What is a Tax Lien
A tax lien is the governments legal claim against your property when you neglect—or fail—to pay a tax debt. For example, if you don’t pay your property taxes that year, the county will place a tax lien against your property unless you pay.
What is a Tax Lien Auction?
Assuming you continue not paying your property taxes for an extended period of time, the county will eventually place the lien up for auction.
This length of time varies by state and county, but in the county I went to this year you would have to fail to pay your taxes for three years before your lien comes up for auction.
The county doesn’t want to devote anymore time or resources to getting their money back. They bring in other investors, who are willing to pay the county back, with intent of either recouping their money, or being able to possess the home in the future.
The starting bid at these auctions is whatever amount of back taxes are owed on the property, but they don’t always sell for that amount.
Requirements to Buy a Tax Lien Property
This may seem pretty straight forward, but I wanted to touch on it real quickly because I almost didn’t get to bid at the auction this year.
Make sure you look up your counties requirements to bid at the auction, and then register in advance!
Some basic requirements may include:
- Resident of that state (utility bill may not count)
- Ability to pay for the tax lien in full that day
- Do not currently owe the state any back taxes yourself
The reason this almost screwed me is because I haven’t moved my residency to the state of Missouri yet. Until I’m off active duty, I planned to keep my home of record license/residency. While there is nothing wrong with this, I found out 75 minutes before the auction that I could not register to bid on any properties.
Luckily, they would allow me to have somebody stand next to me and bid on my behalf. I would still be able to pay the tax lien, and have my name placed on the tax lien certificate.
I literally called my executive assistant, and said “Can you make it to X County within 35 minutes?”
Then I paid for her gas, and she stood next to me and bid on properties while I nudged, and threw out prices, hahaha.
*Side note, where there’s a will, there’s a way. Too many people would have just accepted defeat and left without bidding.
How Do I Buy Tax Lien Properties?
Once the auction ends, you pay whatever amount you bid in full, and viola, you will receive your tax lien certificate!
I highly recommend that you call the county tax collector’s office before the auction and confirm how they’ll accept payment for the liens. Most counties will accept cash or check, but the one I went to this year even accepted credit cards!
Am I Buying The House, or The Tax Lien at Auction?
At a tax lien auction you are buying the tax lien, not the property itself. However, if the owner fails to repay you by the required date—and you follow your counties guidelines for paperwork/deadlines—you will be able to take possession of the home at that time.
For example, if I buy Joe’s tax lien for $2,000 and Joe pays me back before the deadline, he gets to keep the property. However, if Joe fails to pay me back, I will take possession of the home for that $2,000.
It is important to note that you won’t have the option at the end of the year to say “never mind, I don’t want this property”. You purchased the tax lien, and will be taking possession of the home. Make sure you do your homework before the auction, and don’t bid on properties you have no desire to own!
Do Your Homework Before Bidding at a Tax Auction
Before you arrive at the tax lien auction you should have done a lot of homework.
About a month before the auction the county will announce the properties that are coming up for auction. It is important to note that not all of these will make it to auction. If the property owner catches up on their taxes prior to the auction, the home will be taken off the list.
In my case, this happened with about 1/3 of the homes that were on that original list.
You need to take this list of properties and run them through your county’s GIS (surveyor) map. You can do this by searching “X County GIS” in Google.
From there, you will want to search by the parcel ID, and write down the address of the property.
My partner Marty helped me create an excel document that had columns for parcel number, owner name, physical address, What type of property (SFH, vacant lot, mobile home, etc.), does it look inhabitable. Does it look occupied, starting bid, maximum allowable offer (MAO).
Then you should drive by—or pay somebody else to drive by—each and every property and answer all of these questions. You may find that some of the properties that come up for auction are like a 0.05 acre lot that is the result of a bad survey, or a house that is completely falling over. You may also find that some of the homes are incredible—but the odds are that those owners may actually pay their taxes before the auction date, haha.
Both of the nicest properties I was eye-balling were paid in full prior to he auction 🙁
You will also want to look on Propstream, or your county's websites, and try to figure out if any of these properties have additional issues like code violations, additional liens (federal taxes, contractors, etc.)
The last thing you want to do is inherit a massive problem-child.
Are Tax Lien Auctions Profitable?
Ultimately, the profitability will depend on how well you did your research, how much you paid for the lien, and whether the owner pays you back, or you take possession of the home.
It can be very profitable, as Marty talks about on this episode of The Military Millionaire Podcast, but this strategy also carries a large risk that you need to be able to withstand financially.
How Am I Compensated If The Owner Repays Their Tax Lien?
Every state is going to treat these differently, so make sure you check with your local county tax collector.
For example, in Missouri the owner will have to repay you their back taxes, plus 8% interest. Apparently in Arizona, it is the same but they must repay you with 16% interest.
It is important to note that they only pay interest on the original back taxes.
Going back to our previous example, lets assume that Joe only owed $1,000 in back taxes on the property that I paid $2,000 for at auction, and that he had one year to repay me. In this case Joe would owe me $2,080 to close out his debt without me taking possession of his home. That is 8% interest over the year on his original $1,000 in back taxes, plus the $1,000 that I paid over the existing tax lien.
In this example, while Joe would have paid 8% interest, my effective return is only 4% interest because of the additional $1,000 that did not earn any interest.
That being said, if Joe fails to repay me for purchasing the tax lien, I will take possession of the home, and that can be quite profitable.
…you could also inherit a terrible property, that isn’t worth anything at all. That is why you must do your homework prior to attending a tax lien auction!
What Is The Risk Of Buying Tax Lien Properties
The most likely “risk” of buying tax liens, is that you may have a significant amount of capital tied up for a year earning you little to no interest. You need to ensure that you only spend money you can afford to “lose” for a year (or more if you take possession without being repaid).
Another risk is that you take possession of a useless piece of land, or a parcel that has massive liens against it.
Yet another risk, is that the home is a complete gut job.
Keep in mind, that if you buy some crappy vacant lot, you will be stuck maintaining it, and paying property taxes on it until you can build something, or get rid of it.
Tax Lien Title Issues
That brings me to the next issue…selling a property that you took possession of via tax lien.
In Missouri, most title companies will not be able to insure the title of a home for 10-12 years after the tax lien possession. While you can still sell the property, it will absolutely be worth less without a clear title.
It is possible to get a judge to sign a quiet title action. A Quiet Title Action is essentially a lawsuit filed with the county to establish ownership of the property in question. You will most likely be out $2,500-$5,000 to conduct a quiet title action, so make sure it is worth your time to go through this, as opposed to selling with a cloudy title, or waiting 10-12 years for the title company to be willing to insure it.
Should You Buy a Tax Lien?
As with everything, it depends.
- You need to do your homework before bidding on any properties at auction.
- You need to be able to “lose” the capital you invest for up to a year.
- You need to be okay assuming all of the risks associated with buying a property at auction.
- In my opinion, this should not be the first property you purchase…especially since you won’t even get to take possession for a year or so.
All of that being said, there is absolutely money to be made with tax liens! My friends Marty, Hugh, and I went to three different counties last month with a budget of $15,000 between us. We spent around $8,200 (after processing fees) to purchase 3 SFH’s and 1 duplex tax lien certificates. Assuming none of them pay off their tax lien, we will probably be able to bring in $2,000-$2,500 in gross rents from these properties—after a year of waiting.
The nice thing is that one of these four properties only has 140 days to repay us, so we may be able to recoup our funds, or start earning income, earlier than a year on this one 😊.
If all of these properties pay us back, we will earn around $500 in interest, but hopefully we get to take possession of at least one or two of them!
If you want to find great deals on real estate, but aren’t ready or able to assume the risk of tax lien auctions yet, check out this article on finding yourself some off-market deals!