Purchasing tax lien certificates

[Amber Ponte]

I was recently introduced to the concept of investing in tax lien certificates.  I guess you can  earn 20% on your investment and it could also possibly turn into a tax lien deed. Is this a relatively safe investment? What should I know? What should I be careful of? Has anyone had good or bad outcomes? 

[Jerry K.]

@Account Closed Glad you are thinking ahead - but you are thinking too far ahead for a beginner tax lien investor. Here is what you should be concerned with up front:

• What/state/county are you looking to invest in tax liens? (New York is a Tax Deed state - no liens are sold)
• Have you read and understand the tax lien statutes for that state/county?
• The statues will spell out the auction/sale procedures, redemption periods for the owners, how interest is calculated, fees, what other liens stay with a property, how tax lien foreclosures work and the steps you need to take, etc.
• Do you know the area you are investing in? Many people have mistakenly purchased liens on tiny, landlocked slivers of property that are worthless.

Remember, 95%-98% of all liens are redeemed (paid off) by the owner. Thinking about having trouble selling a house you obtained through tax-lien foreclosure is much further down the list of information you need to understand at this point.

You need to know the statutes first. Here's just one example of why; let's say you have $2,000 to buy a tax lien on a home in Prescott, Arizona this year. The statutes in that county/state (Yavapai county) say that the owner has 3 years to redeem (pay back) the taxes plus interest. To keep your lien in force in Yavapai county, you would have to pay the next 2 years of taxes before you could foreclose. If you spent the entire $2,000 for the first year lien, then you would have to come up with another $2,000 each year. If you don't, and the owner has not redeemed, then the lien goes back in the auction the next year and is sold to a new investor. You would get your principal and interest, but the new investor now holds the lien for both years and can foreclose if the owner does not pay. You are out.

Other states/counties allow you to buy only the lien on one year of taxes and hang on to it without paying subsequent taxes.  If you hold the oldest lien, then you have the earliest right to foreclose.  Statutes are different in every state.

Learn the statutes first. Know how much you will need and approximately when you may need to make additional payments before you can foreclose. Also, be of the mindset that most likely the owner will pay the back taxes at some point.

Now as to answering your specific questions;

1) How can you tell if the tax lien is just a piece of land or dirt?

Drive by the parcel if local before the sale. If not local, you can use Google Maps/Streetview if available - but do not rely on this! Homes burn down, get demolished, etc. and Google pics can be a few years old. Hire someone to drive by the property and take a picture for you.

2) If the tax lien is a house that foreclosed, but is on un-buildable land, on a piece of property in a neighbor's back yard or is near some unfriendly site? I don't believe it's something as simple as looking on Google maps, right?

Exactly correct. You can use the EPA website and punch in the address to see if there are any known environmental issues. Again, having a person do a drive by/picture will help you determine the suitability. You can check the zoning/plat maps with the county before the auction (if you want to go that deep in research). Having a builder drive by the parcel would get you their opinion on if the land is suitable for building. I try to stay away from extremely sloping land. This sort of due diligence is what keeps most people out of tax lien investing. Researching hundreds of parcels this way is time consuming and no guarantees the parcel is buildable just by looking at it.

3) What would you do if you had a tax lien on a house, obtained the rights to the home, but had trouble selling it?

This is just like any other property you own and have trouble selling. If you obtained a house via a tax lien foreclosure or tax deed sale - you own it. If it turns out to be hard to sell, then lower your price, rehab it, market it better - all the same steps you would take with any property. You now own it, have to pay taxes going forward, have insurance, responsible for any HOA (Homeowner Association) fees, city fees for mowing (if necessary) etc. You can't give it back to the county/city. (I guess you could stop paying the taxes and let it go to that way, but you are going to incur fines, fees, and maybe a lawsuit if somebody gets hurt on the property while it is in your name.

Bottom line, as a new investor - learn the statutes for tax liens first. Decide your goals for lien investing - focus on interest rate return or focus on property that you may be able to obtain through foreclosure (highly unlikely). Then develop a due diligence process for researching parcels BEFORE you buy the lien. Then you can figure out an exit strategy for the parcel IF you somehow get ownership. Once you have all that lined up, then you need a bidding strategy if going to a tax lien auction.