A tax lien is an encumbrance against property owned by someone who is delinquent in paying their taxes. In most jurisdictions, after a certain period of time the local government will auction a tax lien certificate to a third-party investor pending sale of the property to pay back taxes. Online auctions are becoming increasingly popular. Tax lien certificates pay high interest rates, and if the delinquent owner fails to pay back taxes within a statutory redemption period, many jurisdictions will allow the tax lien certificate holder to take title to the property.
Research the laws of various jurisdictions (usually county governments) to determine if tax lien certificates are available to the public, whether the real estate owner has a statutory redemption period and whether the local government offers holders of tax lien certificates title to the property before it auctions it off. In many counties the answer to all three of these questions is yes. You will also want to inquire about the interest rates offered to certificate holders. This research can be conducted with materials that can be purchased online and downloaded (see Resources).
Visit the websites or jurisdictions that offer tax lien certificates and find out if they offer online auctions. Online auctions are becoming increasingly popular with local governments because they are inexpensive and efficient. Most jurisdictions hold auctions once a year.
Register for online tax lien certificate auctions with various local jurisdictions. You may be required to submit IRS Form W-9 and your Social Security number, and pay a registration fee equal to at least 10 percent of the maximum amount that you will be allowed to bid.
Carefully research the auction rules before bidding -- each jurisdiction runs its auctions a little bit differently. In particular, you will want to understand how much money to deposit and what payment methods are acceptable.
Obtain an current version of the sales list several days before each online auction. If the owner pays taxes at the last minute, no tax lien certificate will be auctioned for the property.
Obtain the address of each property along with the owner's name and use it to conduct an online check of the property's files on the website of the County Clerk or equivalent official. You will want to know how the property is zoned, the amount of its assessed value, its annual property tax, the value of any mortgages and other encumbrances and any other information that would affect the value of the property. This kind of investigation can tell you how likely it is that the current owner will bother to pay off back taxes and whether the cost of the tax lien certificate is greater than the value of the property.
Bid on desirable properties. When you win a bid, make sure to take physical possession of the tax lien certificate (in other words, don't be satisfied with an online notification from the County Clerk).
Make sure that the interest rate offered on the tax lien certificate is high enough to justify its purchase, even if the current owner eventually pays back taxes and redeems the property. Make sure you take into account the length of the owner's statutory redemption period (one to three years in most jurisdictions) when you assess the value of a tax lien certificate.
If the homeowner declares bankruptcy, the IRS and other creditors may have a claim to the homeowner's property that is superior to yours. In this case, it is unlikely that you will receive title to the property.
Items you will need
- IRS form W-9
- Tax lien directory