How to Use Tax Liens to Acquire Distressed Properties

A few months ago, I met a woman who had just moved from her single-family suburban home into an apartment complex. When I asked her why, she told me that back in 2006, she was injured in a serious automobile accident. For the next five years, she was unable to work. Even though she owned her home outright, she was unable to pay any property taxes to her town during that period. Then in 2012, her town told her that an investor was entitled to take ownership of her home if she couldn’t pay back property taxes which were, at that point, more than $50,000. So she left her home, the investor paid the outstanding balance, and he took ownership of the house. In essence, he had “bought” the property from the town for a little more than $50,000 by satisfying her taxes.

You have probably heard similar stories. When someone is unable to pay taxes on a property, the county or municipality where it is located seizes it and can sell it to you at a rock-bottom price. That is essentially true. However, the reality is a bit more complicated. When you acquire a property in this way, you are exercising a tax lien, not simply making a purchase.

Here is some information you should know about this strategy . . .

You do not actually purchase a property when you acquire a tax lien certificate. In most cases, you are actually buying the right to collect those taxes, as well as future taxes, from the property owner. In most cases, you are also entitled to charge that individual an interest fee for doing so if that is your plan.

Taking ownership of the property can become complicated if the current owner/occupant wants to try to repay taxes and remain in the property. That is why it is best to negotiate early with property-owners before acquiring tax liens on their properties.

This investment strategy is too complex for many first-time investors. Tax liens can become quite messy. Other investors can appear on the scene and try to beat you out during negotiations with city hall or the previous owner. People generally do not like to leave their homes, and can find unexpected sources of money at the last minute so they can pay their taxes and stay. Even if everything moves ahead and you acquire a property, you could still have to deal with evicting the previous owner, which is not for the faint of heart. And properties that have been obtained through tax liens are usually left in poor condition, and often cluttered with furniture and trash.

The bottom line is, you are not really buying properties when you become involved in tax liens, but leveraging your way into a position between an unfortunate property owner and the government. However, the potential for acquiring properties at low cost is there.

If this real estate investment strategy interests you, speak with an attorney in your area who can offer you specific information and advice about how tax liens are issued in your county and state.