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Hey Veterans: Are You Interested In Tax Lien Certificate Investing?

Imagine the following scenario on your favorite tv drama cop show: A guy in a dark coat with an evil glint in his eye walks up to the star of the show and tests their financial intelligence:

“Hey…Psst…You kid…c’mere… You interested in getting 20% interest GUARANTEED and easy as pie? Well, check this out.  looks around suspiciously  Right here in my trench coat, you see, I got this gold-plated guide.

It shows how normal Joe Schmoes are makin’ out like bandits. It’s all right here in this book called “Guide to Get-Rich-Quick Buying Tax Liens”.  Shhhh… SHHHH!!! Normally, people pay $497 for this inside info, but (and I’ll probably regret it later) ima let it go for only $97.  Whaddayathink??”

Luckily for you, just the other day you happened to see this exact blog post.  It was like having a vaccine against tax-lien hucksterism!

Oh, you say that you can’t remember all the finer points of the article?

Well, the TL: DR version is “I personally wouldn’t waste my time on this”.  There are easier ways to make money.

But, for those who wish to get a little bit more in-depth knowledge, read on!

Below, I break down the reasons why most people probably should steer clear of tax-liens or tax lien certificate investing.

Note: This article does not get into the ethical question of whether one should get into this racket (the “you’re-making-widows-and-orphans-homeless” argument). It is not my place to judge how you legally invest your money.

The fact is, local governments are desperate for the cash that comes from this activity.

So, what’s a tax lien?

In simple terms, it is the process that occurs when a person does not pay their property taxes.

The county or other jurisdiction needs to collect a tax payment from the homeowner.  Instead of hiring a collections firm or bugging the homeowner, the ask investors to pay the person’s bill.  What the investor gets in return is called a tax lien certificate from the city or county government that states that they’re not only going to get their original investment back, but that they will be able to collect a sizeable amount of interest too.

The typical cost of property taxes for a year can be a thousand, three thousand, five thousand, or even eight thousand dollars per year depending on the area. Not only does an investor get the original investment back but you will also get an unusually high-interest rate or rate of return. All because they paid that homeowners bill. All because most American counties are in dire economic straits and typically have significant money needs.

Incredibly Specific Local Rules

The first thing any potential investor needs to be aware regarding tax lien investing is that the rules are very area specific.

The rules vary from County to County and from state to state. Each state has global rules but then at a county-specific level there are even more details, rules, and regulations.  The basic risk is that every area is different. You need to be fully aware of all rules if you are going to operate in a specific area.

Some locales are going to offer a higher rate of return than others. In other areas, it can be easier to actually become the owner of the property if the person never pays back their taxes. That’s where things become really interesting.

Disclaimer: I personally do not buy tax liens.

I have purchased real estate in the past and have studied the process of tax lien property investing and decided it was not worth the headaches. We’ll discuss pros and cons I think potential investors ought to be aware of.

Tax liens or tax lien certificates on homes can cost from two to eight thousand dollars. Of course, it’s going to cost much more if the lien is on a big commercial property.  That might cost you a hundred thousand or more, but in most cases, the average investor won’t be buying this type of lien.

Let’s talk about the process.

It starts with a property owner who will not pay their property tax.

Who is most likely not to pay their property taxes and have the property end up on a tax lien list?

People that don’t want their property and also do not have a loan against their property.

This means that there may be some properties on a tax lien list that potentially have equity. Most of the time, these properties don’t have a loan on them.


Because most loans on a home are made through a mortgage company.  The mortgage company usually will pay the taxes and insurance each year, on time.

Even if the homeowner doesn’t pay their mortgage, the bank will still pay the property taxes and the insurance because they want to protect their position. If there’s a loan against a property, the taxes are almost certainly being paid and most of the time you won’t see these properties on tax lien lists. If the property is owned free and clear you might definitely expect some people to stop paying.

What kind of properties are own free and clear? Those that have been owned a long time by an owner.  They probably paid off the loan a long time ago.

Sometimes an heir might inherit the property. Those are the most likely people not to pay their taxes.  Imagine if you just inherited this wonderful property but now owe an extra $6000 a year to pay the taxes to keep it.

If it is in a depressed area of the country you may have trouble selling it.  If you don’t have the $6K lying around, this could make you throw your hands up and say “No Thanks!”.

Beware The “Too Good To Be True”Outhouse-fixer-upper

There are other people who don’t want the properties they have, though.

Examine closely: If someone owns a property free and clear and doesn’t want it, you must carefully ask “Why?”.

Maybe it’s some weird piece of land that’s completely landlocked containing only a whole bunch of trees. In this case, you couldn’t even sell the trees to a logging company because they couldn’t get in to harvest the trees.

Many properties you will see on the list have strange unmarketable features weird like that.  Perhaps it’s raw or vacant land that the owners themselves don’t want.  They say “Forget this crap! I’m not going to pay four K a year for this poopy property. I’m out! Peace!”

In these cases, the city will eventually become the rightful owner because the land has no value. Unless some sucker bids on a tax-lien.

But I Want It, Mom!!!

If you win an auction for tax lien certificates, in many cases you have the option of potentially becoming the owner. This can happen if you pay the taxes over a number of years. This process depends completely on the state, though. In Florida, for example, if the person doesn’t pay their taxes for three years, the property is sold at a tax deed foreclosure auction.

So, the only way to own the property if you hold the tax lien is that no one else bids at the final auction.

Yet, if I am the lien holder, this would really scare me because this means that no one else wanted it. NO ONE??

If no one else wants the property, why should I?

I’d probably now be stuck with a property I now really do not want that I now must continuously pay taxes on.

If you’re interested in investing in tax liens, you’re obviously going to have to evaluate each property individually to see which one you want to potentially buy the tax lien certificate for.

Do Your Homework!

In Chicago, where I am from, they issue a list once a year. There are over 50,000 tax lien certificates that are sold in a year and they do it once a year.

That means you have potentially to crawl through all 50,000 just to make sure you are not going to end up screwing yourself.

If you have a budget of twenty grand in a year and you want to invest in these tax liens you could just go shopping properties down the list until you estimate that you’ve eaten up your budget, but remember you may lose on this or that auction so you will have to have some backups.

Please, please, please evaluate each property in person before you make the decision to put the money into a tax lien certificate. You absolutely need to know what you’re putting your money into.

If you’re blindly putting that money on some weird slab of land, you just may end up with it. After that, it’s pretty much guaranteed that you will suffer a loss of your investment.

No Mom! I Still Want It!!!

In certain cases, you may actually want the property. This is where it gets interesting. You are probably going to have lots of competition if the property is desirable.

You will now be going up against the big boys.  Your competition will likely be local banks, hedge funds and other major players.

Here’s what they typically do: They will cherry-pick the single-family homes or properties that have a big mortgage on them. This happens because if the tax lien isn’t paid after two or three years, depending on the area, that mortgage could get wiped out.

Most mortgage companies will come in and pay the tax lien right before the tax deed sale. Either that or somebody is getting fired.

Banks and hedge funds absolutely love this game because they may get 2, 4, 6, and 8% on their money. Currently, deposits in a bank might make .5%. You do the math.

But I Heard About Making 20% Interest on Tax Liens?

You may have heard that there are places in this country that give up to 20% guaranteed rates of return on tax liens, but it doesn’t quite work like that. Why? Because it’s an auction process.

The person who bids the lowest interest rate will probably win. 20% is where the bidding usually starts. Competition then bids the price down.  You’re bidding against other people on the interest rate so the final percentage may end up on 6% or 8% or maybe 10% which is still hefty compared to, say, a savings account.

Once again, it depends on the area.

All in all, you’ll probably have serious competition which will be a challenge because you’re going head to head with people that have been doing this a very long time, know a lot more about this than you do, and have deeper resources than you.

A single-family home with a high dollar first mortgage on it is probably going to get redeemed. If not by the homeowner, at least by the banks. They will definitely go pay the back taxes before the property goes to foreclosure and they lose their mortgage investment. If that’s your goal, great!

But if your goal is to pick up a couple of these properties, then you’re going to need to take the approach of finding the deals that are least likely to get redeemed.

Just how do you get the property?

Start by going to tax auctions with the intent to learn the ropes for a few rounds before you first do any investing.  Study the process.  Study the players.

Figure out who the competitors are and what they’re doing.  Study what happens to each of the listed properties.  It will take time but you’ll start to notice some holes in the system.

I’m telling you to go study your local area (or area of choice) because that’s where the key pieces of information are. No tax lien course will be so thorough that it will allow you to skip this step.

It’s simply not possible given the competition, the amount of money at stake, and the possibility of rule changes.

It’s also a really good idea to go talk to an attorney that handles tax foreclosures.  For example, if you are a tax lien owner and you need to get your money back and the property owners didn’t pay you, sometimes you can file for a quiet title or for a tax foreclosure.

If this is possible in your area, this can make you much more competitive picking up properties.

Find out who’s handling tax foreclosures and learn from them.  There may be some local providers that handle this for investors.  In fact, I would bet that if you went to an auction and asked around you would quickly get to know what attorney to use and which title company to use because everyone wants a clear title.

Getting clear title can be a challenge in certain states.  For example, in Tennessee, it used to be a very big problem.  In Florida, there are closing companies that focus specifically on clear title for tax foreclosures.

You’ll have to definitely get a better understanding and that’s where these local service providers can give you some great wisdom on this subject.

Again you must really dig in and learn what’s going on in the game.  Remember, it’s much better if you know the property you’re dealing with.

Be Careful, You’re Playing With Real Money Now!

In every investment, you have got to verify whether it’s a good idea. The problem is that you have to go through so many to find a few that are going to be winners, that the time investment may not be worth it. It is difficult to know what’s going to be a good use of time.

You definitely need to have money ready to play in this arena.  This is not the no money, no cash down, creative financing stuff.

You have to have the money now. I would not personally put my own money into it because I could use that money to make a lot more deals out of it.

For example, if I was going to take $20,000 and throw it into a tax lien, I could also take that same $20,000 and give it to a homeowner or someone who needs to get out of their property ASAP.

I could then turn around and, most likely, flip that property for a lot more than I put in.

Getting more done in less time would mean that I can get a much better rate of return over the course of a year.

However, there are some people out there who are cash rich and don’t want the hands-on work that’s required with what I am suggesting.  They would much prefer to just go buy a bunch of tax liens and expect to get six to eight percent on their money.

They might focus on single-family homes that they know will get redeemed.  They won’t have to worry about owning the property and that’s exactly how they want it.

So are there any good things about tax lien investing?

In many instances, it’s a hands-off real estate investment style. Sure, it’s not hands-off in the beginning when you have to examine and choose which property you’re buying but it becomes hands off once you buy it.

You buy it, set it, then forget it. Then you move on. That that’s definitely a benefit.

You are also getting a guaranteed interest rate. Of course, it is very likely that you’re going to wait a couple of years before you can get it back. As a financial planner I prefer to think this is positive or negative related to your personal need for liquidity.

This type of investment is not very liquid because once you buy it, you have to sit on it. And wait.

You can end up sitting on it for three years before you get your money back.  But it’s a good rate of return, much better than any bank cd’s on the market today.

My Personal Preference Is Not To Invest in Tax Liens

Once again, I don’t do it because I prefer to have a better place to put my money.  However, I do love to check out tax deed auctions in Illinois, just out of curiosity.

Where I prefer to be in the real estate game is more on the active side because I’m happier with the hands-on, person to person deals. I don’t prefer to invest in a hands-off fashion because I’m happier actively making deals.

If possible I don’t want to get a specific return on my money over three years but would prefer active buying and selling which increase monetary turnover.

So That’s It! Location, Location, Location!

I hope you enjoyed this article and hopefully, you have gained some insights that you won’t see in other places whether paid or free.  This data comes from the good ol’ school of taking my lumps on the street.

I have certainly suffered enough headaches and stress to know what my personal preferences are.

So if you want to go the tax lien certificate investing route, just remember to know where your profitable paths lie.  It really is all about being a local expert, knowing other local experts, and knowing your local laws thoroughly.

If you study long enough in your local area and talk to enough professionals who are doing it, you’ll eventually begin to see where the opportunities are and that’s a HUGE key to success.

It’s simply about knowing what’s going on locally, asking a lot of professionals for information in that area and finally digging into knowing who the players are.

Maybe the guys at the auction that are bidding may not want to help you but if you knock on enough doors and buy enough people a latte, you can start to get to the juicy money-making information that others won’t know.

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