Tax Liens

What Every Investor Needs To Know About Tax Liens!

Today’s guest post comes via Blunt Money, an Arizona-based wife and mother, who’s had experience with being divorced, unemployment, under-employed, employed and self-employed!

What are Tax Liens?

Tax liens are liens placed against real estate to secure the debt from unpaid taxes. They are first liens, which means that they (in theory) must be repaid before any other debts that the property might be collateral for. Like everything else regarding tax liens and investments, there are a few exceptions to this — nothing is guaranteed.

The process of investing in tax liens and the amount of interest you can earn from them varies from county to county, so it’s best to get specifics on the exact requirements from the particular county you’re interested in.

My experience is with buying them in Maricopa County, Arizona. Here, the auction is held online once a year in February. The highest you are allowed to bid is 16% interest, and the lowest is 0% interest. If you win the bid and the tax lien is repaid, you earn the amount of interest you bid that was charged during the time you held the lien. If the tax lien is not repaid within 3 years, you have the right to start foreclosure proceedings.

This means that there are two basic ways to think about tax liens: either you hope to end up with the property itself eventually, or you hope to receive interest when the liens are redeemed. I try to split the difference — I look for good properties that I believe would be worth owning if I ended up with them, and I also try to earn a better interest rate on them than I could receive elsewhere. I’ve had several liens o ver the years, all in the 5-7% range. One set of liens got close to being eligible for foreclosure, but was paid off a few months before that date. The rest have all been repaid fairly quickly, usually in under a year or two, which is more typical.

Do Your Research Before You Buy

If you want to increase the probability of you owning the property if the lien is not repaid (and if you want to increase the chances of actually being repaid) you also need to pay the subtaxes on the property for subsequent years. This is handled by calling up the county and arranging to make payment for them once they have become delinquent.

Investing in tax liens requires a commitment because you could end up owning 3 liens at a time on a single property, and you need to watch to see if the current year’s taxes become delinquent. The liens that I’ve purchased have ranged from about $400 to $1500 each, but they go for a very wide range of amounts.

The most important thing when investing in tax liens is to do your due diligence before bidding on a property’s lien. This is a time consuming part of the process, but it’s critical. Be certain of exactly WHAT You are bidding on. Dangers include ending up the owner of a property that requires you to pay for toxic cleanup, or (not quite as bad) ending up the owner of a worthless piece of property that you can’t sell. There’s also the ever-present investment danger of losing your entire investment.

As far as due diligence goes, the satellite view in Google maps is a good starting point. For properties that look interesting beyond that point, I then check the county assessor’s site to find out the property owner’s name. I also generally take a look at the county recorder’s site to see what other properties they may own, and to get an idea of the owner’s general financial shape. I try to judge the odds; and bid lower on liens I feel I’m more likely to end up with the properties on, and higher on liens that look likely to be repaid. Anything that looks bad, has problems, or that I just have a bad feeling about gets eliminated at this point. The next step is to drive out to the remaining properties. I do basic things like make sure that they’re still standing, look decent and are in a decent neighborhood, etc. (Talking to the owners is a no-no.) The last step I take before bidding is to check PACER to make sure that the owners have not started bankruptcy proceedings, as not getting repaid in that situation is also a danger.

From that point out, it’s just a matter of following the bidding proceedings and being certain that I don’t go over budget if I should win all of my bids.

See this page to buy tax liens or learn more about investing in tax lien certificates.

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