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anyone have experience with tax lien sales?


stahleyp
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Hey guys,

 

Does anyone here have any experience with these? It looks like the returns are decent enough from what I've read (10%-12%) with little downside. However, I'm a total novice and this one is currently not in my circle of competence. Are these worth the headaches? Thanks for any insight!

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I have experience, but they are very different in each market / municipality.  You would want to get advice from someone who has done it in your exact market - or a title attorney who works with clients involved in tax lien sales regularly.  In New Orleans there are 3 different (at least) types and the rules and risks are different for each.  Generally, I have heard the rules are favorable for investors in some areas of Florida, but where I live it's not a great deal for the most part.

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It's a very competitive business.  The returns are good if you're willing to put in the work.  As in going to the courthouse every day to find new liens, building connections to get new leads, dealing with evictions, etc.

 

It's similar to buying real estate at auction.  You're going to have plenty of competition for the same bid. 

 

Going to the tenant and saying I have a lien on your house.  Pay me or I'll take your house.  Most will give you the finger.  And if they do leave, they'll most likely trash the house.  They didn't pay their taxes for a reason, so the chances of them paying you is unlikely too.  Some will, but that's the rare case.

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I've looked into and had a friend who has done it and received some property. The rules are different in every state - generally, southern states have the most favorable rules.

 

Some general info:

 

* Sometimes it's a fee that is automatically owed to you (I think GA does this). Sometimes it's an accrual for every month of non-payment (MS does this). In the later event, you can buy the lien and someone pay within a month and you get a paltry % return for the effort of going to the courthouse, paying the fees to participate in the auction, etc. In the case of the former, it's great for you but it also removes an incentive to pay until the very end of the 12 month period.

 

* Most liens do pay you back. You do not get into this business to receive property. Most states have rules requiring you to buy multiple years worth of liens before you're entitled to the property (in MS I think it's 2 years). So, you could be out two years worth of liens before even getting a chance at the property, but then you'd still have to pay a title lawyer before you could ever sell or develop the land.

 

*Lots of auctions are competitive bid with no cap (i.e. you can pay more than what is owed hoping to make it back on the fat yield). Some places, like Florida, the liens are literally bid up to paltry returns that hardly make it worth the effort.

 

* this is a literally a state-by-state, county-by-county type of thing. It's really attractive in some areas - less so in others. You may have to travel to get somewhere it's worth doing.

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Pennsylvania doesn't have tax liens, they have a different structure and I've purchased property though it.  Ended up with an acre of land for $300. 

 

I've talked with people who have extensive experience with lien sales.  Berkshire101 is partially right, it's very competitive if you're a small player.  Tax liens for houses are affordable for most to bid on and there is a lot of competition.  The real money is made in bidding on larger liens, liens on hotels, warehouses, businesses.  Great returns, sometimes you end up with the property for a song, and not many players in the market.  The issue is many of these liens are $100k on up.  You might be bidding $350k on a tax lien for a $4m hotel.

 

One guy with experience in this said the more expensive the property and higher the lien the better the return.  If you're sufficiently capitalized you'll do well.  There is a lot of travel involved.  At the higher levels I believe it's easier to work out payment deals as well.  If a hotel or restaurant is having issues they're sometimes franchised, and you can work something out with the larger backing company.  The last thing McDonalds wants in the news is some vulture investor taking over a restaurant because someone didn't pay their taxes.

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I have done this some over the years in three different states with wildly different laws. Frankly, the money in stocks is way easier. So it is a headache, to directly answer your question.

 

Regarding caveats, I mostly concur with Berkshire and Oddball.  It is not easy money. But sometimes you do wind up with property.

  • The biggest returns are in the big deals
  • You HAVE  to do your DUE DILIGENCE

(That is on the property and on the state and county laws.)

 

What I would recommend is that you observe and maybe do some deals and when there is a massive disruption either locally (oil patch?) or nationally like 2008, etc. then pounce. The lien sales are really popular when real estate in hot and the returns are just bid away.  Not to be a grave dancer, but I know some people who also do this after disasters, fires, floods,etc.  I never had the stomach for that.

 

A story on due diligence.  Crappy little one room apartment in Chinatown, (I don't think it even had bathroom )it had been in arrears for years and years.  One year someone actually paid more on the lien than the property was worth given the time in default and interest charges; price of the lien was maybe 2 or 3 times value!

 

Sometimes there used to be price fixing amongst the locals, i.e. mutual non-bidding, but that was mostly in the old days when this was not so popular.

 

(Notice to the lurkers here:  You are not, repeat not going to get a beach front property in the Hamptons or in Santa Barbara. If you do get a property, more than likely it will be a sh&t hole in a marginal neighborhood. (but if you get enough of them, you could make a down payment for the Hamptons!)  8)

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I have done these in the past in Michigan before they changed the system and moved away from selling liens to the county holding the lien and collecting the interest and possibly foreclosing on the property and then selling the few properties that end up in foreclosure. But back then I bought the liens and they worked out nicely. Of the 12 or so that I bought most paid out with decent interest 10-12% but one of them never paid and I went through foreclosure.

 

All in cost of getting that one property including catching up the taxes and paying a lawyer was 5500. the property was a rural corner lot on two gravel roads with an old trashed trailer sitting on it. I didn't want to do anything with the property so I put it on the market at 25,000 not expecting to get that much but two days later had a full price offer to sell it on a land contract with 5000 down and 8% int from the neighbor who really wanted that land. so I ended up with interest getting 29K out of it

 

I really wish that they kept that system because I was just starting to figure it out.

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I have done these in the past in Michigan before they changed the system and moved away from selling liens to the county holding the lien and collecting the interest and possibly foreclosing on the property and then selling the few properties that end up in foreclosure. But back then I bought the liens and they worked out nicely. Of the 12 or so that I bought most paid out with decent interest 10-12% but one of them never paid and I went through foreclosure.

 

All in cost of getting that one property including catching up the taxes and paying a lawyer was 5500. the property was a rural corner lot on two gravel roads with an old trashed trailer sitting on it. I didn't want to do anything with the property so I put it on the market at 25,000 not expecting to get that much but two days later had a full price offer to sell it on a land contract with 5000 down and 8% int from the neighbor who really wanted that land. so I ended up with interest getting 29K out of it

 

I really wish that they kept that system because I was just starting to figure it out.

 

This is key.  Pennsylvania has a unique system.  Throughout the year properties will be be entered onto a sheriff sale list as taxes go unpaid.  The sheriff sale (called an upset sale) is for the property with all liens and mortgages attached.  If the property fails to sell at a sheriff sale and taxes aren't paid it sits for another year and is listed in the judicial sale.  The judicial sale is an auction where the starting bid is for the amount of unpaid taxes.  Purchasing at a judicial sale results in a free and clear title, all liens are wiped out by the county/state/irs.  This is where deals can be found.  But beyond this properties that don't sell at repository sales enter a repository list.  This is a list you have to pay a few bucks for ($2-5 cash only) at the courthouse.  You can purchase anything on this list for the county minimum.  It's not uncommon for people to pick up old lots for a few hundred bucks (like I did).

 

The reason more people don't do this is because there are some weird barriers to entry.  You have to physically go to the court house during business hours and pay a few dollars to get the lists.  You also need to go to the courthouse to use their computers to research.  Some properties were trailers but not the land underneath.  Others were the land but not the building.

 

I purchased my lot in a very rural county.  What was nice is I could use the computers to research and see who owned the surrounding lots.  I went upstairs and there was a different office with some mainframe type system that they gave out every owner and lien for every property in the county.  I could find a lot, then check to make sure there was nothing against it.  All public info, all free, yet you have to be there in person to get it.

 

The reason I purchased anything is because in doing research I found this lot is surrounded entirely by land owned by a forestry company.  I figured buying a wooded parcel they were missing wasn't a bad bet.  I need to write them a letter and offer to sell, just haven't got around to it yet.

 

There are a lot of little ways to make money like this if you're slightly innovative and resourceful.  They don't require a ton of capital either, but the downside is they aren't scaleable.  You might make $150-200k a year doing stuff like this, but you'll never be a millionaire.  There's a reason so many people like to just sit in front of a terminal, point and click and buy stocks, it's MUCH easier.

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For example...here is a sale in Sept: http://www.co.forest.pa.us/assess/JudicialSale.pdf

 

The 1.05 acre house looks decent.  The other place in Hickory looks good as well.  I might drive up for that, the Hickory place would be a good camp, could probably get it for $2-3k or so.

 

Another example.  You can pick up this trailer for $50...yup $50: http://www.tiogacountypa.us/Departments/Tax_Claim/Documents/Repository%20of%20Unsold%20Properties%20List.pdf

 

 

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Just get started.. I believe you're in Cincinnati right?  I'd go a bit further out, there is probably too much competition in Hamilton County.

 

Look at Butler County, maybe even Oxford area for college type housing, or Clermont, Warren or Clinton.  I prefer to travel a bit, I'm guessing Clinton is your best bet.  I'd go east, not much going on east.

 

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Paul,

 

Both my wife and I went to Miami. My wife is from Cincy originally, so we're down there somewhat frequently.

 

I think Columbus is even easier. Go east again towards Zanesville and you can probably find some places cheap. Beyond that you might end up with some land that has mineral rights, a hot commodity in eastern Ohio right now.

 

Nate

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A lot of great info on this thread, thank you to all that have contributed.

 

I have a little experience at the lower end of this as someone I work with does this on the side and showed me the ropes. As others have said it's a lot of legwork and difficult to scale. For anyone with experience purchasing larger size tax liens what was the negotiation process like between you and the owner? Many seem to be liens on commercial property like warehouses and strip malls that are worth many multiples of the lien amount which I assume provides your margin of safety as an investor. 

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