How to Buy a House with a Tax Lien

Thirty-five states, as well as Washington, D.C., offer tax liens issued by local governments, usually counties, as a means of collecting real estate taxes that have gone unpaid by property owners. Ultimately, with some exceptions, if the taxpayer does not pay the taxes due, the tax lien holder can foreclose on the property and gain title.

Things You'll Need

• Time to do due diligence on properties
• Computer with Internet connection, or...
• Time to spend at the county courthouse researching properties
• Money to invest
• Services of an attorney to perform a "quiet title suit"

Instructions

The Process of Tax Liens

1. The issuance, collection of payment and disbursement of the proceeds of tax liens is all handled by the government, which makes buying tax liens relatively safe. The holder of a tax lien will either receive their investment plus interest to date from the county once the property owner pays the taxes, or they will gain the right to foreclose on the property at the appropriate time, as set by the county, and take title.

2. Tax liens are sold at live auctions or auctions on the Internet by the county or by a third-party service. The date and the frequency of the tax lien auctions is set by the county and they will publish a list of properties and the taxes due on the Internet or available in hard copy from the county. Additional information about a property can often be found on the local county tax assessor's website.

3. The format of the auction can change from state to state, but often the auction starts with the highest allowable interest rate the state offers and participants bid the rate down. For example, if the state offers an interest rate of 18 percent, the winning bid on a lien might be 7 percent. The winning bidder must then pay the county within a set time and then they are sent a document verifying their tax lien.

4. Although the vast majority of tax liens are paid by property owners before foreclosure can proceed, 10 percent or less of the lien holders begin the process of foreclosure. The tax lien holder who is first in line (there may be multiple years of unpaid taxes and multiple liens) will be the first eligible to begin foreclose. In some counties, a lien holder must pay all unpaid property taxes to protect their interest in the property. An investor who purchases latter tax liens on the property may have the right to buy out the first lien holder's interest. The foreclosure process varies from state to state and in some jurisdictions the stat, or county, will handle the entire process.

5. Once the foreclosure occurs, the lien holder is given a lesser title to the property To gain a saleable title to the property, the investor must have an attorney perform a "quiet title suit" to clear any other claims on the property. In all, it may cost several thousand dollars to gain a marketable title to the property. Although tax liens supersede most liens on the property, such as mortgage liens, trust deeds or mechanic's liens, they do not clear a IRS tax lien.

Tips & Warnings

• Tax liens can be bought and sold to other investors To increase your chances of foreclosing on a property, you can purchase liens nearing their expiration date, but be sure the lien is the first tax lien in line on the property Like any form of real estate investing, it is prudent to physically inspect a property before going to the expense of foreclosure and gaining a clear title

• Although the Internet makes it easy to purchase tax liens in various parts of the United States and Canada, it is wise to be familiar with any area prior to pursuing a strategy of property acquisition. Because 90 percent to 95 percent of all tax liens are redeemed by the owner it is relatively safe to invest in tax liens to earn the interest rate. Be cautious, however, of properties that have an IRS lien or has been flagged due to environmental concerns.

References

• Wikipedia - Tax Lien
• SaveWealth.com - Tax Liens
• TaxSaleLists.com

Resources

• Tax Liens