How to Buy a Tax Lien Certificate

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A tax lien is often filed by a local government against a property owner who has failed to pay property taxes. The government agency involved will issue a public certificate stating the amount of unpaid taxes and verifying that a lien has been placed on the property. Often the agency will elect to sell such a certificate to a private investor in order to get some of the money due to them without having to pursue the property owner. If the property owner later pays the tax (with interest), the payment goes to the investor. As with any investment, there are risks in buying lien certificates. If you're considering this type of investment, keep the following information in mind.

Part 1
Part 1 of 3:

Getting Started

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  1. A tax lien represents an unpaid tax debt on a property. If a property owner does not pay their taxes within a certain time period (it varies by jurisdiction), tax collectors will put the unpaid taxes up for auction. It is through this auction process that you have the opportunity to purchase a tax lien. [1] .
    • In the auction the highest bidder wins. The bidder then pays cash to the government in exchange for the lien, thereby transferring the risks and rewards of the lien from the government to the bidder.
  2. There are two ways to get a return on investment from a tax lien. The first is through interest payments. The second is through potential ownership of the property.
    • When you purchase a lien the property owner is required to pay back the entire value of the lien plus interest. Interest rates can vary widely from one location to another. Typically they may run from 5% to 36%. All of the interest goes to the lien holder.
    • The lien will be structured to give the property owner a period of time in which to pay the taxes, usually between six months and three years.
    • In the event the property owner cannot pay off the lien (with interest) in that period, you have the right to foreclose on the property -- or take ownership of it. This is a complex and time-consuming process and should involve the assistance of a lawyer. [2] .
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  3. Tax liens are issued by the county, so you'll have to focus your efforts on specific counties if you want to make such an investment. Counties that are financially strained may be more willing to offer good deals on tax liens. They're looking for money right away instead of having to wait for property owners to pay their taxes. Investigate the financial status of various counties to get an idea of where you might get the best deals on lien certificates. [3]
    • A list of counties in the United States can be found at http://www.naco.org/Pages/default.aspx .
    • Government financial statistics are a matter of public record. You should be able to find information on county finances on the Internet. Try doing an Internet search for the records of a county you're interested in.
  4. Real estate laws vary between jurisdictions, so you'll want to familiarize yourself with the laws where you plan to invest. Most of what you'll need to know will be on a county's website, so start there. If you have further questions, call the county executive office and get specific answers.
    • You should specifically find out when the county can legally place a lien on a property. If they don't follow proper procedures, you could wind up with a lien that was illegally placed, in which case you could lose your investment. Keep this in mind as you investigate specific properties, and make sure a lien is legitimate. [4]
    • Find out if there are any legal limits on what you're allowed to do in collecting payment from property owners. Are there specific times of day you're allowed to call? How many phone calls or letters constitute harassment? Make sure all of your collection efforts are legal.
    • Learn the foreclosure process in your area. If a homeowner fails to satisfy the lien within the prescribed time period, you can start foreclosure proceedings to obtain the property. Foreclosure laws vary. Use http://www.foreclosurelaw.org/ to find foreclosure laws in your locality.
    • If you're having trouble navigating county laws, you might want to speak with a real estate attorney with experience in these matters. He or she can fill you in on all you need to know about local laws.
  5. Usually, either the county treasury or tax office oversees these sales, so start by contacting them to find out what you need to know. Oftentimes lien sales are held by public auction. Sometimes they are handled online. Find out exactly how a county conducts lien sales in order to keep up with other investors. [5]
    • Inquire about when and where the next sale will be held.
    • Find out the format of the auction. Sometimes they'll ask for bids on the lien. For example, bidding may start at $1,000 and then rise as bids come in. In other cases, you may bid down on the interest rate for the lien. In that case, the interest rate may start at 20% and go down. Find out which format your county uses so you can devise a strategy for the auction.
    • Remember that the homeowner's liability is not affected by how much you pay for the lien. Even if you pay too much, the owner doesn't owe more than the original tax bill and interest. Keep that in mind when planning your bids.
  6. Each jurisdiction has its own laws regulating lienholders, so investigate your locality. You may be required to provide written notification to the property owner that you've made the purchase. Also know the local foreclosure laws, since you can threaten to foreclose on the property if the homeowner doesn't pay their debt. Make sure you learn about any responsibilities you'll have in accordance with the law. [6]
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Part 2
Part 2 of 3:

Finding Liens for Purchase

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  1. When you speak with the county treasury or tax office, ask about getting a list of the properties that will be auctioned at the next lien sale. They may have a complete list on hand, or they may refer you to a local periodical that will print the list. Make sure you get a list before the auction date. That way you can research the properties for sale and plan out your investment more effectively.
  2. If there are certificates left over from the last sale, the county might offer them for sale early or at a discounted rate. If there are unsold liens, ask to see the list. Then inquire whether they will be offered for sale early.
    • Keep in mind that leftover liens may have gone unsold simply because they were bad investments. If you do come across any unsold liens, investigate the properties carefully. It's possible that you discovered a gem that no one noticed at the last auction, but the lien could be a money pit, too. Find out everything you can about unsold liens to make sure you'll be making a good investment.
  3. The list could have hundreds of liens for sale, and it's impossible to do a detailed investigation of that many. If there are a lot, cut the list down.
    • A good way to do this is to think about how much money you have to invest. If you plan on investing only a few hundred dollars, then you can easily cross off any liens that require more money than that. If you have several thousand dollars to invest and are looking for a big profit, don't bother with smaller liens.
    • You can focus on particular types of liens. Tax liens can be placed on residential or commercial properties, so focusing on one or the other could narrow down your list.
  4. Remember that once you buy a lien certificate, you assume the risk if the occupants don't pay back their debt. When you've obtained the list of liens, make sure to research all the properties you may be interested in. You want a good investment, so look out for any signs that property may not give you a profit. [7] [8]
    • Find out if there's a mortgage on the property. In this case, the lender might step in to pay the lien before you get a chance to buy it. Lenders might be willing to pay more than you would to protect their larger investment in the property and prevent foreclosure. They also might try to legally stop you from foreclosing on the home if you do manage to buy the lien. [9] It's better to go for homes that have the mortgage paid off, because you won't face competition from mortgage companies that have a lot more money at their disposal.
    • Dilapidated properties in economically depressed neighborhoods are a very risky investment. Such liens might carry higher interest rates, but if the occupants are unable to pay their debt, the interest rate won't do you any good, and you'll wind up losing money.
    • Sometimes occupants owe more in back taxes than the value of the home. This means that if they abandon the property, you won't even be able to earn back your investment by selling the property. Avoid such places, or at least invest with caution.
    • Properties that have suffered environmental problems such as chemical contamination are a risk as well. The cost of the cleanup will probably outweigh the potential profit to be earned from back taxes. Take, for example, old gas stations. These properties need a complete overhaul. Old gas tanks have to be dug up, and the ground has to be decontaminated. This is a dangerous investment that could easily end up losing you money.
  5. After narrowing your list down and investigating some properties you're interested in, you should draw up a final list. This way you can be prepared to focus on specific liens on the day of the sale. The size of this list will depend on how much you're looking to invest. If this is your first time and you don't have much to invest, keeping the list short is probably a good idea. If you're a professional with a lot to invest, the list can get as large as you can afford.
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Part 3
Part 3 of 3:

Purchasing the Lien

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  1. When you've done all of your research and have a final list in mind, it's time to bid on the liens you want. Go to the location of the lien sale. Work out beforehand exactly how much you're willing to spend on each property. Without an advance plan, you could get carried away and bid too much on a lien that won't give you a good return on your investment.
    • Remember to take other expenses into account besides the cost of the lien. For example, if the homeowners fail to pay their taxes, you might have to start judicial foreclosure proceedings. This will lead to legal fees, which can get expensive. Keep this in mind when deciding how much to spend.
    • The lien sale, whether online or in person, should feature a typical auction format. The lien for sale will be announced, an opening price will be set, and then bidding will start. Pay attention during the auction so you know when a lien you're interested in comes up.
    • Usually auctions require payment in cash or certified check. Add up what you're willing to spend on your liens, and bring either enough cash or a few certified checks. Some auctions allow you to finance a purchase. If this is the case, you should get pre-approved to avoid administrative slowdowns. [10]
  2. Make sure you stay within the law during this whole process. You may be required to provide written notification of your purchase to the property owner. There may be other legal requirements as well, so keep yourself informed of local law. [11]
    • When notifying the property owners, send a certified letter to their address. Let them know that you've bought the lien on their property. The county is supposed to notify a property owner when a lien is offered for sale, so they should already be aware of this possibility. Let them know how much they owe in back taxes and when this amount must be paid.
  3. When you buy a lien it usually comes with an expiration date. When this date passes, you no longer have a claim on the back taxes. If the property owners aren't paying their debts, notify them again about their outstanding debt. If you do nothing, you risk losing your investment. [12]
  4. The property owners still have to pay their money to the county when you've purchased a lien. When they do so the county will contact you, and you can go pick up your money at the county office. [13]
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      Tips

      • Don't be shy. Speak to as many of the other auction bidders as you can to learn more about the liens being sold.
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      Warnings

      • Many people buy tax liens and mortgage notes expecting to get a house if the tax is never paid. Rarely does the property go into foreclosure. This doesn’t mean the lien is a bad investment, but know that you're unlikely to get a house from it.
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      • Your investment is not liquid. Your money could be tied up for years.
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      References

      1. ↑ https://www.irs.gov/businesses/small-businesses-self-employed/understanding-a-federal-tax-lien
      2. ↑ https://www.larimer.gov/treasurer/thirdparty/liens/sale
      3. ↑ https://dat.maryland.gov/Pages/Tax-Sale-Information.aspx
      4. ↑ https://www.in.gov/courts/files/small-claims-manual.pdf
      5. ↑ https://www.mass.gov/info-details/frequently-asked-questions-about-tax-lien-foreclosure-cases-in-the-land-court
      6. ↑ https://www.mass.gov/info-details/frequently-asked-questions-about-tax-lien-foreclosure-cases-in-the-land-court
      7. ↑ https://www.larimer.gov/treasurer/thirdparty/liens/sale
      8. ↑ https://www.gov.uk/get-information-about-property-and-land/search-the-register
      9. ↑ https://www.gov.uk/search-property-information-land-registry
      1. ↑ https://delcopa.gov/treasurer/backyeartaxes.html
      2. ↑ https://www.piercecountywa.gov/718/Purchasing-Foreclosure-Property
      3. ↑ https://www.ftb.ca.gov/pay/collections/liens/help.html
      4. ↑ https://www.revenue.wi.gov/DOR%20Publications/pb060.pdf

      About This Article

      Article Summary X

      Before buying a tax lien certificate, decide where you want to invest in a tax lien, then research the laws regarding liens in that specific county, since they vary from area to area. Once you’ve done your research, get a list of properties for sale from the county treasurer, investigate potential properties, and make a list of the ones you want. Attend the lien auction and purchase a property lien, then notify the homeowner via certified letter. When the homeowner pays their taxes, you’ll be paid by the county. To learn from our Financial Advisor co-author about what areas to look for liens, continue reading the article!

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