How to Buy a House Using a Real Estate Tax Lien

If you are interested in getting into the world of real estate investing but you do not have a lot of money to invest, then you may want to try to buy a house using a real estate tax lien. The government places a tax lien on a property when an owner does not pay the real estate taxes. During an auction, the highest bidder becomes responsible for payment of the tax, and under certain conditions, you may own the house.

Instructions

Difficulty: Moderately Challenging

1. Find tax lien sales in your area. Some counties announce tax liens online, in the local paper or at the county courthouse.
2. Research the specific process to purchase a tax lien in your area. For example in Cobb County, Georgia, you must show up at the county courthouse the first Tuesday of each month. A county official will announce the tax liens properties for auction. The award goes to the highest bidders, who must pay that day in cash.
3. Realize that it will take a while before you can recognize any profit from a tax lien purchase. For example in Georgia, an owner has one year to reimburse you for paying the delinquent taxes.
4. Plan on keeping long-term records. Understand that if the owner of the house does not pay you back after one year, the title to the house passes to you. This is why people bid on tax liens--the potential to acquire a house far below its value exists. You cannot do anything to the house during the one-year grace period, such as renting it, renovating it or evicting the tenants. Even if the owner does reimburse you, you may earn a 20 percent or greater profit (in Georgia), which is greater than the stock market's historical average.
5. Keep your risks in mind. Be aware of the downsides associated with tax liens. You must have a great deal of cash to be able to buy a tax lien property, because they are usually auctioned off for far more than the outstanding tax debt. If a property has an outstanding $3,000 tax lien, and you purchase the tax lien for $50,000 on a house that is worth $100,000, you may be able to get the house for half-price. However, you must have that kind of liquidity, and you have to be able to float the $50,000 for up to a year before you realize any return. In Georgia, it is also your responsibility to foreclose on and evict the current owners at the end of the one-year grace period.

Tips & Warnings

• Always visit houses or land which have tax liens on them before you bid. Counties release lists of properties long enough before the auctions to go check them out. You want to make sure that you are making a sound investment. You do not want to bid sight unseen on a property only to find out that it is in a flood plain, has environmental contamination or is directly in an airport's flight path.