Using Tax Lien Auctions to Invest in Cheap Properties
When the owner of a property in the United States fails to pay taxes on the property, the government can seize it through a tax deed sale or a tax lien sale, which leads to a foreclosure. In most states and counties in the US, a tax lien sale is the easiest way for the government to collect back taxes and is ideal for real estate investors because the properties are often sold way below their worth. Investors are also comforted by low interest rates and the support of the government. For a few dollars worth of back taxes and a minor foreclosure cost, a smart investor can purchase a great property.
It’s the law that states that counties are required to publish a list of all the properties that are going to be auctioned off at least four weeks before the auction. This is often done in a community circular or newspaper and is also often published on the Internet for free at the county or state webpage. Interested buyers can also request a list of the properties from the county. This is often delivered in the form of a CD and will cost only a few extra dollars. Because the list is released at least four weeks before the auction, that leaves plenty of time for you to check out each property and decide which ones you’d like to place bids on.
Becoming a bidder is a very simple process. After filling out a form, bidders are given numbers. Often times this process is all done on the day of the auction, but, depending on laws and regulations, some states or counties may require bidders to register a few days prior to the auction. Often times a bidder will also need to provide proof that they have the money to follow through with their bid. Luckily, since the prices of the properties often sell for very little, the minimal requirement is considerably low.
After you’ve received your bidder number, you’ll get a card that you can use during the auction. Most auctions are pretty basic but it can vary according to your state or county, so check with auction officials beforehand to make sure you have everything you need.
The main difference between a typical auction and a tax lien auction is that your not bidding on the actual amount written on the tax lien certificate, although some auctions do work like that. Instead, your bid reflects the properties interest rate and bid amounts go down rather than up. For instance, if you’re bidding on a tax lien for $1,000 in a state or county where the highest interest rate is 16%, the bid begins at 16%. The more bids there are, the lower the interest rate. So instead of increasing from $1,000 to $1,500, the bid will go from 16% to 15% then to 14% and so on. This continues until only one bidder is still in the game or until the interest rate has bottomed out at zero. The winner of the auction will be the bidder who is willing to take on the lowest interest rate on their investment.
After the auction is over or once you’ve won a bid, you pay out the amount of the tax lien certificate to the auction’s cashier. The certificate is then mailed to you within a few days. This does not mean the property is automatically yours, however. You have to wait through a redemption period. During this time the owner can redeem the tax lien certificate. If this happens, you’ll not only get back the money you paid, but the high interest rate as well. After the redemption period, if the owner has not opted to keep the property, you can buy the number of years of delinquent taxes and begin the foreclosure process.
No matter what, you’ll be turning a profit. Often times the money you make in a property with delinquent taxes is 500% to 1000% the amount of your investment.
Disclaimer: Original article idea from Jack Bosch.
