In real estate, a lien can be put against a property for debts that are unpaid where the property is used as collateral. While it's possible to have multiple types of liens on a property -- a mechanics lien and a judgment lien, for example -- many investors focus on tax liens because it's possible to invest in these liens for a profit.
With that in mind, below is a guide on how to find liens on property that's geared toward tax lien investors. Read on below to learn more about what property tax liens are and how the process of finding property tax liens works. Armed with this knowledge, you should have a better idea of whether this investment opportunity is right for you.
What are property tax liens?
If you own your own home, you're likely familiar with the concept of property taxes. These taxes are collected to benefit the community and go to fund assets like public libraries or to help fund community services, such as paving roads or snow removal. However, when a property owner doesn't keep up with their tax bill, a lien is created on the property.
As an investor, it's possible to invest in these property tax liens by buying the debt from the county or local government and collecting on it with interest. Fortunately, you don't need to be an accredited investor in order to do so, but you should have a firm foundational knowledge of real estate practices since this tends to be a very active form of investing.
How to find property tax liens to invest in
Before we get into the process of how to find property tax liens to invest in, it's important to note that every county and municipality has its own process and procedures for collecting unpaid taxes and selling those debts. However, at its core, the process involves paying off the taxes for the property owner in exchange for a certificate worth the amount you've paid, plus interest and fees.
Step 1: Choose your target market
Since each jurisdiction or state has its own process for dealing with unpaid tax debt, the rate of return you can expect to receive on your investment will vary as well. For example, Florida has a maximum statutory interest rate of 18% while Alabama has a fixed rate of 12%. You can use resources from the National Tax Lien Association (NTLA) to the area you'd like to target. However, keep in mind that the areas with the highest rate of return are also likely to feature the most competition.
Step 2: Sign up for the auction
Once you find the area you're hoping to invest in, conduct a property lien search via the municipality's treasurer or clerk's office. However, while doing your due diligence, you should also be sure to ask when and how they hold tax lien auctions. Usually, they'll hold either a public or online auction annually and you typically need to sign up in advance and pay a fee in order to participate.
If you're newer to this form of investing, it may be a good idea to participate in a few auctions as a spectator before you start making bids. That way, you'll have a better sense of how the process works before you get caught up in the craziness of a live auction with your money on the line.
Step 3: Do your due diligence
Auctions typically prevent investors from seeing the inside of the property before the big event. Still, it's absolutely crucial to do your due diligence beforehand. Along with your registration for the auction, you should have been given a list of the property liens that are scheduled to be auctioned. Each lien is given an ID number and the county should have information on each one, including the property address, owner's name, a description of the property, the assessed value of the property, and the value of the recorded lien. Often, this information can be accessed online through the county's property records.
In this case, it may be worth it to wait and to do your due diligence until just before the auction. It's not uncommon for the taxpayer to get caught up on their tax payment and for the lien to get resolved prior to the auction.
Step 4: Participate in the auction
When it's time for the auction, there are two typical methods that may be used. The first involves bidding down the interest rate. This occurs when the country sets a maximum interest rate for the property lien, and then the bidder who offers the lowest interest rate below that maximum becomes the lien holder.
The other involves investors paying a premium for the recorded lien. In this case, whichever bidder agrees to pay the highest premium above the lien amount becomes the new lien holder.
Step 5: Notify the homeowners
Again, while the process will vary by county or municipality, it's important to follow the laws in your area regarding obtaining tax debt. In many cases, you may be required to notify the homeowners that you've purchased their lien. At a minimum, the letter should inform them how much they owe in tax debt.
Step 6: Collect your ROI
Usually, the taxpayer will have a set amount of time -- typically, one to three years -- to pay back their debts. In that time, you'll get to collect what you paid for the lien, plus interest. If they don't pay back what they owe, you're within your rights to start foreclosure proceedings.
Though it's rare for a foreclosure to go all the way through to eviction, there are instances where it's possible to add a piece of real property to your portfolio for the price of the lien certificate.
How risky is investing in property tax liens?
Many investors consider investing in liens because of the low-cost barrier to entry and the possibility of double-digit returns. However, it's not without risk. Mainly, it can be costly, especially if you do end up going through the foreclosure process and taking procession of the property. However, it's also possible that there could be other liens on the property that are held by another agency. You'll be responsible for those costs as well, which is why it's crucial to do your due diligence.
That said, if you'd rather take a more passive approach to this investing deal, it's possible to hire a tax lien investment manager to take care of the due diligence and other duties for you. Be sure to consider all of the risks and benefits before deciding whether tax lien investing is right for you.