How Tax Lien Auctions Work and Why You Should Avoid Them

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If you’re getting into real estate investing, you may have seen infomercials for investing systems that have you thinking that buying tax property is as simple as going to a tax sale and paying the back taxes. Not so. Before you get too attached to the notion of buying property at tax lien auctions, make sure you understand how they work.

Every state sells either tax liens or tax deeds, or both, at the tax sale. If you live in a tax deed state, it will have tax deed auctions, not tax lien auctions. There, you’ll be bidding on the deed to the property. If you are the successful bidder, you will either receive the deed right then (in a few states), or you’ll be able to apply for the deed when the year or so redemption period– the period of time the owner has after tax sale to pay the back taxes, penalties, and interest and rescue their property– is up.

If you live in a tax lien state, you will be bidding at tax lien auctions on a lien against the property. Then when the redemption period is up, you can notice any other lien holders that you intend to foreclose on the property. If no one else claims a stake in the property, or after you have dealt with those that do, then and only then, you may apply for a deed to the property. This can be a long, frustrating process.

Of course, homeowners usually pay their taxes off during that time period, and most tax lien investors bank on this. The allure of bidding at tax lien auctions, for most investors, is the attractive interest rate they will make on their money when the owner eventually pays off the taxes.

However, it’s a risk– sometimes the owners don’t pay their taxes, and you end up with the property you thought you wanted– only to find out it’s a nightmare. Since you can’t inspect the property beforehand, you have to take a gamble that it’s not trashed or needing serious repairs– and even if you are relatively sure of that at the time of the sale, in the interim, any number of things can happen to the property, and you’re still bound to it.

Even if you decide to take that risk, you’re not likely to be successful bidding against the tax lien investment companies you’ll find at the tax lien auctions. These companies are full-time investors, dedicated solely to tax lien investing, with teams of lawyers and researchers and more financial backing than you can imagine.

So, what to do? Avoid the auction all together, that’s what. Go directly to the source of these tax properties– the homeowners that haven’t paid their taxes.

By avoiding tax lien auctions and buying directly from the owners, you get a couple of major benefits. First of all, you can actually see what you’re purchasing- no surprises there. Secondly, you get the property when you buy it, without a waiting period. Then you can decide at your leisure what you want to do with it: pay off the taxes and other liens, and then flip it, rent it, or live in it; or, let it go to the tax sale yourself, to collect the excess proceeds.

Perhaps the nicest benefit of all is that you save these owners from getting nothing at all from their properties. They are extremely motivated to sell, and often glad to give you a very steep discount just to save the property from being lost to the government. Many are absentee owners who are just glad to have the property off their hands, and you’re doing them a great favor by taking care of the situation for them.

Contrast this with bidding against huge companies on properties you don’t know much about and having to wait a year or more to see any return on your investment, and it seems pretty obvious that if you want to be a serious contender in the tax sale investing industry, you’re going to have to avoid tax lien auctions.

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