A tax lien sale, also known as tax foreclosures, tax foreclosure and tax deed sales, is when the unpaid property tax liens are auctioned off to the highest bidder. The highest bidder now has the right to collect the liens, plus interest, from the homeowner. If the property homeowner cannot pay the liens, the new lien owner can foreclose on the property.
A lien is a legal claim against the property for the unpaid owed amount. Property that has a lien attached to it cannot be sold or refinanced until the taxes are paid and the lien is removed. Similar to how actual properties can be bought/sold at auctions, these property tax liens can be purchased as well.
When you buy tax liens, it’s important to do your homework before you bid at the auctions. Although tax lien investing can be safe, you want to be certain you bid on the best. There are a few things you might consider when you start your tax lien investing.
First, make sure the property is located in a good area that has value. I’ve been in some areas where the home is not even worth what is owed in back taxes, so you’ll have a hard time getting paid quickly.
Secondly, stay away from hazardous material that might be located on the property grounds. Clean up could cost a lot more than what it’s worth. Lastly, certain states are way better to buy tax liens in than others. Go to a local auction first so you get the feel for what to expect, then find the states that give the best benefits so you’re not wasting valuable time. In some states you can even buy tax liens online so you don’t ever leave the comfort of your home. However, you need to know how to do the due diligence when buying a certificate sight unseen.
After conducting proper research and you acquire a tax lien certificate there are only two outcomes:
1. The tax lien certificate is redeemed, and the investor receives all of their money back plus their 18%, or 24% or 36% interest, or…
2. The tax lien certificate is not redeemed, and the investor receives a free and clear deed to the property with no mortgage for as little as 5 to 10 cents on the dollar.
TAX LIEN CONFUSION
Much of the confusion investors have with tax lien sales usually starts with the bidding process and property owner redemption process. For example, Paul asks, “My understanding is that the homeowner has a 1 year redemption period where they have the right to pay their tax bill, along with a fee (around 10% I believe), and everything goes back to normal with them. If they don’t pay during the one year the purchaser of the tax lien can then follow a process to gain title and essentially foreclose on the original owners.
What I saw were properties going for well over the recorded tax delinquency. For example, there was one that the county said was around $2,000 delinquent. It sold for around $20,000 in the auction. So if the one year period goes by and the property isn’t redeemed the tax lien purchaser would get the house for $20,000 plus costs to get title and then foreclose.
But what if the original owner pays the back taxes? Don’t they only owe the original $2,000 plus fees? Let’s say that is $2,500 total. If they pay the $2,500 and bring their taxes back to current what happens to the lien purchaser? Seems like they have just put their purchase money at an extreme risk.”
REIA member Jay Redding explains, “This is the essence of how the Allen Co, Indiana tax lien sale works. The property becomes available for the tax lien sale when the property taxes have not been paid for 3 consecutive installment periods. Property taxes are due in Indiana on May 10th and November 10th of each year. In Indiana, property taxes are paid in arrears, meaning that the property taxes due in this year are the property taxes from last year. So the property taxes have not been paid for a 1 1/2 years on the properties that are in the tax lien sale.”
You are bidding on the debt that is placed as a lien on the property. You have no legal rights to the property until after the redemption period has passed and you receive the tax deed. The owner of the property has 1 year in which to redeem the property by paying the back taxes, penalty fees, administration fees and interest on the overages. If the owner redeems the property, the tax lien holder will receive his principal back (winning bid amount back) plus interest that is established by the state. The interest rate has changed a little bit lately. It used to be a flat 10% on the overage amount, currently 5% if the property is redeemed in the first 6 months of the redemption period and moves up to 10% from 6 months to a the end of the redemption period.
BE AWARE OF WHO THE PLAYERS ARE
There are many different strategies being played at the sale. You need to be aware of who the players are and what their strategies are. There are typically hedge funds and private equity groups bidding on the really good properties because they want the interest they receive backed by a hard asset like real estate. They are more interested in the interest than gaining the property. Others are bidding to hopefully gain the property at the end of the redemption period at as low a price as possible. If the property gets redeemed, they still make some money, but the bigger spread and exit strategy is to receive the property at a significant discount to the retail market and hold on to it as a rental or fix and sell out on contract or even wholesale to other investors. Then you have what I call the mom & pop people that are interested in hopefully getting a property that is next to theirs or an adjacent lot to their property. You also have land buyers that hope to get a lot that can be built on. The bottom line is that there are a lot of different players bidding.
The starting lien bid that is published covers the back taxes, penalties and an administration fee. It is only a starting point and has no bearing on the purchase price of the lien. In those situations where you saw the pricing go way up, those were very good homes in good areas and in very good condition. The likely hood of those getting redeemed are very good. So those investors are bidding up to receive the interest guaranteed by the state on the overage above the minimum bid. They are receiving roughly 8-10% guaranteed on their money, not bad for this low interest environment that we are currently in.
Does Allen County publish a public list with the results of the auctions?
You can see the 2023 Fort Wayne tax sale information and the delinquent property list in the REIA resources directory
If you happen to receive the property and gain the tax deed, you can then sell the property to get your money back. So the key in this situation becomes bidding up the property, but not too high that you can’t get your money out of the property to cover what you have invested. Most of these players were bidding up to about 50-60% of the estimated value of the property. If they get the property back, they could still do some fix up on the home and sell out at retail price and be able to cover their initial investment and still make a profit.
There are many other strategies employed. This is just a quick over view to help you understand why certain properties were bid way above the tax lien listing price. The bottom line is that the county gets to use your money for a year while it is earning interest. The interest on the overage above the minimum bid is paid by the property owner if he redeems the property. If not, you receive the deed to the property at the end of the year.
DOING YOUR DUE DILIGENCE
If you are going to be successful in this arena, you must do your due diligence on the property beforehand. There are always people that pay far too much for property given the condition and area. If they have not done their due diligence and only looked at the pictures on the assessor’s site or google maps, they will be very disappointed because those pictures are usually 2 to 4 years old. You, or your assistant, need to physically drive buy the property to determine the condition. It is truly a buyer beware situation.
MISSING UNKNOWN LIENS
The down side is you could potentially miss some unknown liens. There could be other types of liens on the property such as a mortgage, IRS lien etc. For Allen County, the IRS actually provides a blanket waiver that the Auditor’s office provides in the detailed information on the logistics of the tax lien sale. There is usually at least 30 days from the end of the redemption period until the tax deed is filed for the county judge to sign off on. During that time, I usually have one of my title companies that I use do a title search on the property to see what liens are on the property. You can then decide what strategy to use to clear the title.
Sometimes you may need to do a quiet title to make sure the deed is clean. Depending what liens are on the property, the title companies will ensure over the top of the liens. If there was a mortgage on the property, and the lending institution really wanted to protect their interest, they would have paid the tax lien off before the tax sale or possibly even during the redemption period.
All parties that have an interest in the property are required to be officially notified by state law. There must be proof provided for this. I have had situations where the title company has insured over the old mortgage and even provided a warranty deed to the seller. The key thing is to do a title search after the redemption period has completed to see what liens are on the property. Then your title company can provide you guidance on who to talk to and what needs to be done to clean the title. You will need to have a good attorney that does quiet titles on your team.
How would you check for these liens?
The specifics of how each tax sale works is unique to each state and county. Do your due diligence before hand on both the properties and the county processes. A good title agent who understands investors and tax sales is crucial to buying tax liens at auction with confidence.
GET GREAT DEALS WITHOUT THE RISKS
You can safely earn double digit returns on your money with tax liens, and acquire property for 10%-50% of market value through tax deed foreclosures. Learn about the new foreclosure opportunity available to investors and the methods used to invest in real estate tax liens and tax deeds.
Going to a tax sale? Be sure to listening to the Insider Interview™ with two top Fort Wayne professionals involved with hundreds of Indiana tax sale lien deals to learn the most crucial parts of the process:
- Where the biggest deals come from
- How to research properties correctly
- Exactly how to start buying tax deeds today
- What to do if your tax lien does not redeem
- How to avoid the mistakes new tax deed investors make
- The 3 ways you can make money buying Fort Wayne tax liens
Although there are many pitfalls, this interview shows you how to steer clear of them as well as make wise decisions when bidding. Discover what to do, and what not to do, when buying at the Fort Wayne tax lien sale, or at any Indiana foreclosure auction or tax deed sale. This is a must-hear if you want to safely invest at the 2023 Allen County tax lien sale.
Have a legal, tax or financial question? Looking for a good contractor or an agent who 'gets' it? See who's on our team using the Dream Team Directory or ask at the next meetup.
Build your team of agents, lawyers, closing agents, and contractors to help you invest by getting the Dream Team Directory
RELATED: See more about tax sales during the REIA Inner Circle Mastermind Panel
Want to grow your portfolio? Here’s the tool we use to manage income property professionally. Check it out and get our Landlord Survival Forms Free