When I Went To Buy Tax Liens, But When Those Checks Started Rolling In..."
Yes. Investing in tax lien certificates can be
Buying my first few liens was a frightening experience.
I left my first sale, giving the Larimer County, Colorado, treasurer a
check for $2,708.95. All I had to show for it was a receipt saying I had
paid for 7 tax lien certificates. I had no rights to even walk onto these
As I drove home my hands visibly shook on the steering
wheel. I wondered what I had got myself into. Things got interesting,
though, when I would go out to my mailbox. Every once in a while there
would be a check; sometimes small; sometimes big. And, always larger than
whatever I paid for the tax lien. All of those seven original tax liens
have now been paid back. Since that first sale I have purchased over one
thousand tax lien certificates. And at times, those checks were arriving
every day! I used to dread going to the mailbox and finding bills. Can you
imagine what it is like to get money for the effort of walking to your
mailbox? A while back I received a check for $10,343.81!
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What are Tax Lien Certificates?
I'm sure you think that sounds great, but what are Tax Lien
Certificates? Tax Lien Certificates (TLCs) are financial notes that you
can purchase from counties in several states
across the country.
These TLCs are actually in lieu of unpaid taxes by those who own
properties in these counties.
When property owners don’t pay their taxes, the counties do not have the
money to fund their yearly budgets.
So many states have enacted laws that allow the counties to collect their
funds another way. That other way is by selling TLCs to investors.
The counties sell the unpaid taxes to investors who are
willing to pay the taxes for (1) a lien against the owner's property, and
(2) the rights to get high interest rates if the property owner eventually
pays the money back.
If the property owner doesn’t pay their taxes, plus interest, by
the state defined time limit the lien gives the TLC owner the right to the
In these cases the TLC purchaser can file paperwork to take
possession of the property.
The rates of interest you can expect range from 8% all the
way up to 50%, depending on the state.
For example Iowa allows for 2% each full or partial month, or 24% a year!
And, on an annual basis you can actually exceed these rates in some
cases. This is possible because some states have a set penalty or
fee for redemption regardless of when the tax lien is redeemed. For
example, in Wyoming there is a 3% penalty in addition to a 15% per annum
interest rate. So, your best rate of return is actually when the
property owner pays the very next day. That would give you a rate of
return of 3% x 365 or 1095% on an annual basis. As good as that is,
you won't be able to repeat the feat for the other 364 days of the year.
You will usually prefer to let them take a little longer to pay.
The state set redemption time limits (when you can file for
possession of the property) can range from less than a year to several
And once that point has been reached you have another state defined
time limit by which you must file on the property or lose the lien
altogether. So, if you want to give the owner some more time, and you
some more interest, you can wait.
Or, if you want to see if you can get the rights to the property you can
file right away.
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What are Tax Lien Sales Like?
There are as many formats to tax lien sales as there are
counties! The following is a rendition of one of the many variations
on sale methods.
The day starts early as you drive to the sale site a few
counties away. You time your
traveling so that you arrive at the sale at 8 a.m.
This is one hour before the sale starts and is the time this
particular county starts accepting registrations for the sale.
The people at the county treasurer’s office are there at
tables taking registration information.
They request a filled out w-9 for each investor, as they will be reporting
investor earnings to the IRS.
They take your name, address, and phone number.
They assign you a bidding number for the sale.
The treasurer’s office also provides you with a sheet with
instructions for the sale and a packet with the listing of the tax liens
for sale this day.
find yourself a good seat and spend the extra time you have reviewing the
tax lien listing. You are
looking for words and indications of properties you wouldn’t want if they
were offered to you. It might
be just too high or too low of a price.
Or, it might be that there are a significant number of previous tax years
tacked on to the sale item.
Or, it might be that the wording indicates the property is "common
property" and would be difficult to redeem.
Or it might be improvements only, like a farm silo, and you are not
interested in farm silos.
In any case, you mark up your listing so that you know not
to accept your "no" tax liens.
If a particular property is borderline and you haven’t decided yet,
you place a question mark next to it so you can decide later depending on
how your investment day is going.
The sale starts promptly at nine.
The county treasurer gives a little information on how the sale will be
run; that the sale is “buyer beware”; that the investor has no direct
rights to the property they receive (i.e., you are not allowed on the
property as that would be trespassing), and asks if there are any
questions before they start.
The sale starts.
At this particular sale, they use bingo balls to pick the
As each ball comes out the investor number is called out.
If the investor wants the tax lien they say “yes”.
If they do not they say “no”.
A “no” answer means that the treasurer takes out another ball and
calls on another investor.
Eventually someone accepts the tax lien and all the balls are put back
into the bingo machine. Then the next property on the list is read out and a new ball
Each of the properties is gone through one by one until
they have all been taken by investors.
At the end of the sale the treasurer’s office needs time to
tally up the totals for each investor.
You are asked to come back at 2 p.m. to pay for your purchases.
This sale was over by 11:30 a.m.
head off for some lunch. In
the meantime you also add up your purchases to see if they agree with the
county’s total. When you
arrive at 2:00, and the total agrees, you write out your check.
The county gives you copies of your tax lien certificates. You head back home, confident that you will be making good
interest on your money.
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You will Like Investing
In Tax Lien Certificates
really like investing in Tax Lien Certificates (TLCs). You may have
had your money in the stock market, like I did, and subject to the up and
down whims of the market. Even if the market is going up, you may
find that your investments in Tax Lien Certificates are better and/or more
steady than the stock market.
The reason you will like TLCs are:
Higher, fixed rate returns. Tax
Lien Certificates pay much higher rates of returns than Certificates of
Deposits and other fixed rate return investments. Investments in
Colorado, Wyoming and Iowa have paid interest in the range of 10% to 24%
on an annual basis. Other states have a range from 8% to 50%.
You will typically receive 7% to 20% more on your money than the typical
bank savings rates.
In some years you might get a higher rate of return in the
stock market. Yet, I don't think you can get a consistently higher
return in the stock market. And, with the stock market there is the
opportunity to go down. A savvy investor could combine a couple of
investment methods: when a check arrives from a TLC payoff, one could be
investing in the stock market until it they were able to reinvest in tax
The excitement of going to the mailbox each day.
You just can't wait for the mail to come each day. At times you can
have several checks a day from the various counties you have invested in.
Sometimes they are less than $100. And sometimes they are some
eye-popping amounts like the one I received in January for $10,343.81.
It is a great feeling to get "paid" just to walk to your mailbox.
You will want to head right down to credit union and deposit the funds and
have them ready for the next tax lien sale!
Backed by real estate. You
can be reassured by the fact that the investment is backed by excellent
collateral. Although you invest mainly for the high returns, you
know that if the property owner doesn't pay that you will get some real
estate for pennies on the dollar. You usually figure that the
property tax rate is between 1% and 3% of the real estate value for each
year of taxes. So, even when you have had to pay taxes for several
years on a property, you usually have only paid 5-15% on the value of the
real estate. Even when you figure in the cost of the filing for
possession of the property, you can see that you am getting the property
for 6 to 20 cents on the dollar!
That makes you more than happy to sell the property you get
for only 50 cents on the dollar (of actual value) to get your investment
money back quicker. Selling the property at 50% of its appraised
value would still give you around 300% return on your money.
The ability to "up" the investment from home.
To make the initial investment in tax liens, one needs to travel to the
county sale. After that you have earned the right to pay the taxes
for the parcels you purchased from your home. So, if the taxes are
again not paid on the parcels you bought, you can send a check to the
county for the next year of taxes. And you can keep doing
that up until the owner pays off on the parcel or you file for the deed.
So, even if you figure the cost of travel expenses against your profit the
first year, there only the cost of stamps to consider in the following
The fun of "spending money" that gives you something back.
This is more my wife's than mine. Almost all of us like spending
money. My wife likes telling people at the sales -- "This is the
only place my husband lets me spend as much as I want." And she is
right. Anytime one can buy something that will pay you back (and
more) for buying it is MUCH better than buying trinkets that are go down
in value rapidly after you buy them.
Travel that you can write off.
Our family likes to travel and visit new places. Over the last
several years we have had the privilege to visit places all over Colorado,
Wyoming, and Iowa that we just wouldn't have gone to otherwise. We
have been able to take trips to see Yellowstone, Jackson Hole,
Breckenridge, Dinosaur National Monument and a whole bunch of other fun
places. Although the trips certainly offset the profits you would
make, the fact that the trips are able to be written off as a business
expense make it worth it.
It helped me quit my day job.
I had been working toward financial independence for some time before I
learned about tax liens. I was trying to accumulate enough money to
be able to live off the interest at 5%. I just didn't seem to be
getting close enough. Well when I found out how to make around 15%
on my money, the amount I needed to accumulate was cut to one third the
size! I was able to invest most of my money in tax lien certificates
and quit my day job. It wasn't enough to be totally comfortable all
year long, but I was able to take long spells of time off and fill in with
occasional contracting jobs. I have been able to spend more time
with my family, work on an advanced degree, and to work on the projects
that I would like to work on. Being able to wake up without an alarm
clock has been priceless.
Ultimately, you will like fixed rate returns that you can
count on. And you will like getting around 15% rather than 2-5% for
your fixed rate returns. You may find the roller coaster effects of
other investment approaches don't fit in with your new investment style.
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What are the Risks
with Tax Lien Certificates?
Tax Lien Certificates (TLCs) are not risk free. Nor
are they necessarily high risk, when you think of high risk being linked
high returns. There are also a few factors that make tax lien
certificates less than a perfect investment for most. Those factors
are not risks, just detractors.
Now, although there are a number of risks, they are not
prevalent. And, there are ways to minimize the risks.
Unusable land: Every once in a
while a tax lien that comes up for sale is actually unusable land.
If you have raw land that is not buildable, then it is next to useless.
You might be able to camp on it, but that is not what you were investing
for. Examples of unusable land are (1) landlocked access, (2) common
property, (3) swamp land, (4) deeded private parks, and (5) roads.
Landlocked access would be when
a parcel of land has parcels surrounding it that are owned by other
owners. There is no road / public access at any point to the
property. Without permission from one of the adjacent owners,
there is nothing you can really do with the land. You would be
trespassing over their property to get to yours. That would be
true whether walking to it, driving to it, or having building machinery
/ materials brought to it. You can look up and find these
properties in the plat maps at the county. Worst case, if you were
to end up with one of these might be to buy one of the adjacent
properties so you can have legal access to the property.
I have one friend who ended up purchasing a tax lien on a
strip along a limited access highway that was 10 yards wide and 1/2 mile
long. Since it was a limited access highway there was no way to
get to the property. That was compounded by the fact that it just
wasn't wide enough to do anything with it. I purchased a
landlocked parcel by accident once; the owner paid off anyhow.
Common property is when there
is some association of property owners involved. This typically
happens with condos or townhouses. There is a common, shared space
that is usually a green, park-like area. It could be anything,
though. Many times the common property has its own county tax
identifier and therefore separate taxes. These taxes are supposed
to be paid by the association. Unfortunately, many of these
associations have found that it is possible to get away with NOT paying
their taxes. This can happen because the association has written
up bylaws and deed restrictions to all of the land (owned by property
owners [e.g., townhouses] and the common areas). Therefore, even
if someone takes the deed to the common space, the new owner must
lawfully abide by the deed restrictions that are in place. The new
owner receives common space that can have nothing done to it! I
have even heard about one association who, after the property was filed
on, started billing the new owner for some of the association fees!
Swamp land is my term for
anything of a general category of naturally unbuildable land. This
could be a swamp, a desert, or anything that is so undesirable that no
reasonable person would build on it.
Deeded private parks is similar
to open space, but it is not connected with an association necessarily.
as a category includes alleys and parts of roads that seem to make it
occasionally into the tax rolls. I have heard of examples of
counties ending up with a new road (i.e., one that was deeded as part of
a development) and hadn't changed its tax status to non-taxable.
These show up and are sold as normal liens.
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Property not worth the cost of filing:
There are properties that, after you have paid all the taxes and are ready
to file for deed, are not worth the amount you will have paid plus the
costs to file. The cases I can think of are: (1) several years of
back taxes, (2) small parcels, (3) property had a structure that changed,
(4) EPA site, and (5) special assessments.
Several years of back taxes is
usually noted very prominently at the tax lien sale. There will
either be totals for prior years shown, or at least an indication on the
bidders list that there are prior years included. Sometimes, with
just a year or two of back taxes involved, it can still be a good
investment. What you need to watch out for is so many years
accumulated that after you have paid a few years of subtaxes and the
fees for filing that you have run up the costs too high relative to the
Small parcels refers to small
dollar amount parcels in general. These parcels might be taxed
anywhere from less than a dollar to a couple hundred dollars (levels
depend on the county). The point is that by the time the tax lien
has been listed for sale it has already accumulated some fees. The
county usually tacks on an advertising fee. I've seen those as
high as $40. The county will have already accumulated some
interest fees against the owner, too. So, if the property was
originally taxed at only $10 a year, the tax lien you are buying might
be $60. If this particular county's taxing rate is about 3% of the
value, the parcel is worth about $333. A few years of subtax
payments might get you to about $100. Then figure in some filing
costs of at least $200 (more in some cases), and you will have spent at
least $300 for a property assessed at $333!. You might be
able to get your money back, but you will not have ended up with the
high interest rates you wanted to get in the first place.
Property had a structure that changed
is not one that you can do a lot about. Sometimes a parcel that
has a building on it has something happen to it. Examples include
fire, moving the building (mobile homes and solid building can be
moved!), demolition, and cave-ins. What can happen is at the time
you purchased the lien there was a viable structure on the property.
Then sometime before you file the building has something happen to it.
You as tax lien holder will see is a drop in the taxes to pay,
I have heard about some very strange cases under this
category. In one, a property owner had a commercial building on
the site. The owner would not pay the taxes and before the deed
filing time he had the building moved to another parcel! What is
even worse in this story is that the owner did it a second time!
In another case, the city condemned a building during the redemption
period. The building was torn down. The tax lien holder was
never notified (and I am not sure they needed to).
EPA site refers anything that
might cause the EPA to need to clean up the site. This could be as
'simple' as an old gas station that likely had leaky tanks underground
to some major industrial cleanup site. In most cases you will not
know if such a site exists. I would stay away from property that
is a gas station and probably adjacent to it.
Special assessments are those
costs that are tagged onto the taxes. These could be things like
road paving, sewers, and other public utility kinds of things.
Each owner is usually assessed a portion of the total costs of the
project. Many of these assessments are reasonable costs that
improve the value of the property. Usually the tax lien listing at
the sales event will also indicate that there are special assessments
involved with the parcel. Sometime the costs are rolled into the
cost of the taxes. Sometimes the special assessments are not due
until you file. The latter of these is the more troublesome.
You may not know how much the assessments are, yet you will need to pay
them before you can take possession of the property. I had a
property I needed to file on where the total taxes I had paid were less
than $10,000, but the special assessments totaled over $25,000!! I
knew the land and building were worth more than $100,000, so it was
worth filing for the deed. The owner paid up before I could get
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Improvements only are usually
noted on the tax lien sales listing. I've seen this include mobile
homes, farm silos, and other general structures. What is happening
here is that the individual structure is being taxed separately from the
land. In most cases, I can't recommend buying the tax liens on these
items. Unless you are interested in the structure itself (for
want a farm silo). I am not sure what you would do with the
structure if you ended up getting it! And mobile homes can be very
difficult. They can be easily moved in the night, before you can get
to them, and you will never find them! So, unless you are a mobile
home park manager, who can observe the movements of your tenants, and also
have a way of selling the mobile homes you get the title to, I would steer
away from improvement only items.
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Incorrectly sold means that the
county made an error and sold the tax lien to a property that had its
taxes paid in full. When the county figures out they sold the taxes
in error they need to pay you off. In all the states I have done
business with they have a provision in their state code as to what to do.
In the case of Colorado it was a lower interest rate (e.g., 9% rather than
14%). In the case of Iowa it was that the county had to pay the tax
lien holder the full amount due at the time the error was discovered.
I had one of these in Iowa. Because I was able to
quote the correct state statute the county gave me everything that I was
You may be saying at this point that there sure are a lot
of risks to this type of investing. I am not sure they are any less
than any other investment. Stocks can go to zero value. Banks
can fold and you can lose your Certificate of Deposit funds, etc., etc.
In the case of TLCs I tend to think statistically. There are very
few properties that have these problems. With experience and
knowledge (most of which will be gained from our home-study course) you
can avoid most of the problem parcels. The few that are left you can
write them off as losses and still make a good return on your total group
of Tax Lien Certificates. I have bought over one thousand TLCs.
When I find an undesirable one, I stop paying the subtaxes on it.
Many times the owners still pay off. And the the few that don't, the
losses are small.
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