Tax Lien Sales: Tips for Leveraging a Home Buying Opportunity

Top Seven Tax-Friendly States in the U.S. (1)

Most people just buy a home straight up from a real estate agent or realtor. But, for the savvy shopper, this isn’t enough. If you’re obsessed with getting a great deal, then you’re probably looking for something along the lines of a Tax Lien.

It’s the best deal in town, except when it isn’t. Here’s how to leverage a tax lien when buying your next home and avoid getting burned.

Tax Lien Basics

Tax liens are basically government liens against a property owner for non-payment of property taxes. You don’t want to be on the receiving end of one of these. But, as an investor, it’s how you pick up properties a for a discount. tax deed investing program is one of the more famous on the Internet, and it shows you all the ins and outs of the investing aspects of this process. So, basically, when a property becomes delinquent on taxes, the county will sell a tax lien certificate to an investor as a way of recouping the losses to the government.

The private investor then becomes the creditor who must collect on the homeowner. The property owner still owns the property, however. The lien holder is entitled to repayment for the amount of the tax lien certificate, plus interest.

If the property owner doesn’t pay up, then the investor can foreclose on the property and take ownership. This isn’t something most people want to do but it’s an option.

Now, if the lien holder doesn’t move forward with foreclosure within the time period specified by the government, the lien will be forfeited and the investor loses his money.

Tax Deed Basics

Tax deeds are a bit simpler than tax liens because when you buy a tax deed, you’re actually buying the property itself. So, if you want to avoid the investing angle, go for the deed. There is no redemption period in most states.

But, like tax liens , you are picking up the slack for the delinquent taxpayer by paying the tax on behalf of the former property owner. Unlike a tax deed, you take ownership of the property.

It’s a clean “sale,” and you can do whatever you want with the property afterwards. From a prospective homeowner’s perspective, this is definitely the easiest way to go – at least, it’s easier than a tax lien and there’s a lot less paperwork and regulation to wade through.

Some deeds can be picked up pretty cheaply too. The only drawback is that you may end up with homes that were abandoned or were poorly maintained by the previous owner.

If you think about it, they didn’t really have a lot of incentive to maintain a property that they knew they were going to lose – and most delinquent taxpayers know they’re going to lose a property well in advance of losing it. The government sends notices and all.

In other words, yes, you will get a property, but it might be a rehab project. If you’re OK with that, and you like the idea of dusting off someone else’s dream to make it your own, this is an awesome way to do it.

Redeemable Deeds

A redeemable deed is somewhere between a tax deed and a tax lien. Redeemable liens are liens that you purchase during a deed sale, and you are purchasing ownership of the property, but there’s a redemption period. 

That means that the prior owner has the right to redeem the deed if he or she pays the back taxes on it. But, in order to do that, they have to pay the full amount that was paid for the property at the tax sale along with a fee and penalty.

It’s a little more risky, but these properties may be a smidge better than the tax deed sales if only because you may end up with a homeowner that really wants their home back so they’ve managed to do something resembling maintenance on it.

If they do happen to recover the property, you can still walk away with a tidy profit and move on to the next house. If they don’t, you get the home.

This type of purchase is ideal if you’re really not in any hurry to move into a new home, don’t mind losing a potential property, and you’re willing to collect from a prior homeowner.

State Law Variations

Different states have different rules regarding how they treat tax deeds, tax liens, and redeemable deeds. So, make sure you check with the municipality before you start throwing money around.

Ted Thomas is a Florida based educator, publisher and author of more than 30 books. He is now an in demand international speaker having spoken with Tony Robbins in engagements on investing throughout the world in Singapore, England, Australia and more.