How to Purchase Tax Lien Properties

By Pete Johnson
Tax liens represent opportunities for real estate investors to buy homes for pennies on the dollar.

real estate image by Andrei Merkulov from Fotolia.com

In 20 U.S. states, tax lien certificates from owners in default of property tax payments may be sold by a county treasurer to bidders interested in paying the tax due. These certificates may be redeemed by the homeowner at a profitable 16 percent interest rate to the lien holder. If the homeowner defaults, the owner of the tax lien certificate may foreclose on the property for pennies on the dollar.

Obtain Property Through a Tax Lien

Select a county from which to purchase a tax lien certificate. You should choose a county based on the return percentage on tax lien certificates the county offers and the amount of time before the home can be foreclosed on. In Maricopa County, Arizona, for example, lien holders see a 16 percent return on certificates and can foreclose in three years, as of 2010.

Contact the county assessor's office to get a list of tax liens that will be auctioned. Once you study the list, register to bid on properties that show promise. Most counties will ask you to provide a W-9 form, which must be signed and filed with the county treasurer's office before bidding.

Research properties of interest. Find comparable sale prices for nearby properties. Make sure the ratio between land and improvements to the land, meaning the house, is reasonable. Make sure there are no secondary liens on the property, such as a Federal Tax lien or a lien held by a federally-funded mortgage company. Also make sure that the property is not in probate. Also make sure the property is not listed a toxic site.

Bid on the property tax lien certificate. You can either bid in person on the date of the auction or via the Internet. Check with the county to find out the bidding methods that are available. Be aware of bidding rules and how they effect the rate of return. Note that some counties have nonreturnable premiums that must be paid at the time of bidding.

Buy liens that are not sold at auction. These are usually available after the auction via a county's OTC, or over-the-counter, process. Obtain a list from the assessor's office. as well as instructions on how to purchase these liens.

Continue paying taxes due on the property until the owner redeems.

Foreclose on the property if the owner fails to redeem. For those owners who have walked away from the property, this is an easy process. Many states will foreclose automatically for the certificate owner. Consult with the county for rules and procedures on foreclosing such a property.

About the Author

Pete Johnson was the chief English editor for eight years at "MC-Square," a Japanese publication based in Tokyo. Johnson received his B.A. in English from the University of California, Berkeley, in 1990.