How to Make Money in Real Estate Tax Liens

States, local governments and school districts are dependent on property taxes for revenues. When an owner doesn't pay, government entities place tax liens on the property. A lien means that before the owner can sell the property, the taxes must be paid. Failure to pay a lien can lead to the foreclosure of the property. Taxing entities that are strapped for cash sometimes sell their liens to investors rather than selling the properties themselves. These liens give investors the ability to seize property if the property owner fails to pay or charge double-digit interest to a property owner. According to Jamaine Burrell, author of "The Complete Guide to Investing in Real Estate Tax Liens and Deeds," investors make money on tax liens by either charging interest on the collection of the debt or by getting control of the property for pennies on the dollar.

Things You'll Need

• Cash to invest
• Time to conduct research

Instructions

1. 

   Do your research.

   Conduct research on local laws. Many states do not authorize the sale of tax liens. In states that do, governments may have protections for homeowners that may make collection a lengthy process. Before you buy a tax lien, look at local laws that describe your rights and limitations to collect. "The 16 Percent Solution," by Joel Moskowitz, has an appendix of state laws that may help you begin your research.

2. 

   Then research more.

   Find out where and when the tax lien sale will take place. Start by calling the local tax collector or sheriff's office. In many places, the auctions are conducted by the sheriff's department. In some places, the sale will take place once per month. In other places, the sale takes place just once per year. Before buying anything, go to the auction to see how it is conducted. Ask active investors about the process.

3. 

   Leins are sometimes in the newspaper.

   Obtain the list of liens for sale. Sale of a tax lien often requires public notice. Usually, this is done in a newspaper and by posting a notice in a public place, such as at a county courthouse. Often, these notices are difficult to interpret because they describe properties by their survey boundaries, not physical address. In many cases, private companies have stepped in to offer easier lists of liens for sale. The local tax collector's office or sheriff's office may be able to put you in contact with a list that is easy to read and find.

4. 

   Ownership--headache or blessing.

   Research properties by driving to the address. Examine whether it is in poor condition or well-kept. Property taxes are often a small portion of the costs of ownership, especially when compared to a mortgage. If an owner hasn't paid property taxes, they many not have the money to perform even minimal repairs. Remember: You may end up owning this property if the owner fails to pay you. Make sure the condition of the property is worth the trouble and effort it would take to fix and resell the building.

5. 

   Consider consulting an attorney.

   Narrow your research to particular properties. In some cases, a property may have an existing mortgage or be subject to additional liens from other taxing entities, contractors who performed repairs on the building and weren't paid, or even a city that mowed grass to prevent the building from becoming an eyesore. Research if these situations exist by going to the county courthouse where liens and mortgages are filed. If these situations exist, conduct research to determine what happens to those claims against the property. If you end up owning the property, you may end up paying for these costs.

6. 

   Bid in minimal amounts.

   Go to the auction and bid. But don't lose your head. If you pay too much, you may end up losing money.

Tips & Warnings

• Before investing, consider consulting a qualified real estate attorney who is knowledgeable in the area you are investing in. They may be aware of quirks in the local process for auctions and foreclosure.

• No investment is guaranteed. Only invest with money you can afford to lose.

References

• "The 16% Solution: How to get High Interest Rates in a low Interest World?; Moskowitz, Joel S.; 1994
• "The Complete Guide to Investing in Real Estate Tax Liens and Deeds"; Burrell, Jamaine; 2006