How to Make Money Buying Tax Liens
Investing in tax liens can be a lucrative venture if you know how to navigate the process effectively. By purchasing tax liens, you can potentially earn a significant return on your investment. In this guide, I’ll walk you through the steps and considerations involved in making money by buying tax liens.
Understanding Tax Liens
A tax lien is a legal claim against a property when the property owner fails to pay their property taxes. The government or a tax collector’s office holds the lien until the taxes are paid. If the taxes remain unpaid, the lien can be sold to investors at a public auction.
It’s important to note that tax liens are not the same as tax deeds. While tax liens give you the right to collect the unpaid taxes, tax deeds give you ownership of the property. Tax liens are generally considered less risky than tax deeds because you are only purchasing the right to collect the taxes, not the property itself.
Researching Tax Lien Sales
Before diving into the world of tax lien investing, it’s crucial to research and understand the tax lien sales in your desired location. Here are some steps to help you get started:
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Identify the jurisdictions where tax liens are sold. This can vary by state and even by county.
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Visit the tax collector’s office or website to gather information on upcoming tax lien sales. This will provide you with details on the properties, the amount of taxes owed, and the auction date and location.
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Review the properties available for sale. Look for properties with a high likelihood of being redeemed, such as those with a history of timely tax payments or those owned by individuals rather than businesses.
Understanding the Risks
While tax liens can be a profitable investment, it’s important to be aware of the risks involved:
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Redemption Risk: The property owner may redeem the lien before the redemption period expires. This means you won’t receive the full amount of your investment back.
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Interest Rate Risk: The interest rate on tax liens can vary, and it’s important to understand the rate you’ll earn on your investment.
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Property Value Risk: The value of the property securing the lien may decrease over time, potentially affecting the overall return on your investment.
Calculating the Potential Return
When considering a tax lien investment, it’s essential to calculate the potential return. Here’s a simple formula to help you estimate your return:
Return = (Amount Owed + Interest) / Initial Investment
For example, if a property has a tax lien of $10,000 with an interest rate of 18% per year, and you pay $9,000 for the lien, your potential return would be calculated as follows:
| Amount Owed | Interest | Initial Investment | Return |
|---|---|---|---|
| $10,000 | $1,800 | $9,000 | $11,800 / $9,000 = 1.3222 or 132.22% |
Attending the Auction
Once you’ve identified potential tax liens to invest in, it’s time to attend the auction. Here are some tips for a successful auction experience:
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Arrive early to familiarize yourself with the auction process and the properties available.
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Bring a calculator and notepad to keep track of your bids.
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Be prepared to bid competitively. Research the properties and understand the potential risks and returns.
Collecting the Taxes
After winning a tax lien at auction, you’ll need to collect the unpaid taxes. Here’s what to expect:
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Wait for the redemption period to expire. This period varies by jurisdiction but is typically between one and three years.
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After the redemption period expires, you can file a lawsuit to foreclose on the property and
