Introduction to the Tax Lien States
Investments come in all shapes and sizes, including delinquent property taxes. Although investing in missing tax payments may seem counterintuitive, tax liens can provide higher returns than the stock market and present the possibility of becoming a property owner.
Tax Sale Resources has spent over fifteen years working with tax liens and deeds. We provide insight on tax lien investment strategies and how to know which states offer the best returns for your portfolio.
Plus, we’ve seen enough mistakes in the field to help you avoid disaster.
Read on to get a leg-up on the competition as a tax lien investor.
The Crossover Between Tax Liens and Redeemable Deeds
Tax liens and redeemable deeds are ways to invest in properties with unpaid taxes.
Your state’s laws dictate whether liens or deeds are available, and the two function differently for investing purposes.
Specifically, a tax deed grants ownership of the real estate. On the other hand, a lien is a financial interest in the property.
Instead of owning the property, you gain the right to collect payment from paid back taxes or from the sale of the property.
Purchasing a lien means relying on the property owner to commit to paying the taxes plus interest. Otherwise, you won’t see a return on investment.
With a deed, the property is yours to do with as you please. This aspect is the key difference between liens and deeds: ownership versus interest.
In addition, what starts out as a lien may turn into property ownership, depending on your state’s laws. For instance, Florida can be classified as either a tax lien state or redeemable deed state. Initially, it sells liens on properties for a certain amount of time. If you purchase one and hold it for 22 months, you can apply for ownership during the foreclosure process through a tax deed application (TDA).
Then, Florida offers a tax deed auction where you can obtain the deed for the property through the lien you’ve held.
Remember, redeemable states, or hybrid states, are not uncommon – in fact, about 30 states this year have had lien auctions and follow-up auctions. Therefore, checking your state regulations for tax liens is crucial to wise investing.
Tax Lien States List
The following list is all the tax lien states across the country: Alabama, Arizona, Colorado, District of Columbia, Iowa, Kentucky, Maryland, Mississippi, Missouri, Montana, Nebraska, New Jersey, Rhode Island, South Dakota, Vermont, and Wyoming.
Other tax lien states that offer additional auction types are as follows: Connecticut, Florida, Illinois, Indiana, Louisiana, New York, Ohio, and West Virginia.
To see this list graphically, below you will find the tax lien states in red, or you can explore the tax lien states in greater detail through our state directory.
Redemption Periods in Tax Lien States
Generally, redemption periods for liens are how long the property owner has to pay delinquent taxes.
Therefore, this period also determines how long a lien holder earns interest on the property. State laws lay out redemption periods and vary throughout the country, so it’s best to familiarize yourself with your state’s regulations by reading the statutes and consulting with an attorney.
For example, Arizona has a three-year redemption period but can go beyond that if nobody redeems the lien.
Likewise, Florida’s 22-month redemption period can stretch up to seven years. Typically, lien holders will let the redemption period continue if they’ll receive more interest payments.
Once payments cease, you can end the redemption period.
Tax Lien States Interest Rates
Similarly, state and local governments determine tax lien interest rates. For example, Texas tax liens have a 24% interest rate. However, it’s critical to remember that you may not get that rate because lien auctions mean investors compete for properties.
Winning a bid for a tax lien means offering a lower interest rate than other investors. Therefore, you might win a bid at 10% because other bidders don’t want to minimize their returns any further.
For this reason, the most desirable properties usually have lower interest rates because they get more attention during auctions. For instance, single-family homes in good condition with modest taxes (between $2,000 and $8,000) are typically the most fought over. So, investors are willing to bid lower interest rates to win what they see as stable, profitable assets.
What Happens if the Property Owner Doesn’t Redeem?
Unfortunately, not all lien investments result in payments from the property owner.
Your options depend on your state, but the investor must take action in these cases.
If you don’t, the property will languish for untold amounts of time where neither the owner nor the state address the situation. So, being proactive is your best bet to escape a bad investment or becoming the property owner.
For example, investors in Florida can act after holding a lien for 22 months. Specifically, they can file a Tax Deed Application (TDA) to get out of the lien investment and initiate the tax deed sale process. At the end of this process, they can purchase the tax deed and become the owner of the real estate.
Remember, your state might not hold a secondary tax deed auction for unredeemed liens. So, knowing the relevant statutes and working with a knowledgeable attorney is essential when investing in liens.
Also, states usually handle tax liens and deeds inefficiently, meaning it’s up to the investor to move the process along at the correct time when a property owner doesn’t redeem a lien.
The Secondary Market for Tax Liens
If you come up dry at a tax lien auction, you have another shot at investing through the secondary market.
In other words, you can purchase a lien from an investor who won it. When you do so, make sure you fill out the necessary paperwork with your county and state.
However, secondary market tax lien transactions are few and far between because investors usually purchase liens on properties they want to own eventually.
So, instead of selling liens near the end of their redemption period, investors hold onto them for profit and property ownership.
That said, you may find investors who would prefer a lump sum to their lien or believe the lien is inferior. In these cases, you could purchase the lien and procure an investment from the secondary market. Fortunately, Tax Sale Resources offers transparent secondary market trading services with no hidden fees.
Cons of Specific Tax Lien States
While tax liens can be fruitful assets, it’s a mistake to think they provide guaranteed returns. Municipalities don’t guarantee payments when auctioning off liens. Therefore, uninformed decisions can result in huge financial losses.
The one exception to this rule is an Illinois state law, which allows you to get your money back for liens the state defines as worthless.
However, even if you invest in Illinois, relying on state regulations to bail you out of a poor investment isn’t a winning strategy.
Instead, it’s best to do your research and not assume that a tax lien will turn into property ownership. In most cases, the current owner will pay what they owe rather than forfeit the property. So, if you’re new to the industry, approach auctions with deliberation after doing your homework.
In addition, it’s vital to understand your state’s redemption period requirements. The quickest way to obtain the relevant information is to speak to a local attorney. Getting the details on your notification requirements, your obligations and limitations as an investor, and best practices from a legal standpoint will help you turn a profit on your investments.
Pros of Specific Tax Lien States
Evaluating the advantages of tax lien states depends on your investment model. As an investor, you might avoid risk even if it means missing out on the highest returns.
In addition, your location will drive your investment strategy. For example, Florida offers the most tax liens of any state. However, it’s also the most competitive, meaning you might bid a lower interest rate than you’d like to win a lien. Therefore, you might adjust your strategy by solely attending live auctions with less competition and ignoring online auctions.
In addition, you might get into tax lien investing for the profits, not the real estate ownership. This is because collecting interest payments can be simpler than owning multiple houses.
Plus, tax liens are generally less of an investment than a tax deed and present less risk.
Therefore, tax liens are a less volatile way to invest in real estate.
Various Investing Strategies for Tax Lien States
There is no one-size-fits-all investment strategy for tax liens, but investors can benefit from several foundational tips.
First, the market has never been more competitive. Individual investors and investment funds alike seek tax liens and deeds for their portfolios.
In addition, the majority of investors want to own real estate and see tax liens as an avenue into ownership. Therefore, you must adjust your investing approach to thrive in this competitive setting.
For instance, you might carve out a niche for yourself by specializing in fixer-uppers or empty plots instead of updated single-family residences.
Remember, around 3% of liens sold end up as real estate. So, if you’re buying on any sort of scale, you’re going to end up owning a handful of properties.
If your goal isn’t to become a property owner, you’ll need to modify your investment approach.
For example, you could arrange sales as redemption periods get closer.
Over-the-counter liens are another investment option. You buy them directly from your municipality, and they’re for sale because everyone passed on them during the latest auction. While over-the-counter liens are usually of poor quality, you can find diamonds in the rough if you search thoroughly. Luckily for you, when you sign up for the Research platform you will get some download credits to nationwide over the counter lists.
Plus, these liens have no competition, so you don’t have to bid down the interest rate to purchase it. Therefore, a carefully researched over-the-counter lien can be a profitable addition to your portfolio.
How to Win in a Competitive Environment
It can be challenging to procure tax liens because more investors are pursuing them and willing to take lower interest rates to add real estate to their portfolios.
Winning bids isn’t a foregone conclusion in this tight market. Remember, the more defined your strategy is, the more likely you’ll outbid other investors.
Instead of being a generalist, be a specialist in a specific area. Giant investment companies can afford to throw money at numerous bids, but individual investors must be laser-focused. In other words, when your end game is unique to you, you might take lower interest rates than everyone else or go for properties others may pass on.
Likewise, searching online auctions for liens will only expose you to more competition. Because everyone can participate in online auctions, you’ll probably lose on 99% of your bids.
Instead, attend live auctions, where competition may be toned down.
In addition, research is critical, as you’ve likely gathered by this point. Tax Sale Resources offers in-depth research tools you can customize for your investment strategy. For example, if you exclusively buy liens on commercial property worth $1 million and above, you might struggle to locate sufficient properties to build your portfolio. With Tax Sale Resources, you can set a notification every time that type of property enters the website’s database.
Tax Lien Frequently Asked Questions
What are the best states to buy tax lien certificates?
The best states to buy tax liens certificates are those that fit your investment strategy.
For example, if you want a chance at ownership, you’ll want to pick a state that offers tax deeds after the redemption period expires, such as Florida.
On the other hand, if high interest rates are your focus, you may want to pick a state like Mississippi, which has an 18% rate.
What is a tax lien redemption?
A tax lien redemption is when a property owner completely repays what they owe and the investor receives the highest amount of interest possible.
Failing to redeem a tax lien means the investor may have a chance to file for ownership of the property.
What interest rates do tax liens have?
Because they are lucrative investments, more investors chase after tax liens now than in previous decades. As a result, a defined strategy informed by patient research will provide the most reliable returns.