How to Invest in Tax Lien Properties
Tax lien properties are similar to tax deed properties. The owner failed to pay their property taxes, and the county responds by putting a lien on the property instead of auctioning the deed to the home (see my other article on How to Buy Tax Deed Properties for more ideas). Then the county auctions the lien certificates in order to generate revenues. If the owners end up paying their taxes, you get your money back plus interest. If they fail to pay, you could get the deed. This guide will tell you how to invest or purchase tax lien properties.
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Instructions
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Choose a tax lien state. Depending on state law, the state you live in is either a tax deed or tax lien state. Here is a list of tax lien states and their corresponding interest rates:
Alabama 12%
Arizona 16%
Colorado 9%
Connecticut 18%
Florida 18%
Illinois 18%
Indiana 10% to 25%
Iowa 24%
Kentucky 12%
Louisiana 5% and up
Maryland 12% to 24%
Massachusetts 18%
Michigan 15% to 50%
Mississippi 17%
Missouri 10%
Montana at 10%
Nebraska 14%
New Hampshire 18%
New Jersey 18%
New York 14%
North Carolina 12%
North Dakota 12%
Rhode Island 12%
South Carolina 8%
South Dakota 12%
Tennessee 10%
Vermont 12%
West Virginia 12%
Wyoming 18% -
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Visit the county treasurer's website (or department of finance) and get a list of liens and properties to be sold at the next auction. If you can't find the county website, simply do a Google search with the county name and "tax lien certificate list". Sales and auctions are typically held once a year.
While on the county website, find the FAQ - or auction procedures and get familiar with them. Each county differs a little. Sometimes the auctions are held completely online, and in some counties they keep a list in their office that you will have to physically visit and purchase at the counter. Each different method has its advantages
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Research the properties. You may be tempted to just buy or bid on these properties, but remember that there's a chance you could become the owner, so you want to make sure that it has either rentability or resale value.
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Find liens that are within your means and then look for indications that there is a structure on the property. Then look at the address. If there's a physical address with a street number, search for that address on Google maps, Earth or www.zillow.com. You can then see for yourself by zooming in or looking on Zillow to verify that there's a building on the property. Avoid empty lots and commercial zones.
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Go to the county court or Recorder's office to see if there are any special assessments or liens that won't fall off the property as specified in the FAQ or information sheet (in the event that you become the owner). Another option is to have a local title company do a search on the property to see if it's insurable. There may be issues that you can't find on your own that would otherwise rule out a property from your list. Chances are if there has been a resident there within the last 6 months or so, the taxes will be paid, but don't rely on that alone.
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Attend the auction. The FAQ document should tell you everything you need to know before going in for that particular county. Tax lien auctions typically bid on interest rates, starting with the highest possible rate and then each subsequent bid goes down by ½ percent. Again, each county varies.
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After the auction(s) simply wait for your checks to roll in. If you were hoping to own the property, keep in mind that it could take a while depending on state law (e.g. 1 year).
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Tips & Warnings
The key to your success is knowing the county procedures
The research phase can be trimmed a bit (chance of ownership is rare)
Don't underbid the interest rate. You want a decent return. Otherwise you may as well invest in a CD.
