TAX LIEN INVESTING
Copyright Iron Clad Realty Services - Jan 2005
We have provided some general and specific
information about the industry below. However, one must always do their
due-diligence prior to making any investment. Laws, regulations, and statutes
change regularly so always consult the latest county and state documents before
The first thing we want to point out is that
if you expect 50%, 100%, and 1000% returns as portrayed by infomercials
and slick web salesmen, you may as well not read any further. Tax lien
investing should be looked at as a modest return, lower risk investment.
Goals should be set between 10% and 15% as a net return each year. Sure,
you may get a foreclosure and hit a home run once in a while, but after
your overall costs and almost guaranteed mistakes or foreclosure
difficulties, your return will probably match these numbers. If your
return is any higher, you have been very diligent in your research,
efficient in your due-diligence, and very lucky in foreclosures.
Foreclosures do not come easy or often as portrayed in most ‘sales’
literature and seminars.
liens are issued by municipal taxing authorities (counties) in return for
the payment of delinquent property taxes. For municipalities with poor tax
collection rates, the sale of liens not only generates revenue from
non-performing assets, but also spares governments the politically awkward
chores of eviction and foreclosure. They earn interest as specified by
state statutes (8%–50%) and are secured by the underlying real property.
The liens are issued when a property is delinquent on its property taxes.
This includes industrial, residential, commercial, and specially zoned
property and land. These liens are then auctioned on the open marketplace
to individuals, firms, large corporations and whoever else shows up at the
Tax liens are superior to all other liens,
including the IRS and mortgages. Tax deeds are the actual conveyance of
the real property itself subsequent to foreclosure by the municipal taxing
$7.6 billion dollars in delinquent property taxes
are created each year with total size of the market at any given time
being in the $20 billion dollar range. There are 566 municipalities that
sell municipal liens in NJ alone. The industry is growing at a rate of 8
to 12% per year. There are currently about 31 states that issue tax liens.
There are two types of
returns in tax lien investing:
Redemption – A lien
redeems (pays off) during its redemption period and you make back your
principal, fees, and a percentage return on your principal investment.
periods vary state to state and range from a period of one to four
Foreclosure – taking
possession of the underlying property after the property owner has
failed to redeem within the redemption period. Foreclosure laws vary
from state to state and difficulty of foreclosure is just as varied.
There are various parts of the marketplace where
you can make money in one of these two ways. However, almost all ‘product’
begins at the auctions.
Depending on time of redemption, the bidding system and state law, a tax
buyer can earn anywhere from 12% to 24% interest the first year by
purchasing certificates. Interest earned for the second year can range
upwards from 24% to 50%. Each redemption rate of interest can be
found in the code or statute of a given tax lien type state. This interest
rate is set into law and can only be changed by an act of legislation.
In each case, the individual, estate, or other
entity that owes those taxes has a period within which they have absolute
right to pay that lien off (redeem). That varies by state (FL is 2 years,
SC is 1 year). They pay your principal (what you paid for the lien at the
auction), fees (filing, notices, etc), and any penalties that may be
issued according to state statute. If they do not redeem the deed within
this time period, the lien holder has the right to file for deed. The
statutes and procedures vary by state, so refer to the state statutes for
exact details and process. The Tax Collector’s office is a good source for
CAUSES OF DELINQUENCY
underlying causes of delinquency is important because they reflect the
taxpayer's ability to eventually make payment. The following situations
are other reasons that taxes are delinquent other than the complete
inability to pay.
may miss payments simply because a municipality lacks the resources or
expertise to effectively service receivables. These taxpayers will
typically pay after the introduction of more aggressive servicing
techniques, such as the threat of foreclosure.
skip payments due to short-term financial distress or temporary lack of
liquidity are also likely to redeem outstanding liens. When this type of
taxpayer lacks necessary funds or faces more insistent creditors,
municipal redemption periods of one or two years typically provide
sufficient opportunity for the taxpayers to become current. Because tax
obligations are relatively small, these taxpayers generally make payments
after their more pressing financial difficulties are resolved.
commercial property owners and larger taxpayers
do possess sufficient resources for payment, but use
delinquency as a form of financing. If the jurisdiction’s delinquency
penalties are competitive with the rates charged by regular lenders, a tax
lien offers property owners a 'no documentation' loan for the length of
the redemption period. 'No documentation loan' delinquencies will realize
a high voluntary payment rate, but only as foreclosures become imminent.
redemptions are dramatically lower if the underlying property value is
less than the sum of outstanding taxes and other claims on the property.
Cash flows from this type of property are limited to liquidation proceeds.
If foreclosure and liquidation expenses exceed the property's liquidation
proceeds, these properties will not generate any cash flow.
There are other
reasons that a property may be tax delinquent but these are the main
IS TAX LIEN INVESTING FOR ME?
There are several questions you must ask yourself first to help determine
whether or not you should even be investing in tax liens and by what
Does this fit my
investment goals and strategies?
Is an investment
instrument that brings the return of 10-20% something that interests
Can I afford to have capital illiquid for a number of years if that’s
how long it might take to redeem or foreclose?
You should have
a YES answer to all of these questions to plan on moving forward
with tax lien investing.
Can I handle the
Do I have the time to go to auctions, do due-diligence work, find
opportunities, assess data or afford to pay for those services?
If I end up with real estate, will I have the means to manage the
and REO (property realized through foreclosure)?
You should have a YES
answer to all of these questions to plan on moving forward with tax lien
Do I mind getting my
Do I mind
competition (and sometimes stiff competition) at an auction?
Do I have the
wherewithal to deal with the inconsistencies, and sometimes, downright
stubbornness of the county?
Can I really take
someone’s property from them if that is what it comes down to?
You should have a YES answer to the first
two questions to plan on moving forward
on tax lien investing. You can always pass on taking someone’s
property, but you
will also pass on profits.
TIME & COSTS
Next step in determining whether this is a good investment instrument for
you is realizing there is time and costs involved in tax lien investing
and requires dedicated funds needed to not only make the purchases with,
but to maintain them as well. The level of time and costs will vary and
increase depending on your personal involvement and your level of
diligence in your research to make good investment decisions.
You can get a list of tax liens for an upcoming auction, which typically
comes out 3 to 4 weeks prior to the sale. Some counties have 10’s of
thousands of parcel #’s (Broward Co, FL – approx. 33,000 in 2002). So you
can see, time may be of a real issue depending on your capabilities. The
list will typically have parcel #’s, owner name, address or legal
description, land use, and assessed value. Since this is all the typical
investor has available to them, we will work off this. There is other
information available sometimes and better ways of obtaining it.
The first tasks will include the following and the amount of time doing
this will vary depending on the size of the list.
Decide what kind of
properties you will bid on
Determine amount of
investment capital you have for the auction
Decide what price
range you will bid on
Decide what areas
you will bid on
Mark those on the
Cost - $0.00 if you
use the list that is published in the local paper prior to the sale. They
have a list at the auction and sometimes charge a few bucks for
You may then decide that you want to look at these properties, like any
smart person would do. How many properties can you drive by in 3 weeks and
do you have the time to do it at all. Some people skip this altogether and
take their chances by buying based on the list information. You can decide
if the added risk in not knowing exactly what you are buying is acceptable
because of your time restraints. However, if you are going to look at
them, the following time is involved.
properties you are going to look at
Map those properties
Either make notes on
the value of that property and area or just mark yes on properties that
seem to be OK. You can also develop your own rating system.
Cost – Gas and film if you are taking pictures and not using a digital
If there is a property without an address, you may choose to go to the
assessor's or appraiser's office to retrieve tax maps. Tax maps are either aerial or
plat maps that identify the exact confines of a property and its exact
location. In some municipalities, we recommend getting tax maps for every
property you are considering purchasing liens on because of
inconsistencies in the county’s address information. Nearly every office
has a different system for pulling tax maps but go to the Tax Collectors
or Tax Assessors office and ask them. Once you are there doing it, they
may do it for you or you may have to do it yourself. Some map systems are
very hard to read and finding each property may take 5 to 10 minutes just
to locate. So, if you have a list of more than 20 properties that need tax
maps, plan on at least a full day to retrieve maps.
Have your list of
properties to retrieve maps for with parcel or property account numbers
Pull maps and locate
Have copies made
Physically look at
Now you have your list of what you are bidding on.
Some auctions charge a bidder fee but other than that you just need to
bring the money you are planning to invest. Some counties require you to
pay at the end of the auction for everything and some will allow 24hrs for
payment, but I would not count on that. Be prepared to pay at the end of
Cost – up to $150
During the life of your portfolio you are going to
have to maintain it if you want a better outcome and this includes filing
notices and receiving redemption checks (which takes tracking and
accounting). If you are a larger investor and your portfolio is $500,000
or more, it may make sense to hire a professional Servicer to manage your
portfolio. Typically this will cost you about 2% of the value of your
portfolio each year.
Costs – be prepared to pay filing fees (which vary)
and depending on your level of investment you may have to pay subsequent
or prior taxes if you want to proceed to foreclosure. These taxes, filing
fees and other minor charges from the county are ‘rolled’ up into your
initial investment and you will earn interest on that as well.
RULES OF THE GAME
Ground rules are
handouts, mail outs or information given to potential investors from
county governments outlining the requirements for the sale. Information
usually included in these ground rules are time, place and date of sale;
deposit requirements, if any; interest rate; redemption periods; bidding
system; bidding increments; and/or summarization of statutes. These ground
rules do not necessarily teach you how to become a successful tax lien
investor and will not include very specific information about all the
other aspects of investing, filing deeds, filing notices, or foreclosure
To find out what
the exact rules are on tax lien investing and foreclosure laws for your
area, refer to your state statutes. Some counties or state websites will
have this information posted or the Tax Collector’s office may provide all
of this information to you as well.
Registering For The
Procedure varies by
county. You must have a social security or tax ID number and complete a
W-9 form (W-8 form for foreign individuals or entities). In addition, the
county may require their own registration form for general contact
Also know as a Buyer Number, a bidder number is
assigned by the Tax Collector at the time of registration, similar to an
account number allows you to bid under that number. In most counties your
bidder number stays the same from year to year. You may have more than one
bidder number if you want to have two separate portfolios. When you win a
successful bid, that bid will be assigned to your number for that
Some states bid-down an interest rate, meaning that
bidding starts at a particular percentage (in FL 18%) and participants bid
in increments. The bidder willing to take the least amount of interest on
the money owed wins the bid. If you bid 10% on a particular tax lien, you
get that rate of return over the redemption period. If the lien is paid
off in 1 year and the lien was $10,000, then you will make $1,000 plus
filing fees and sometimes other penalties.
Other states are over-bid. Bidding starts at the
amount of taxes owed and bids up from there. This may continue to bid up
to assessed value or more depending on the competition. You will then have
to pay the taxes owed and place as a ‘good faith’ deposit the amount of
the overbid. You may only have to place a percentage of this overbid as a
deposit and the amount of interest you earn and the amount earned on will
Some states, such as NJ, are a mixture of both type
auctions where bidding will start at a percentage rate, bid down to zero
and then bidding with a premium attached begins. Both these type states
obviously require more investment capital and are not recommended for
basically 5 different groups at the auctions.
‘Mom & Pops’ (45-55%)
Local real estate ‘experts’ (10%)
Mid size portfolio holders (5%)
Institutional and corporate investors (including banks) (1-2%)
Characteristics of auctions vary from place to place, but the above is
a close scenario to what you will experience at nearly all auctions. Over
the last several years, the Institutional and Corporate investors have
created the most competition.
DEVELOPING AN INVESTMENT STRATEGY
In general you
can choose the type properties you are willing to purchase liens on and
then do one of three things. Set you investments geared on buying liens
that are more likely to foreclose or that are more likely to redeem.
However, if you are a bit more sophisticated in your strategy and want to
try and realize foreclosure but also want a relatively steady cash flow in
the interim, you may want to do both. Once you think you have a strategy
down for buying liens that are more likely to redeem, you can allocate a
certain percentage of your funds to purchasing those type liens. Then you
can allocate the rest into purchases that are more likely to foreclose and
wait out the redemption period or purchase more mature liens. This is not
an exact science, but it is likely if you have an interest and inclination
to do so, that you will consider the following information when
determining a bidding strategy for yourself.
CALCULATING REDEMPTION & RISKS
The reason we are
mentioning risk here is the acceptance or avoidance of risk is strategy in
itself. If you accept the risk of investing in liens in general and on
certain properties, then you must have a plan with dealing with the
reality that may come from that risk. Many situations can be overcome if
you have the means to deal with it, some will plainly be a loss or
write-off, and a few could become ‘nightmarish’. Although the likelihood
of redemption can be assessed to some extent, we will consider the
advantages and disadvantages as if they were on foreclosures, since that
is where your potential for single largest profits and single largest
Vacant residential –
You know exactly
what your getting
If large enough you
can divide into multiple lots, potentially increasing your investment
Clean slate for
In some areas, these
resell like hotcakes
If next to or very
near a gas station or other potential EPA risks, there could be an EPA
risk for the lot as well
Many times, these
lots are unkempt and get fines piled on by the city for the owner not
maintaining the property
There can be zoning
issues that arise since no structure is currently there when trying to
build something new. If the city so desires, they can change or deny
zoning for the property because of this
Vacant Commercial –
Potential Advantages and Disadvantages are same as above with zoning and
EPA issues being potentially larger problems
Vacant Industrial –
Potential Advantages and Disadvantages are same as above with zoning and
EPA issues being potentially much larger problems. Selling land zoned
industrial can be very difficult because of these potential issues,
especially since it is likely that there are EPA issues with the property
Common Areas & Easements –
Impossible to sell
– usually parks or schools
Better have a good
Better have a good
However, if you are able to look further into the properties that are
zoned ‘Other’ you may locate a good find – something that is very likely
to pay off or is just a strange, but marketable commercial property. If
there is good data from the county and you have the ability to dig a
little, I would not necessarily discount these.
Government & University Land
Don’t even think about it
The potential advantages are not very significant, either they are going
to pay off or they are not with one potentially big problem – they can
drive off at any time if they are not one of the larger affixed mobile
Likely to pay off if
‘Lien-To-Value” is low
Can provide for good
rehab opportunities, thus providing flip or income property
House burns or is
destroyed in some other way and the resulting property is worth less
than the lien you bought plus any priors or subs you may have to pay off
other legal issues – these can pop up but are usually listed in the
information with the county. But they can occur between the time you buy
the lien and redemption period end
You have to choose
whether or not you want to take a loss or take some poor old ladies
home. Its something you may have to deal with. Just the truth here
Potential Advantages and Disadvantages are basically the same with EPA
risks being an issue depending on type property. You will see a higher
rate of foreclosure on lesser quality properties due to the higher
likelihood that it may become a write-off for a corporation or individual
if the ‘Lien-To-Value’ is higher. Remember though, it typically takes a
lot more knowledge and effort to rehab a commercial property
These are always a bit risky due to zoning restrictions, potential EPA
risks, and the marketability of such properties. If the business looks to
be in good shape, ‘Lien-To-Value’ is not
exceptionally high, and there are no large EPA or zoning issues, they are
likely to pay off. If you end up in foreclosure and the lien has not cost
you that much, as long as you can fund the asset until it sells or
re-leases, you probably made a lot of money.
Government & University Property
Don’t even think
If a redemption period
expires and you gain the right to file tax deed, you may need to pay off
prior years to file deed. This then becomes another investment. The
Clerk’s office or Tax Collector’s office will provide this information
once you claim interest in filing deed. You must determine investment vs.
market value, then decide if it is worth it to continue with filing the
tax deed and subsequent foreclosure, if available. If not, you will hope
that some other lien holder from another year will find it worth it to do
so or the property owner eventually pays off the lien. Otherwise, you may
be stuck with your investment.
When property owners
become delinquent in paying their taxes, these are called defaulted,
delinquent, or back taxes. If taxes aren't paid the second, third or
fourth year, these are called subsequent taxes. In some states a tax
purchaser is required to pay these subsequent taxes, thus resulting in an
increased investment. Some states will have a subsequent tax sale and the
original tax purchaser is redeemed. In others, you may lose your
investment for failure to pay these taxes. All states have their
peculiarities on the procedures for handling these subsequent taxes. You
will earn interest on subsequent taxes.
Tax Deed Process
Tax Deeds are
issued by the Clerk of the Court. Once the redemption period has passed
and all subsequent or prior taxes are satisfied, if need be, the right to
file deed becomes realized. In some states, such as SC, the deed is
immediately issued upon the filing of deed. In other states, such as FL,
the deed is then placed on the tax sale roll for the deed to be auctioned
at a tax deed sale. The actual sale may not occur for that particular
property for a number of months, but in most states you will earn the
maximum interest on total taxes owed during that time period. You may
still be outbid at the tax deed sale by a competitive bidder, since the
sales are held as an open marketplace as well. They will then in turn pay
everything that is owed to you. So, its still not such a bad deal.
Notices are of the
extreme utmost importance. Giving the proper notices is just as important
as bidding. If you are the successful bidder on a valuable piece of
property and you acquire this property, you can lose everything if you
have failed to give the proper notices. In some counties, the treasurer,
tax collector or auditor will perform this task for you. However, it is
your responsibility to get these procedures done, even reminding the
county official to do this.
In every state code or
statute there are notice requirements. Mortgagees, lien holders,
creditors, heirs, owners of record, etc. that have an interest in property
are called "interested parties." All interested parties have to be
notified, either by publication, certified mail, by personal service by
sheriff or just a posting. If interested parties aren't notified as
prescribed by law, then tax buyer will not receive a deed, or deed will be
attacked at a later date. Each state's statutes or codes always have
sections pertaining to the requirements for notification of interested
parties. Some of these requirements are in detail. These notices are given
not only for the benefit of the property owner, but for the interested
parties. This is due process of law. These notices give the interest
parties the right to "not lose their property at a tax sale, or the right
to redeem or recover ownership of their property or interest in property."
If all notices are
given properly and you are not redeemed, then that is just too bad for the
interested parties. You will receive the property. Interested parties
forfeit ownership to property for a multitude of reasons.
companies will not insure a tax deed. In some cases they may insure the
title after the tax deed has been issued for 4 years, others say they will
after 20 years. If you want to sell the property and offer title insurance
you must file a Quiet Title Suit. The Quiet Title process is not
complicated, but it will require hiring an attorney. It is recommended
that you use a company/attorney that specialize in Quiet Title Suits. The
minimum fee is $300 - $500 for a non-contested suit. If the former owner
files an answer this will require more of the attorneys time and possibly
appearing in court for a hearing, increasing your cost.
During the tax deed
process a title search is conducted on the property, you paid for it and
you have a right to obtain a copy of it. Make sure you always get a copy.
It will be helpful and should save you additional expense in the event you
chose to file for a quiet title. It is also recommended that you write
letters to former owners and offering to pay them a small fee ($100 -
$200.) in exchange for them signing a Quit-Claim Deed. This will avoid the
Quiet Title Suit and their name being published in the paper. Few will
take you up on your offer, but it is well worth the try, and you get to at
least verify their address so your attorney can serve them with notice if
you file the Quiet Title Suit. If you receive and record a Quit-Claim Deed
you can offer title insurance.
United States Constitution, IV, Sec. 3(2); plus the V, IX & X Amendments
United States Supreme Court, Chief Justice Marshall, McCulloch v. MD
United States Court of Appeals 5th Circuit, 554 F.2d. 216 (1977)
United States Court of Appeals, 2nd Circuit, Mikulec v. IRS (1983)
United States District Court, Birdville v. Hurst, RTC, FSLIC, General
Internal Revenue Service Code, Reg. 301-6323 (states tax liens are
superior to IRS liens)
Article III of the Uniform Commercial Code (UCC) - as adopted in all 50