Tax Lien Investing Pros and Cons

http://www.dreamstime.com/-image4697637 You’re about to discover tax lien investing pros and cons from the real world of real estate investing. This isn’t a regurgitation of what you could find elsewhere on the web. These lessons come from the school of hard knocks in being in the tax lien investing game. Therefore, you may be surprised by what you learn as it may not line up with traditional wisdom on the subject.

 

 

What’s a Tax Lien?

 

In simple terms, it is when a person does not pay their property taxes. What happens is the county, as opposed to say hiring a collections firm and bugging the heck out of that homeowner, instead what they do is they literally ask investors to pay the person’s bill. What the investor gets in return is a tax lien certificate from the city or from the county that states that they’re not only going to get their original investment back . The typical cost of somebody’s property taxes for a year, and you can probably figure it out for your own area, it’s a thousand, three thousand, five thousand, eight thousand, depending on the area. . You paid their bill, so you not only are going to get that money back, but you’re also going to get an interest rate or a rate of return.

 

Area Specific

 

The first key lesson that you need to be aware of when it comes to tax lien investing is that it’s very area specific. The rules are completely different from county to county to state to state. Very, very different. Each state has certain rules, but then on a more county specific level, there’s even greater details of rules. What that means is, every area is different. Some are going to be better than others, and what I mean by better is the ability to get more of a rate of return. That’s where the better comes in. Then, in some cases, it can be easier than in others to actually become the owner of the property if the person doesn’t pay back their taxes. That’s where we’re going to move this conversation because this gets real interesting in the real world.

 

By the way, what I’m going to share with you is not regurgitated from a book or another training. This is what we have discovered over a lifetime of experience. I’ll give you one more disclaimer. I, personally, do not buy tax liens. I’m not saying that necessarily jades me one way or the other because I have friends that own over $500,000 in tax liens each year. They buy them and then the other ones get paid off, and they just go buy more. I know the pros and cons. I’m going to talk about those. You’ll also learn why I don’t invest in them.

 

Tax Lien Pros

 

Tax liens or tax lien certificates, they’re going to be in that two to five, eight thousand kind of range. Now, sometimes it’s a big commercial property and it might be like $100,000 or $150,000, but in most cases it’s not. Let’s talk about how you get there. Well, you get there if somebody doesn’t pay their property taxes. Who’s most likely not to pay their property taxes? Number one are the people that don’t have a loan against the property. That’s a pro, okay? On the pro side is you’re going to get some properties that potentially have equity. I’m going to come back to this, too. There’s two reasons why this is helpful.

 

No Loan Against the Property

 

A lot of the time these properties don’t have a loan on them. Why? Because a lot of the people that get a loan or a home loan to buy a property typically the mortgage company is paying the taxes each year, and the insurance. Even if the homeowner doesn’t pay their mortgage, the bank still pays the property taxes and the insurance. Typically, when there’s a loan against a property, typically the taxes are being paid and you won’t see these property tax lien issues. If the property is owned free and clear, you definitely can run into that. Now, what kind of properties are owned free and clear? Obviously you have those that have been owned a long time by one owner and they’ve paid off the loan. You see where sometimes the property gets inherited by an heir. Those are the most likely ones not to pay the taxes because they just inherited this wonderful property, but they may not have the extra $6000 a year to pay the taxes.

 

Misfits

 

What about the properties that they don’t want? One of the cons is you’ve got to be very careful about, I would call them misfits. These are properties that the owner just doesn’t want. Maybe it’s some weird sliver of land that’s completely landlocked, and it’s just a whole bunch of undeveloped trees or something. It would not only be difficult to sell the trees to a logging company, but you couldn’t even get in there because it’s landlocked. This happens a lot, so many of these properties are weird misfits. They’re slivers of land, raw land, vacant land. Things that the owners themselves don’t want. They look at it and say, “Well, who cares? I’m not going to pay two grand a year for this property. Let the city take it back. I’m not paying nothing.” Some of these properties just stay in this perpetual cycle of nobody wanting it, and sometimes the city actually takes them over. Nobody actually ends up paying the taxes, nobody buys it at the tax deed sale, and voila, the city becomes the owner.

You get these misfits, and what happens is there’s usually a period of like two to three years. If you don’t pay your taxes the first year, a tax lien gets issued. Then the next year if you don’t pay, a new tax lien certificate gets issued. Now that’s gets important, because if you buy the first one on year one for let’s say $3000, but you don’t have money next year to invest in that one, well then you get put on the back of the line in case the owner never redeems or pays back the back taxes. It can put you in an inferior line or role to potentially become the owner of the property, which is a small segment of this overall investing strategy. If you do pay for the tax lien certificates, you have the option of potentially becoming the owner.

 

You Could Possibly Become the Owner

 

That’s going to depend on the state, because I know in my area here in Florida, what happens is if the person doesn’t pay their taxes for, say, three years, what’s going to happen is, it’s going to go to a tax deed foreclosure auction. The only way I’d get it back as being the tax lien owner is if nobody bids at the auction. Which is kind of scary, because what that means is nobody wanted it. Now all of sudden I’m stuck with a property that I don’t want that I got to now pay taxes on that nobody wanted to buy at the auction. This goes back to this con. You could get, potentially, you could get stuck with one of these. That means that if you’re interested in tax liens, your obviously going to have to evaluate each property individually to see which one you want to potentially buy the tax lien certificate for.

Now in my area, they issue the list once a year. There are twenty-one thousand tax lien certificates that they sell in a year, and they do it once a year. That means you have to cull through all twenty thousand. Maybe you have a budget of, say, twenty grand in a year that you want to invest in these kinds of things, so I guess you would just go down the list until you hit about the first twenty. Remember you may lose on that auction, so you got to have some backups. I don’t know if this is a pro or a con, but part of this is that you’re going to have to evaluate before you make the decision to put the money into a tax lien certificate because you need to know what it is that you’re putting this money against. If you’re putting that money against some weird sliver of property, you may end up with it and you don’t want that. If nobody else is going to buy it at the auction, you don’t want it.

 

Competition

 

Now in other cases, in other states, you may want the property. Now this is where things get really interesting. Another potential con of this is going to be competition. Obviously, if it’s such a good idea, everybody’s going to do it. This requires some real money. You got to have some money if you’re going to buy tax liens. The competition is typically banks, like local banks, hedge funds. Here’s what they do. They cherry pick, usually, for the single family homes, or the single family homes where properties have a big mortgage on there. Because if the tax lien doesn’t get paid after, say, two or three years, depends on the area, potentially that mortgage could get wiped out. These mortgage companies will come in and make sure and pay the tax lien right before the tax deed sale. Banks, hedge funds, they love this because maybe they get two, four, six, eight percent on their money.

Maybe you’ve heard there’s places in this country that will give up to twenty percent guaranteed rates of return, or twenty-five percent. Well, that’s where the bidding usually starts, and then it usually bids down. You’re bidding against other people on the interest rate, so the interest rate may land on six percent or eight percent or maybe ten. Again, it depends on the area. Again, this is where we get a little technical because each area is just so much different than the next that you have to know the rules. We’ll talk about how you figure out the rules here at the end.

You’re going to have competition, and that can be a challenge as well because you’re going to be dealing with people that have been doing this a very long time that know a lot more about this than you do. That’s a big con about this whole thing, is making sure you can weave and bob in and out of the competitors. Remember, these competitors probably have a lot more money than you, especially these banks and hedge funds. They may have unlimited funds to buy these things. It also depends on the property and what’s going to happen with it. Again, like I said, a weird sliver of land, that’s a little bit more of a red flag. A single family home with a big, fat first mortgage on there, you know it’s probably going to get redeemed. If not by the homeowner, at least the bank is going to pay back that money before it goes to foreclosure and they lose their first mortgage.

 

Finding the Right Deals

 

If that’s your goal, great. But then your goal might be to try and pick off a couple of these properties. Then you’re going to want to take the approach of finding the deals that are least likely to get redeemed. How do you do that? Now, I’m going to give you some really good tips here. The first is, go to these tax auctions for a while. If you have any interest in investing in a tax liens, study them. Study who’s there. I know in my area typically there’s three companies that buy like all of them. They do it all across Florida. There’s three big companies and they buy them all. That’s their business, though.

 

Study Up

 

Figure out who the competition is, what they’re doing, and study it. Study what happens to these properties.¬† You can do all this, and it’s going to take time. You noticed I’m not telling you to go buy some course on tax lien investing. I’m telling you that you’ll study your local knowledge because that’s where the wisdom is. I also think it’s a good idea for you to go talk to an attorney that handles tax foreclosures. In other words, if you are the tax lien owner and you need to get your money back, and they didn’t pay you, often times you can file for a quiet title or for a tax foreclosure. Find out who’s handling those and learn from them. There’s going to be some local providers that handle this for the people that are there right now.

 

Tax Lien Cons

Getting Clear Title

 

In fact, if you went to an auction, you asked around, “What attorney do you use? What title company do you use?” Because one con can be getting clear title. Getting clear title can be a challenge in certain states, in certain areas. In Tennessee it was a very big problem. In Florida, there’s actually some closing companies that just focus on clear title for tax foreclosure. 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 can really dig in and learn what’s going on. Again, like I said before, it’s much better if you know the property you’re dealing with. I don’t know if this is a con or not, because every investment you’ve got to verify if it’s a good idea. I guess the part of the con is just that you have to go through so many to find a few that are going to be winners, that are going to be a good use of time.

 

Need Money

 

You’re definitely going to have to have money. This is not a game for no money, no cash down, creative financing stuff. You got to have the money. I, personally, don’t put my own money into it because I can use that money and make a lot more deals out of it. In other words, if I was going to take $10,000 and throw it at a tax lien, I could take that same $10,000, give it to a homeowner, somebody who has to absolutely get out of their house today, and then I could turn around property and flip that property for a lot more than I put in, so I can get a much better rate of return.

However, I know people that have been ex-venture capitalists, ex-investment bankers, and they’re sitting on several million dollars, and so they don’t want the hands on that’s required that I do when I do my regular investing. They just go buy a bunch of tax liens, and maybe they get six to eight percent on their money. They focus on single families that they know they’re going to get redeemed. They don’t have to worry about getting the property back. That’s the way they roll.

 

Pro: It’s Hands Off

It’s not hands off in the beginning when you have to actually choose which one you’re buying. It becomes hands off once you buy it. You set it. You forget it. You move on. That’s definitely a benefit. I suppose when you talk about the pro of a guaranteed interest rate, that’s nice. I am also going to argue it’s a lot like a bank CD. A bank CD meaning you buy it, and then you’re going to have to wait a couple of years before you can get back to it. My brother is a financial planner and he would call it liquidity. Not very liquid. Once you buy it, you’re going to have to sit on it. You could even sit on that thing for three years before you end up getting your money back. But it’s a good rate of return, so it’s not all bad.

 

Tax Deed Auctions

 

That can be a good little niche. Where they get really nice is this: When you get a situation where somebody passed away and the probate hadn’t been handled all the way or they haven’t fully transferred the assets over to the heirs or there’s some sort of disagreement, and meanwhile it’s barreling towards a tax foreclosure, maybe it goes to tax foreclosure. Sure you have to compete against the other guys who are bidding at the tax deed sale, but sometimes you can get a pretty good deal there.

That can be a great little option. That’s where I’d rather be in the game is more on that side. I’m okay with the hands on. I don’t need hands off, because I’m already in the flow of deals everyday. I want to be in the flow so that … I don’t want to get six or eight percent return on my money. I want to do a lot better than that in a year, that’s for sure. Again, certain parts of the country may do a little bit better.

 

Hopefully I shared with you some insights that you wouldn’t hear in other places, because this comes from the school of hard knocks. We’ve just been through this so many times, we know where the benefits are. I’ll say this, and I’ve talked about it earlier in this video. It’s all about local, local, local. If you study this thing long enough in your local area, you talk to enough professionals who are doing it, you’ll eventually begin to see where the opportunities are. That’s the key. It’s about knowing what’s going on locally, asking a lot of professionals in that area and finally digging into what’s going on. Now maybe the guys at the auction that are bidding may not want to help you, but if you knock loud enough and long enough, you’ll eventually wake somebody up.

Comments

  1. thanks for showing the tax lien . I ve seen this in the daily news, very informative thanks. I’ll keep this in mind only because it pays more interest than a cd

  2. What about circumventing this process and buying these properties penny on the dollar just before the auction just to be the owner on the record and let others fight over your properties at the auction and wait and get the overages, and VOILA, isn’t that a great return on investment then the interest rates?

    • Phil Pustejovsky says:

      It sounds good on the surface, but most of the properties have title issues, other liens, etc, and the overrages usually go to the other lienholders. It is worth a try but don’t I wouldn’t get married to the idea that it is a complete slam dunk. You may nab a deal or two ever-so-often.

  3. Tax lien is just a waste of time and energy.

  4. Thanks. Great information, brief, to the point. Now I know what tax lien investing is and also, knowing pros &cons, I can decide if I want to pursue the idea further.

  5. Phil,
    I enjoy your online videos.

  6. you give great insight to people in the business. the knowledge you provide is priceless.

  7. I am very interested in this, especially investing in tax deeds. However, you mention that you must learn and do business locally. I am an American citizen but I reside in France. How can I learn how to invest in tax deeds effectively from here. I know online auctions are available, but it is difficult to spot a good deal when I have no experience and I feel distant from the process.

    • Phil Pustejovsky says:

      Although the auctions may be online, you want to know the property that the tax lien is attached to, which is why being local is so critical. I would strongly avoid doing tax liens long distance.

  8. Let’s amplify on of the Cons on the list. The Quiet Title actions can take anywhere from 90-180 days (may vary from state to state). Thus IF you end up with the property AND there is a cloud on the title, the only way that you can convey it to another buyer is via a Quit Claim deed until such time that the title is ‘quieted’. And that can leave you with some holding costs that you may wish weren’t there in addition to the cost of the Quiet Title action.
    Overall, Phil, good presentation.

  9. Alyslesa Franks says:

    Great Video, I am a beginner investor and this was very helpful to me.

  10. I love the videos you send my way. Enjoy each and very one of them. Have a wonderful Christmas and a Happy New Year.

  11. I appreciate the frank explanations that you provide.

  12. Mike Kopack says:

    Phil you are great I’ve been on your mailing list for a while, and it is obvious you are very pationet about helping others learn about re investing. Good tax lein video Thanks Mike

  13. Jimmy Woodall says:

    I have been semiretired for several years, used to do a lot of rehabs, pre-foreclosures and foreclosures as well as tax deed stuff in central Florida, Polk County and surrounding areas.
    Was a Law at that time in the 1998 to 2005 time periods, bought several tax deed properties about that time. The main difference I remember from that time, we had to a quiet title action on each of the tax deed foreclosures, which at the time had a cost of about twice the amount of a regular foreclosure. Had to be done in order for anyone to be able to get a loan on the property. Please Let me know if is still true??
    thanks
    Jimb73

    • Phil Pustejovsky says:

      YES! In Florida, if you win a tax deed sale auction, you have to pay what amounts to a few thousand to do a quiet title.

      • Ronald Deveaux says:

        Phil, I’ve been watching your videos for a while. I love the knowledge that you give and how your honest about everything I just finished reading one of your books I am going to get the second book restate gone bad. Please please can you be my mentor I am ready to change my life.

  14. A year ago a noted R. E. investor promoted tax liens in Arizona and Georgia, but in his recent local seminar, about two months ago, tax liens were not mentioned. Do you have any comments?

    You are an excellent teacher. God has gifted you. From a teacher and pastor.

  15. Ed (California) says:

    I just got your book and this video was great. Being that I am from California and there are no tax liens locally, what do you recommend as a good place for me to start to get in the game?

  16. Eric Volkers says:

    You are an amazing teacher. My question is I understand you said invest in your back yard but what if there are other county’s and states that have a low amount in investment to get in example: In California homes prices in most parts of the state are high so mostly likely taxes would be higher amounts before you can get into them but let’s say in other states like Alabama it could be like $200-$500 and if you get the property you could have a greater return on investment could this be true? I ask this because years ago around Charlton Sheets days some guy advertised on tv a course on getting properties for first cheap in other states like this?

    • Phil Pustejovsky says:

      Stay close to home. Far away deals create massive headaches. There are plenty of small tax liens in LA County.

  17. Good job Phil! I agree with you on the tax deed sales can be sweet alot of homework involved !

  18. Fidel Cano says:

    Great stuff!!!, thanks for sharing your knowledge and wisdom with us.

  19. Wish I had heard your video before I lost 12K on tax liens several years ago. They were all in FLA and I can’t find the owners or the owner has disconnected not wanting the property. I agree that there is a much better way of using the money.

  20. Phil,

    Great video the only thing I would like to request is further explanation on the types of deeds that are issued in terms of pros and cons. Like special warranty to limited to quit claim etc…
    thanks for the videos they are very informative

  21. Robert Lambert says:

    Phil, very good presentation, especially listing the ‘pros’ and ‘cons’ from your view. I once listened to a presenter who specifically DIDN’T want the property, only the BIG payout when the owner redeemed. Like any investing, he got the big payoffs only occasionally. He worked on avoiding the ‘cons’ which is what we do with our ‘due diligence’ on buying property.

  22. Phil Good Presentation. I bought 7 tax Liens from Iowa this past June . We did not bid down the interest rate. In the county we were in we bid down the % of ownership. That is only important when you foreclose on the property. We got at 100% ownership.
    We also got an interest rate of 24%. guaranteed. for 1 month to almost 3 years. yes it is not liquid but I can wait 3 years to get my return back. How many C/Ds can you get at 24%. I did a search of CDS and found a rate of 1%. So if the owner doesn’t redeem we have 100% ownership to foreclose on it. I am happy with a 2% rate of return on each month. Not 2% per year. One of our Tax Liens has already been redeemed.

  23. A couple of years ago I looked into tax liens in Illinois – Chicago Area, and the interest rate was very low. You had to bid on the rate and the lowest rate won. The benefit would be if you could get the title to the property, but that was not a easy. I agree with you there are better ways to invest your money. Good video.

  24. rochelle jordan says:

    thanks for the info. t was thinking about purchasing one from certificates for sale company.it shows the property pics and gives good info on it

  25. Thanks for the insights, Phil.
    I wish I could have qualified for your apprentice program. I couldn’t even quite swing the deal finder program.
    If you say wholesaling without a license can be done in XYZ state, but not under PDQ conditions, that (your words-resonate).
    Back in April, some RE investors had me come seek for them and even leave large post it note on doors. I had several phone calls, traced down several missing parts, and got an appointment. Long and short was somehow, no money revealed itself and I put in a lot of work, door knocking, paying a friend’s gas to get me places. Ugh.
    They were making shifts in their branding and going from massive wholesalers to investing with IRA’S.

    We had a meeting in Sept I think it was. 3 of us discussed a new arrangement. I’d heard of Tax Lien Overages and asked about that (finding the owner that had money coming back from a Tax Foreclosure).

    Question 1- Have you heard of that? Unclaimed Tax Foreclosure Overages?

    Well, here in AZ owners have a 3 year redemption period before they can lose the property in Tax Foreclosure, and they do it online in February. Still, trying to find out more but the Investors (who hadn’t heard of the overage angle) liked the angle of finding leads of properties soon to go to Auction. “There’s usually high equity there…”

    Thanks for clearing up why there is often “Equity there”, I didn’t catch why that may be so, until now.

    Very few investors explore or even mention how the Pre-Auction Property owner may be a good source of leads, but in out state, there is a Tax Lien Purchase Map-(I forget what it’s called but the Treasurer’s office has it)

    Question 2: Have you or your students had success helping these People get rid of their property and get some cash prior to Auction?

    Thanks again!

    -Cory

  26. very interesting love the knowledge.

  27. Thank you for all the time you put into these issues. I am a beginning investor and I tried a tax lien course and it has cost much more than it was worth. I want to invest but my cash flow is nothing compared too a big pocket investor. What is possible?

  28. Very informative. Thank you

  29. I have been considering TLC’s in Florida. I have my own Pro/Con list(s) as well. Keeping in mind the old adage that if something sounds too good to be true__ it probably is too good to be true.. and since I am way too old to enter into a time-sensitive investment environment.. I am going to go in the direction of relatively low investment, relatively low (but steady) cash flow environment.

    I, considering my age (72) am going to exercise prudence as well as a stern reality check and opt for using what I already know fully, to achieve a controllable small supplimental income.

    Doing TLC’s makes my head hurt thinking about it.

    BTW.. thank you for helping me come to a comfortable realistic and sensible decision; there are surprisingly few people to get real-world truth from these days… thanks for a welcomed dose of honesty.

    In my past, I have moved too quickly without prudent investigation and lost money in the process. Then I went thru a period where I over-analized and did nothing.

    In that proces that took decades, I have learned to view proposals without emotion and probe for a firm basis in reality. I then look at it with a sort of “worse-case scenario” eye.

    Buy mainly I look at it to determine if it fits well with who I really am at that point in my life. If have found over the years that things done for money mostly… are boring to the greatest degree. I prefer to enjoy what time I may have left here. I’d rather have more fun, with less money than more money with no fun at all. When I lay dieing, I won’t be glad about my money… I will be happy about how much fun I had with my family and friends… much greater is THAT wealth at least as far as I’m concerned anyway.

    Paul C. Florida

  30. hi phil,what if the owner declares bankruptcy?

  31. You touched on it briefly at beginning of video. But I did not get it. If a person holds a tax lien on the first yr taxes are not paid. And there not paid by the owner in the first yr and yr two rolls around and someone else buys the tax lien in yr two. Where does the person who bought the yr one lien sit ?

    • Phil Pustejovsky says:

      Depends on the area. You would have to ask for your specific area that you are buying the tax lien in.

  32. If the people have one or more loans through an institution or private that are open at the time of the tax sale, does the tax sale wipe out those loans? And what if there are other federal, state, liens on the property would I be responsible for those?

    • Phil Pustejovsky says:

      Yes, it can wipe out existing mortgages. Usually the mortgage holder will catch up and pay the taxes before the tax deed sale to avoid losing their investment.

  33. Thank you for sharing your knowledge on tax liens. I appreciate your honesty and willingness to enrich

  34. Richard Elliott says:

    Thanks Phil, you make some great helpful videos and it is much appreciated!! Maybe I’ll get to meet you in person some day.

  35. Lenzie O. Winstead says:

    Thank you very much for this information!

  36. Sylvia Willis says:

    You mention that you have to have money, but i read and listen in on training courses and they said that their first investment was as low 54 dollars. So are you saying this is impossible to do?

    • Freedom Mentor says:

      There are some instances which require you to have real money; buying at Auction and Tax Lien Investing are two of them. Many of our students employ strategies taught her that require little or no money.

  37. Very cool. I had training that included doing this. It sounded like an easy peasy deal to do. I cannot thank you enough for this timely information. More headaches than I’m ready to assume. Thank you!

  38. Eric Lawless says:

    I currently have a contract on a tax lien property. My partner and I have a connection with someone who works for the city and can sell off these properties before the auction. What I’m wondering is, would it be a bad idea to have an investor help us with the initial buy out in order to take possession of the home, with the eventual goal being to sell it outright. It’s being auctioned for 60k and is worth 410k. The title company I am working with informed me that it would be at least 2 years before we could get clear title. Would we be unable to do anything with that property during that time? Renting it out for instance? I understand that things are different in every area, I would appreciate any insight you can provide for me. I am in Houston Texas.

    • Phil Pustejovsky says:

      You could rent it out between the time of purchase and the time of clear title. Once title is clear, then you can sell it.

  39. Albert Stancato says:

    Absolutely Sage Advice. Here Phil tells is like it is. I’m a tax investor. Phil, thank you for providing straight forward instruction. You are one of a handful of seasoned, inventive, and honest investors!

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