Can you imagine purchasing a house just by paying someone's outstanding property taxes? The city or county can place tax liens on a property when taxes aren't paid. You could bid on the house at auction, pay the outstanding taxes and gain ownership. Let's take a look at whether or not purchasing a tax lien property is right for you.
When a homeowner fails to pay property taxes to the state or local government on an annual basis, a tax lien is place on their property. These unpaid taxes eventually accrue interest (varies per jurisdiction) creating even more debt. Once the tax lien is filed, the general public will have knowledge of the unpaid debt. In order to remove the lien, outstanding taxes must be paid. If these taxes aren't paid within a year (or more in some states), a tax lien certificate is created and the property can be put up for auction. This is where you get the opportunity to bid for the home.
When to avoid bidding on a tax lien home:
- When the tax lien is higher than the value of the home (delinquent tax lien ÷ property's market value needs to be < 4%, per the NTLA)
- If there are other liens on the property
- When the home has been involved in a natural disaster
- If the home is located in a slum neighborhood
Avoid simply showing up for an auction. Two weeks prior to the auction, you may be required to send a certified notice of intent to purchase the tax lien. If you win the auction, you will be responsible for paying the delinquent taxes, penalties, interest and costs. In many cases, you will need to pay the lump sum at the time you win the bid. When you win the bid, you will receive a copy of the tax lien certificate and, once the lien is filed with the Clerk & Recorder, a copy will be sent to the owner of the property.
Even though you won the bid and paid the outstanding taxes, the original homeowner will have 3 years (varies by state) to pay the taxes plus interest (10-12% on average) and redeem their property. In other words, the property may sit for years before you can take it over. If the original property owner is able to pay off the taxes, before the 3 years runs out, they will regain ownership of the property and you will get your money back with interest, in many cases. If the owner doesn't pay the taxes within that time period, you will officially own the home.
Purchasing a tax lien doesn't come without issues. Not only will you have to wait a significant number of years to officially take ownership, you may be faced with a home in disrepair. You should take into consideration the amount of money you may have to put into the home to make it livable, before considering a tax lien purchase.
- Visit the house prior to the auction (you won't be able to go inside the home) to get a better idea of what you're investing in.
- Research local property records to see whether or not the tax bill was sent to the homeowner.
- Once the homeowner is on a repayment schedule, most are able to pay the lien in full. In other words, they'll gain ownership of the house again and you'll get your investment back.
- Once you own the home, you may have to evict current occupants. This may require assistance from a lawyer or property management team in which you'll incur additional expenses.
- Tax liens expire and you could lose your rights to own the home if you don't keep track of timelines.
- When you buy a tax lien you cannot put it on a shelf and forget about it. You'll have additional responsibilities during the 3 years the owners have to pay back the taxes and interest. For example, you'll need to know if the original homeowner meets their repayment deadline. If they don't, you'll need to send them a letter before the lien expires, notifying them of your possession of the lien and ability to foreclose on the home.
- You may want to pay future taxes on the home so no one else can purchase a lien and claim the property under their name.
As you can see, there's a lot to consider when purchasing a tax lien. You'll want to do a bit of research on the home, including visiting the home, before placing a bid. Purchasing tax liens isn't wise for novice investors so talk to your real estate agent and consider investing with a tax lien professional. These professionals can provide more information on homes with tax liens in your area and whether or not this type of purchase is right for you.