How to Buy Property Tax Liens

Local governments rely on property taxes to pay for expenses. If a property owner fails to pay their property tax, there are still expenses to pay. One way governments compensate for delinquent payments is to sell property tax liens. Investors pay the delinquent property tax, and then the government has money to pay expenses. When the property owner finally pays their taxes, they pay the investor back, plus interest. If the property owner fails to pay the taxes back within a specific timeframe, the investor can foreclose on the property and gain clear title.

Difficulty:

Moderate

Instructions

1. Shop locally. When you first begin investing in real estate tax liens, stay close to home, so you can check out the property before investing. If you are relatively new to investing in real estate tax liens, purchasing liens from across the country may not be prudent.

2. Discover if the state you are shopping is a lien state or a deed state. The process is different for each type. In a deed state, delinquent taxes are paid by auctioning off the property. A lien state is one where the investor purchases a tax lien on the property. More due diligence is required in a deed state, and the investor's goal is to own the property, whereas in a lien state, the primary goal is to make high interest.

3. Check to see if there is an IRS or other tax lien on the property. Typically a property tax lien will trump other liens on the property, even a mortgage with a bank. If an investor forecloses on a house that has a mortgage, they do not owe the mortgage, as the property tax supersedes the mortgage. But, if it is an IRS lien, that debt may remain with the property.

4. Avoid buying vacant land that you are unfamiliar with. If you pay a tax lien on swamp property, and the owners don't repay the taxes and interest, do you really want to end up owning swamp land?

5. Approach commercial real estate with caution. Business property might be more likely to have IRS or other tax liens attached.

6. Go online to the county website for the area you are investigating. Many county websites post the procedures for purchasing real estate tax liens, along with available properties.

7. Don't expect to end up gaining full ownership to the real estate when purchasing property tax liens. Although it does happen, property owners tend to eventually repay their taxes before loosing their property.

8. Negotiate the interest you will earn on your investment. Some states offer 16%, 24% 5%, and other rates. If more than one investor wants to purchase the lien on one piece of property they will make a bid. The lowest bid wins, meaning the investor receives less interest than the standard rate, and the government gets to keep the difference as profit.