Yes, the rules can be complicated, but if you invest the time and money to play, TLC’s (tax lien certificates) can spell phenomenal returns on your dollar and ultimately winning the tax lien game.
As a youngster, I spent countless hours in dusty and cold courthouse chairs watching my father sift through and study endless maps and plats wondering what in the world he was doing. My mother and father’s marriage dissolved in divorce when I was twelve so I never truly had the benefit of comprehending his life’s profession until later in life.
It was years later when I was introduced and schooled in tax liens and deeds through a sought after wealthy mentor, that I truly began to understand what my dad had learned from years of trial and error—that buying delinquent property tax bills at government auctions so you can collect the interest and penalties that accrue was ridiculously win-win. Better than the lottery, every time you invest a dollar you get a dollar back and then some. And every now and then you win the lottery (the property).
So, what is a tax lien? Bottom line, a tax lien is created when someone doesn’t pay his/her property taxes. The government auctions a lien certificate on the overdue bill as a way of recouping its lost revenue. Let’s face it, property taxes are a critical part of county government’s revenue. They use the dollars to fund public schools, roads, emergency services, libraries, hospitals and a variety of other services.
For the most part the laws allow for one of two things to happen. The county can offer the property for sale at a ‘deed sale’ or through a ‘tax lien certificate sale’ (more prevalent). To avoid losing his property, the original owner must repay the lien plus a penalty (which provides a hearty interest payment to the lien buyer). If for whatever reason he can’t repay after a set time, the investor can even take title to the property. No question, that’s the home run, but it happens less than 10 percent of the time. In the meantime, you’re going to have to settle for base hits and doubles (collecting established and steady interest rates mandated by state statute). The average returns are somewhere between 8 to 10 percent and higher.
To illustrate, let’s look at a typical example of a county in Florida where I do some of my tax lien investing.
October: The County sets and sends out property tax bills to owners
Nov-March: Property owners pay property taxes
April: All unpaid property taxes delinquent from year before
May: Tax liens are offered for sale (we know where)
Understand that there are 27 states at this writing that offer tax liens for sale and you guessed it, everyone operates a little differently. Colorado, as an example, sets the interest rate based upon 9% plus the Prime Rate (currently around 1%). In Colorado you bid up the price of the lien. On the other hand, in Florida the investors at auction set the interest rate. The bidding typically starts at 18% and the bidder who accepts the lowest rate owns the tax lien. Your safest bet, invest in tax liens for the return on investment you can make, not with the intent of owning the property.
Returns & States Currently Offering TLC’s…
STATE R.O.I.
Alabama 12%
Arizona 16%
Colorado 9% (plus Prime Rate) = 10% in 2014
Florida 18%
Georgia 20% (right of redemption fee)
Illinois 18% (6 months; up to 36% for the year)
Indiana 10-25%
Iowa 24%
Kentucky 12%
Louisiana 17% (5% minimum plus 12%)
Maryland 6%-24%
Mass. 16%
Mississippi 2%
Missouri 10%
Nebraska 14%
New Jersey 18%
New York 12% (certain municipalities only; most counties sell deeds)
Rhode Island 10-16%
S. Carolina 8-12%
S. Dakota 12%
Texas 25% (EVERY six months; right of redemption fee)
Vermont 12%
W. Virginia 12%
Wyoming 18%
Getting Paid.
Simply put, the investor gets paid when the county gets paid. The property owner will pay the back taxes, plus interest to the county. Best yet, your check is written directly to the county, so no broker’s commissions, inflated costs and complete anonymity! By now you gotta begin to see why tax lien certificates represent such a fantastic way for not only high returns on your dollar but if invested correctly the opp to never run out of money at retirement!
The municipal government will then send you a check for the money you invested, plus the interest set in that particular county. You typically receive a Form 1099-INT at tax time and report the gains as interest income (unless invested through a self directed IRA).
Most county seats hold the public auction once a year and sell the ‘left over liens’ throughout the year. And frankly, here is a ‘hidden market’ or diamond in the rough, as you generally don’t bid against someone for these investments. For example, in Florida, the leftovers or “over the counter liens–OTC’s–are set at 18%!
Do I Need Alot of Money?
Every year I see liens for under $50, others for $10,000 and up to $1,000,000 plus (picked up by the big banks, insurance carriers and annuity companies).
I recently attended a sale in Arizona and there were a little over 12,500 liens not bid on. Why? More often than not because most aren’t even aware they are available or know the first thing about how to go about securing them. The beauty here is that you decide how much you want to invest, where geographically and in what type of property (you’ll find that you run out of money before you ever run out of properties).
You can even bid on liens through an IRA. All you have to do is open up or transfer your current IRA to a “self directed” IRA with an independent custodian. You do the research, bid on the liens, send instructions to the IRA custodian to pay for them and the custodian sends the money to the tax authority. The custodian then holds the liens (for your benefit) and collects the principal and interest when paid off. (Email me at cashflowwithgus@safe-mail.net for a referral or two).
Which Liens to Bid On?
Probably the most common question of a novice is which liens should I bid on? My many years of experience (and those of my father and business partner who total nearly 100 years of investing combined) points to single family homes as your best pick, preferably owner occupied and those free and clear of other unpaid tax liens of any type. Normally those liens are the ones that are also paid off in the timeliest manner.
And remember, your insurance is that the original property owner (regardless of the real estate) can’t do anything with the property until the lien from the county is settled first. They can’t sell, refinance or even trade it! This means until they pay the penalty and interest to the county and you are written the check from that municipality, the home and property owner are tied to paying off that lien first, before they can do anything else with the property! Beyond that, because you hold the first lien position that’s collateral baby that can boost your credit score, even leverage your way into more real estate!
How do you know if a property is owner-occupied? In many states, owner-occupied properties often are ‘homesteaded’, offering the property owner additional tax breaks and creditor protection. These homesteaded properties are a great way to then self select which properties to start with. As an example, in Florida officials place an ‘x’ next to each homesteaded property on the list so your work here is already done for you. You can also look on the County Assessor’s site and compare the site address with the owner’s address to see if it’s owner occupied.
Here are a very few select strategies designed to stack the odds in your favor for the greatest return on your investment dollar and not only winning the tax lien game but never running out of money at retirement.
Invest ONLY Long Term Money.
Number one rule: Invest only money that you can tie up for long periods of time. Even though, yes, you can make quick profits in tax liens, the money invested may not be available to you for an extended period of time (what the counties refer to as a redemption period–from six months to one to three years). However, your safe investment continues to accrue simple interest until the property owner pays off his or her back taxes.
Invest in Safe Properties.
Yep, there are many tax liens against many different types of properties, including commercial, residential, agricultural, raw land and timber. But again, I would start with residential real estate and build your portfolio from there. In the event the tax lien is not redeemed (remember about 10% or less), you may have to force the sale of the property. What you never want to venture into are environmentally hazardous properties with the risk of tremendous liability. A mistake that most novices always make.
Inspect each Property before Bidding.
Once you’ve invested in a tax lien, your security IS the property. The tax authorities (counties, cities, etc.), typically through your local assessor’s office, publish a list of the available liens before the auction takes place. So, take a drive by the properties you plan to bid on to get a general idea of each property’s condition and a ‘gut check’ of the neighborhood. My business partner and I do quarterly tax lien seminars on site where our students do just that and actually visit and bid on many of those properties. Our quarterly events fill up fast–kept intentionally small and intimate–so typically there’s a wait list. Email me at cashflowwithgus@safe-mail.net for details.
Don’t Invest in Encumbered Real Estate.
Make absolutely certain that whatever you’re investing in has no other outstanding liens against the property (that’s what title searches solve). I continue to find many properties with multiple tiers of unpaid taxes over my years in the business (ditto for my father and partner). Avoid those properties for two reasons.
First, the property owner has a habit of not paying taxes, which means that you could be waiting for your money indefinitely. Second, since there are other encumbered liens from past years, they may have priority over the current year’s lien being sold at auction. If you forced the sale of the property, these liens would be paid first.
Do Invest in Liens against New Construction.
One of my earliest eye opening experiences was that many newly built homes have back taxes owed from the first year the house was built. These liens are a great source of high-quality investments (almost like a double digit certificate of deposit) primarily because they have no previous liens, the properties are in good to great condition and you can normally secure them for bottom dollar.
I have a student who purchased a tax lien for under $20,000 because a house was being built on it during that year. The following year, the property’s appraised value (with the house) was over $120,000. He had the only tax lien against the house, a solid interest rate and a quality property as security to boot!
Interestingly enough, other investors didn’t know that the home was an owner-occupied home. He knew because he counseled with us first, drove through the sub-divisions and checked them against the original list. Lesson. Winning the tax lien game is always in the details and prep.
Start Small but Start.
Best advice I can give you is to start in fewer, smaller counties because there is literally less competition. Start with smaller amounts of money, $500 to a $1,000, to get your ‘feet wet’ in the process, and minimize your mistakes until you can develop a system that works best for you based on what time and money you’re willing to commit to.
There is no “free lunch”. To make any of this work for you, obviously you are going to put in effort and sweat equity. That can mean going to the auctions, researching the properties, doing some traveling. I always recommend researching in warm weather states by the way.
To reduce the learning curve and stack the odds hugely in your favor, I recommend a ‘team approach’ that stresses education so that you are empowered to do the deals. I have found through many years of trial and error that winning the tax lien game comes down to one certainty. “It’s not important you possess the right skill set but that you have access to those who do!” 
Undoubtedly, the single biggest request that I receive from students and clients is who can you refer to help me navigate the waters that would allow me to avoid the ‘land mines’ and find the good deals?
After a lot of years and countless hours honing the tax lien investment process, I’ve finally come across a seasoned enterprise and team of pro’s who can deliver (and believe me, that’s rare in this business). Far from any type of guarantee, they immerse you in educating yourself to do the deals at your level of competency and pace (E-mail me at cashflowwithgus@safe-mail.net for details. Serious inquires only!)
Should you decide to go it alone, is it doable? Yes, but like any endeavor, there is a learning curve. I’d say ignore the advice you see on infomercials and the Web. You can learn how to drive a car on the Net but nothing substitutes for getting behind the wheel yourself. Investing in tax lien certificates can be fun, lucrative and challenging. Just remember–each state and county is different, but with some focused time, research and effort anyone has the potential of closing in on phenomenal, consistent returns and inevitably winning the tax lien game.
Reducing the Tax Bite.
The payment of income taxes on your investment income and gains can significantly reduce your total return. So, here are strategies to help reduce the tax consequences on your newfound portfolio (ALWAYS huddle with a CPA or competent accountant first).
Decide carefully which investments to hold in tax-advantaged (e.g., retirement accounts) or taxable accounts.
Assuming you’ve gone the direction of a self-directed Individual Retirement Account (IRA) or 401(k) plan with your money, at this writing, you are taxed at ordinary income tax rates when withdrawn, rather than at the lower capital gains tax rates. Although it might make sense to hold investments that produce ordinary income in retirement accounts and investments that produce capital gains in taxable accounts, factors such as the redemption period on the liens should be seriously considered.
Take advantage of tax-deferred or tax-exempt investments.
Make regular contributions to your 401(k) plans and/or IRA. The deferral of income taxes can make a significant difference in the ultimate size of your portfolio.
Doubling Your Money. 
The secret formula used for years by banks and financial advisors is called the “Rule of 72”. The formula states the number of years required to double your money in an investment is determined by dividing the number 72 by the return that you expect on that investment.
So, if you want to know how long it will take to double your investment at a minimum 8% return bid in Arizona, as an example (I’m assuming the interest is annually compounded and accepted at a low bid which is ultimately guaranteed by state statute), divide 8 into 72 and get 9 years. As you’ll see, the Rule of 72 is remarkably accurate.
You can also run the reverse scenario. If you want to double your money in 5 years, just divide 5 into 72 to find that it will require an interest rate of about 12%, which will point you in the direction of tax liens in New York, Alabama, Mississippi and West Virginia.
Keep Turnover in your Portfolio to a Minimum.
Target tax liens and properties you’ll be comfortable owning for years to come, especially during retirement (perhaps in a sunnier climate). That way, in turn, you can allow any unrealized capital gains to grow long term.
Analyze the tax consequences before rebalancing your portfolio.
Portfolio rebalancing is a taxable event that may result in a taxable gain or loss. In general, avoid redeeming tax lien investments from your taxable portfolio for reasons other than performance. Bring your asset allocation back in line through other methods. For example, when purchasing a new tax lien or property, select these from higher return investments or rebalance through your tax-deferred accounts, which generally will not result in a current tax liability.
Consider Donating to Charity.
You will receive a charitable contribution for the fair market value of the lien and you’ll avoid paying a capital gains tax. The amount of the donation is subject to limitation, based on a percentage of your adjusted gross income.
Look at your Redemption or Holding Period before Selling.
Keep in mind that your gains on investments held for more than one year are taxed at a maximum capital gains tax rate of 15% (5% if you are in the 15% marginal tax bracket or lower), while gains on investments held for less than one year are taxed at your ordinary income tax rate. You may be able to save a significant amount of taxes by simply timing your sales or redemption. Again, always seek the advice of a seasoned CPA or accountant BEFORE making any tax moves.
Consider Selling Investments with Losses to Offset Gains.
The best tax strategy yet may be to recognize losses that completely offset your capital gains. Then generate an additional $3,000 loss, since up to $3,000 of excess losses can be deducted against ordinary income.
If you believe your investment has the potential to increase in value, especially if you’re creating a diversified asset portfolio including stocks, you can deduct the loss and repurchase the investment as long as you avoid the “wash sale” rules. These rules state that you must repurchase the shares at least 31 days before or after you sell the original investment in order to recognize the loss for tax purposes.
Keep Accurate Records of your Cost Basis.
Reinvested returns are part of your cost basis, since income taxes were paid on them in the year the dividends were received. For inherited assets, the cost basis is typically the value of the date of the previous owner’s death.
When selling only part of your investment, evaluate which portion to redeem.
Typically, you’ll want to redeem the highest-cost liens first to reduce your capital gains. However, the holding period of those liens or shares
and your current year income tax position should be considered.
Separating Tax Liens Fact from Myth…
Taxes are normally something that cost you money. Tax liens, on the other hand, are a form of taxes that can make you money!
Remember, a tax lien is a lien against a piece of real estate, which is created when property owners fail to pay their property taxes. Property taxes are a large part of a county government’s revenue. Along with general operating expenses, the money generated by property taxes is often used for public schools, police and fire departments, libraries, and hospitals. Because hundreds of counties throughout the U.S. need the millions of dollars generated by property taxes, many of these counties sell tax liens to the general public each year to replace the revenue they were originally expecting.
This is, of course, where you benefit. Because the original property owner failed to pay his taxes on time, the county assesses a set interest charge as a penalty. That penalty, in effect, becomes your ‘rate of return’ until the lien is satisfied. Now that you own the lien (not the property), you receive ALL the interest paid by the property owner when they eventually pay their property taxes, plus your principal.
Companies promising ‘get rich quick’ and ‘get the house of your dreams’ are just that, dreaming. Investing in tax liens and deeds is doable—when you know what you are doing. Getting all the facts and having a game plan, before you begin is crucial to winning the tax lien game–and potentially never running out of money at retirement.
MYTH: If the property owner never pays their taxes, I automatically get the property…
Very unlikely, but possible (less than 10% fail to pay). On residential homes, that number is even lower – 1% to 5% at best. You have to play the odds; the more you participate, the more you potentially win. Those odds are actually greater in ‘deeded sales’. When you have a tax lien certificate and the redemption period has passed, you can apply for a tax deed. The process is different in every state and you should always seek expert help, especially the first time out.
MYTH: You have to be a professional real estate investor to make money in tax liens…
This myth couldn’t be further from the truth. Granted, there is work, but it’s not unusual (especially if you’re self-educated or mentored) to obtain guaranteed ‘by state statute’ double digit rates of return on your dollars.
MYTH: If you don’t live in a state (or country) that sells tax liens, you can’t invest in them…
Counties generally sell tax liens in one of two ways. First, they conduct a live public auction where you (or a representative) must be present to bid on the liens. This is usually the best place to secure the best deals. Since all liens available are not sold at these public auctions, many counties continue to sell them throughout the year (referred to as ‘over the counter’ sales).
Secondly, by mail and phone, many counties are now even converting their tax lien availability through the Web, which literally makes the opportunity accessible anywhere on the globe. I’m continuing to see a lot of Canadians and Aussies taking advantage of this investment trend in the U.S. One caution: I’d suggest attending a live auction at least once before ever pursuing the route of mail, phone or on the Web.
MYTH: You need a lot of money to invest in tax liens…
Absolutely false! I’ve seen liens for sale for under $20 and others for more than $20,000 and up. Bottom line, you decide how much you want to invest. It’s all pretty much decided by the size of your wallet.
Some counties require a deposit for all investors. For example, Orange County Florida requires a $1,000 deposit from all investors prior to bidding. The $1,000 is then applied to all the liens you purchase. If you secure more than that amount, you pay the difference.
Remember, each municipal government has its own procedures and protocol. That’s why it’s always best to keep your initial investment to fewer counties and start with less money than more until you perfect your investment goals.
If you are ready to learn about never running out of money at retirement or avoiding the pitfalls and reaping the benefits of tax lien investing, contact me at wealthdoc@protonmail.com Serious inquires only!
I’m Gus Fernandez and I’m fiercely dedicated to saving and making you money!
Gus Fernandez a/k/a the Wealth Doc
Please be sure to read our disclaimer prior to acting on any information you find on this website There is never any substitute for personalized professional advice.
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