Bidding Strategies for Tax Liens

Once you get the when and the details of the terms for a tax lien certificate or deed auction, you will want to use the list of unsold tax liens (or deeds) and begin investigating the parcels that they represent. Do not be concerned if you get with a list with several hundred properties, this could be a very nice problem to have as you could pretty much have a guaranteed tax lien to buy somewhere in that list, because after you get the hang of reading the details then skimming the list will become just like skimming through real estate advertisements. This similarity will make tax lien investing much more basic.

The next thing to do, once you are fortunate enough to get one of these tax lien investing golden lists, is to divide it into little pieces and take it a step at a time. Understand that you do not even need to examine every single item on the list. You just need to locate the few properties needed to cover the money you have for investing in tax liens. Honestly, this will most likely not even get you 10 percent into the list! I hope this is enough encouragement to get you to turn that first page.

Luckily, there are a lot of counties which have tax lien listings available via the internet. From my experience, though, these online listings will be significantly picked through. However you may get lucky, so do not ignore a list just because it is available on the internet. The web may be enough to get you going on your tax lien investing career.

Each property that is in default of it's taxes will typically have an identification number. It will be important to note that the frame of these tax lien lists may carry over between counties, but the details may be different, so use this as a guide and not an end all reference of what you will definitely come across while tax lien investing.

To shrink the tax lien list, begin removing the properties you have no desire or capability to purchase. Begin by removing the properties with tax lien certificates that are too expensive or with a cost that would make you to place too many of your eggs in one basket. It is typically wiser to buy multiple tax lien certificates than it would be to have all your capital into one tax lien certificate. Tax lien investing is a lot like regular investing. You should diversify.

Think about this: if you invest $500, why would you look at properties with certificates of $1000 or more?

The purpose for not placing all your capital into one tax lien certificate is easy to understand. Even though nearly all tax lien certificates get redeemed, there is still a possibility that it will not happen. In this case you lose your cash and return. By not redeeming I don't mean that you obtain ownership of the property. If the debtor declares bankruptcy then you lose everything. For example, if you only have $500 invested into a bankruptcy instead of $10000, then the loss is much easier to stomach. No investment is devoid of risk and tax lien investing is no different.

This particular type of loss can and, if you invest in enough tax liens and invest for long enough, will happen. So be ready by spreading out your tax lien investment capital.

Now that you have a reduced number of properties available in tax lien list, use the identification number (may be named any one of several things ranging from Tax ID to Real Estate #) to do the following:

1) Get the property description 2) Get the address of the property so you can examine it in person 3) Get the owner's name (as well as contact information if need be) 4) The tax assessed value (how much the property is approximately worth) 5) Find out if any repairs are required or if other liens are against the title

It would be smart for you to think of tax lien investing like purchasing a home rather than a tax lien certificate. To begin, you will want to examine comparables. 'Comps' will get you a basic idea of what the property will be worth should you get the property itself. Make adjustments for repairs (new roof, foundation repair, etc.) and findlook at your adjusted value for the property. Is the property value higher than the value of the tax lien investment? If so, you probably one worth buying.

When looking at these properties consider the end product and what you would want to own or end up repairing. Are improvements even something you will be able to do? Do you want residential, multifamily, commercial or some other type of properties? What areas do you find desirable?

Getting the answers to these questions will have spawned a pretty significantly reduced list of tax lien certificates you can buy for investing. Once you have a reduced list, try to hone in on properties where the value far outweighs the total owed. The purpose is because this will be a win-win scenario. It is probable that the owner will want to pay back the debt if it is less than the property value. Yet if they are not able to pay back the debt, you can get a property that can be sold for a price that is more than that of the certificate.

Getting tax lien certificates for these properties will typically guarantee you a significant return. In the case of the latter, the return will be deferred to a later day and might be taxable, yet will still be a return.

Now you will make sure you understand how bidding takes place in the state you have picked for tax lien investing. If you don't, then you should figure it out. In some states the bidding starts at a specific amount and then will be bid down by potential investors.

What this means is, if the interest rate for a state were 10 percent, then bidders would bid 9 percent, 8 percent, 7 percent, etc. The smallest bidder would obtain the tax lien certificate at the bidding rate. In significantly competitive areas the rates are reported at .5 percent. That is a pretty tiny ROI and smaller than desirable. Such a tiny ROI makes tax lien investing appear to be a terrible idea.

So then what happens is that when the redemption happens, the debtor pays the full interest rate, but the certificate owner only earns the bid percentage while the state earns the rest. Still not a good investment in my mind.

Occasionally a state will auction off 'ownership' of a property that the tax lien is against. Assume that a tax lien certificate is worth $1000, then it can't be auctioned for more than that figure. Now, bidders bid on how much of the real property they will own if there is a foreclosure. The lowest bidder will become the tax lien certificate holder.

What this means is, someone has a winning bid of 1 percent. They then get the tax lien certificate and if the property goes into foreclosure then the certificate owner gets 1 percent of the auction value of the property. Let's say a property sells for $100k and you bought a $1000 certificate on the property that you bid 1 percent to hold. One percent of 100k is 1000. You break even.

But, if the property does not foreclose, then the full interest amount applies to the tax lien certificate. This means, if the debtor repays the full debt, then the owner of the tax lien certificate gets all of the interest dictated by the state. This is far more likely, and therefore a far more desirable bidding structure as the risk is much less even when you bid the smallest percentage allowable.

In some auctions you can bid up the amount you are willing to pay for a tax lien certificate. This means, if the certificate is worth $1000, bidders can offer to pay 1100, 1200, 1300, and so on. Regardless of how much is paid for the certificate, however, the interest rate will only apply to the face value of the tax lien certificate.

So if you get a $1000 certificate for 1100 with a 15 percent rate, then certificate will be worth 1150 once paid off. Yet, since you paid 1100, you only net $50. So your true ROI is 50/1100 = 4.5 percent. I am sure you can see how this system can quickly bid you right out of your capital and quickly into a loss if you are not cautious with the numbers when tax lien investing using this bidding structure.

Comprehending these bidding structures is VERY critical to making sure you are getting the return on your cash that you are wanting. It is very possible that bidding and winning a tax lien certificate could net you much less than imagined if you partake in an auction you do not fully understand. This should be clear from some of the above examples.

I suggest that you should attend a number of auctions before you actually take part in tax lien investing. You will obtainfamiliarity and confidence in the systems.

Lastly, if done correctly, you can invest in tax liens with a rather minuscule amount. A tiny amount equals a few hundred dollars. Tax lien investing does not take a large amount of capital to begin investing. What is required is a little education (these articles should be plenty) and a little experience. The experience is up to you.

Good luck in your future tax lien investing endeavors!

About The Author Author is a writer for http://www.korpritzombie.com - a joint blog about personal investing and development of passive income.