are tax liens public record?

What is tax delinquency?

How to buy property with delinquent taxes?

Who pays delinquent property taxes at closing?

Summary of tax liens investing

Investors looking for higher yield real estate options are now more than ever considering the lucrative area of investing in tax delinquent properties for sale. Some savvy investors can receive a sound return on their investments through interest and the sale of foreclosed properties. However, before you jump on board and buy tax liens houses, you should do your due diligence and thoroughly understand your obligations and what you’re purchasing.

This article explains how governments recoup delinquent property tax, how to find tax lien homes for sale, and what you should know before buying a house with a tax lien.

Delinquent property taxes

When property taxes are due but not paid on time, they are deemed delinquent. Governments – either village, county, or state – that cannot collect overdue debts directly from the owner may attempt to recoup costs from outside investors via public auctions. The rules for delinquent property taxes vary for each state.

Investors searching for delinquent tax houses for sale should know the difference between buying a house with a tax lien and buying a tax deed. Depending on the jurisdiction, local governments who publicly auction unpaid property taxes do so in one of two ways:

• Selling tax lien certificates: the winning bidder buys the lien certificate and the right to collect the back taxes on property. The investor first pays the overdue taxes and additional charges to the government, then collects repayment plus interest from the homeowner, and may foreclose if they fail to pay.
• Selling tax deeds: the winning bidder buys the property. Often discounted from market value, there are additional risks of buying tax deed properties compared to regular home sales. You should always undertake your due diligence.

In addition to state and county liens, your property can be subject to tax liens for unpaid federal tax debts.

How to find tax delinquent properties in your area?

Finding tax delinquent homes for sale in your area is relatively simple. Yet, all steps require adequate research and due diligence before deciding on purchasing tax liens property.

1. Contact your local tax revenue assessor responsible for collecting property taxes. Ask how delinquent taxes are collected in your area and determine if there is a public auction to collect unpaid property tax bills.
2. Find out when and where auction details are published for public review. Delinquent property tax lists include basic property details and the amount of delinquent taxes to be sold.
3. Depending on your area, you may need to pay a fee for the tax lien properties list.
4. Review the delinquent property tax list to find suitable properties based on your budget and investment intentions.
5. Research the properties before the auction, as many physical auctions do not allow bidders to enter the homes.
6. Sign-up and pay for any auction fees and attend a delinquent property tax auction, either online or in-person. Before buying tax lien property, you may consider attending an auction without bidding to see how the process works.

FAQ

What is a tax lien?

A tax lien is a legal claim over the property and other financial assets of a person or business that has failed to pay a tax debt owed to a government.

If you fail to pay your federal taxes after receiving your first IRS bill, a federal tax lien is attached to all of your current and future assets, including your home, car, and any rights you have to property.

State and county governments collect property taxes to finance local schools, roads, and services. Any unpaid property taxes may result in a tax lien on your home.

What is a tax lien on a house?

A tax lien on a house occurs when the government has a legal right to the property due to unpaid tax debts. It prohibits the property from being sold or refinanced until the taxes are paid and the lien removed.

This right is recorded in a tax-lien certificate issued by the city or state that is owed the property taxes. Tax lien certificates show the amount of tax owed on a property, in addition to penalties and interest charges.

How much do you need to invest in tax liens?

In the states that allow for the public auction of tax lien property debt, the winning bidder pays the back taxes on property, plus interest and penalties. Therefore, how much you will need to invest will depend on the value of each tax lien property.

If you are considering investing in tax lien houses, you should budget for the amount of delinquent tax, penalties, interest and the redemption period. Homeowners have until the end of the redemption period, which generally lasts from one to three years before they must repay the taxes and interest in full. Therefore, you should factor in the redemption period and ensure you don’t require access to your initial investments funds during this time.

You may also consider starting your investment journey through a property lien investment fund. These funds often offer a lower investment cost and associated risk due to expert management and portfolio diversification.

Is tax lien investing profitable?

Investors generally make a profit based on the interest rate of the tax lien, which varies for each state. For example, tax lien sales in Florida are capped at a maximum interest rate of 18 per cent. However, the actual interest rate will be lower in areas with higher competition between bidders.

As with any investment strategy, there are inherent risks of tax lien investing.

Which states have tax lien certificates?

A significant number of states allow for the sale of tax lien certificates, while California and Wisconsin have enabling legislation for tax lien sales. For example, in Arizona, Iowa, Colorado, and Florida tax lien sales are permitted as well as several other states as outlined by the NTLA. Some states, such as Virginia and Michigan, do not sell tax liens.

How to find tax lien properties?

Tax liens for sale are publicly advertised and are accessible via the municipality’s tax assessor or clerk’s office.

Investors interested in purchasing tax liens should contact their local property tax authority’s office about upcoming tax lien sales. County clerks or treasurers can inform you when and where upcoming tax lien auctions will be held. They can provide a list of properties scheduled for auction and details of the auction registration process.

For example, the Florida Department of Revenue publishes a monthly list of taxpayers with large overdue tax liabilities. Tax liens in Florida are public records filed with the clerk or relevant government department in the county where the taxpayer is located. Investors looking to buy in Florida should contact the relevant county clerk to obtain delinquent property tax lists and research the listed houses.

When calculating how much to bid, one should consider the amount of unpaid taxes, property type and location, and other risk factors.

How do tax liens make money?

When the government issues a lien, a tax lien certificate is placed over the property, reflecting the taxes, penalties, and interest due before the property can be sold or refinanced. Municipalities can then auction lien certificates, either in-person or online, to private investors who bid on the interest rate they’re willing to accept for the loan. The winning bidder is either the investor who has bid down the interest rate or pays the highest cash premium.

The investor who wins the auction must pay the total amount of the lien, including the tax debt, interest and penalties. The property owner must then pay the investor the amount of the lien plus interest over a redemption period. The investor will make money on the lien through the interest paid by the homeowner, with rates varying based on the jurisdiction or state.

For example, Florida tax lien sales set a maximum interest rate of 18%. However, the actual rates of return will depend on each sale. If the property owner is unable to meet the repayments, the investor may commence foreclosure proceedings to receive the title of the property.

Are tax liens public record?

Tax liens are publically available and are accessible via the municipality’s tax assessor or clerk’s office. The local tax revenue official will advise you when and where tax lien properties lists are published and any fees involved. You can also typically search online for a property’s address with the local treasurer or clerk’s office in most states.

For federal tax liens, the IRS will file a Notice of Federal Tax Lien. This notice is also a public document and warns creditors of the IRS’s claim over the assets.

What is tax delinquency?

Tax delinquency is when taxes are due but not paid on time. In terms of delinquent property taxes, if you fail to pay your property tax by the due date, your local or state municipality will charge interest and penalties on your delinquent (i.e. late) taxes and may file a tax lien after a certain period.

How to buy property with delinquent taxes?

The rules for real estate tax sales differ in each country and state. When first investing, it is recommended you focus your property tax lien search on houses in your local area.

Local county and municipal governments sell tax lien certificates at public auctions, either in person or online, to bidders willing to receive the lowest interest rate or place the highest cash bid.

A tax lien certificate does not transfer property title, only the right to collect the back taxes from the homeowner. Non-payment by the homeowner after the repayment period may allow the investor to foreclose on the property.

In contrast, some municipalities auction tax deeds to the public and the winning bid acquires the title deed. The sale price is usually less than the market price as you generally can’t enter the house until after the auction, unlike regular sales.

Both tax liens and tax deeds are sold during auctions, which the government body must publicly advertise. To find out when and where these auctions are held, you can contact your local property revenue authority. You may need to pay a fee to register for the auction and receive copies of tax lien properties lists.

Homeowners may settle the property taxes before the auction date, so you should conduct your research and due diligence closer to the auction to prevent researching unavailable properties.

To buy a property with delinquent taxes, you will need to place the winning bid at auction.

Who pays delinquent property taxes at closing?

A seller is responsible for addressing any delinquent properties before the sale can close. Generally, a seller is responsible for real estate taxes up to and sometimes including the day of settlement. The buyer is responsible for taxes incurred after that. Where taxes have been prepaid for a period, a pro-rata amount is calculated in the closing price. This ensures that both the seller and buyer pay the taxes attributed to when each occupied the home.

If a seller has delinquent property taxes and a tax lien has been attached to the home, they will need to settle the debt before closure or use proceeds from the sale to pay the debt. A seller may repay delinquent taxes by liquidating assets or obtaining a property tax loan. However, as property tax loans grant lenders a lien over the property, the loan will likely need to be repaid before the house can be sold.

The tax debt may be repaid with sale proceeds. In that case, a closing attorney would ensure funds are allocated to the lien and mortgage first and any remaining funds transferred to the seller.

Summary of tax liens investing

When done correctly, tax lien investing can earn you a solid return on investment. Some properties may even foreclose and eventually turn into investment properties. Many investors value property liens for the passive income stream of interest repayments as homeowners repay their debts. As with all investments, it’s crucial you undertake the necessary research to make informed purchasing decisions. When you’re ready to submit an offer, you can do this through Richr’s streamlined online process and even earn up to 2% cashback on the purchase price. Find out more at Richr.