FCP 073: Tax Lien Investing – A Crash Course

Jack: Hello. Jack Bosch here, and welcome to the newest episode of “The Forever Cash” live real estate podcast. I’m super excited to have you here today. Today, we’re going to talk about the concept of tax lien investing. I’m gonna explain how tax lien investing works. Super popular technique, done by a lot of people, very profitable, and you’ll hear about more about that in just one second.

Announcer: Welcome to the “Forever Cash” live real estate investing podcast with your hosts, Jack and Michelle Bosch. Together, let’s uncover the secrets to building true wealth through real estate and living a purpose-driven life.

Jack: All right, Jack Bosch here and as I just mentioned, we are going to talk about tax liens, but before we do that, make sure if you enjoy this part, this episode, you leave me a five-star review on this podcast. Go over to iTunes, don’t just check the five-star box, actually write a little blurb in there, how you enjoyed this episode. So, while we’re going to talk about that, and by the way, if you’re watching this on YouTube, then go, like it to the thumbs up, share it with your friends, spread the word so we can reach more people with this message, how the average person can do real estate investing without any tenants, [inaudible 00:01:14], termites, and without really using any money. Okay, having said that, let’s talk about tax lien investing.

So, tax lien investing is a concept that blew my mind when I first heard about it, because in essence, what it means is that when somebody doesn’t pay the property taxes here in the United States, then the government is out of money, right? The government doesn’t receive the money that they’re counting on because the state government and particularly the county level, they’re counting on property taxes to pay for the police, for the firefighters, for street repairs, and things like that. So, every piece of real estate in the United States has attached to it property taxes. So, if you don’t pay these property taxes, there’s a method and a process that exists that allows that county and authorized by the state to take that property away from you. And they’re doing that in two ways. There are states that follow the tax lien process, which is what we’re going to talk about in this podcast episode. The next one or a couple of times from now we’re gonna talk about the tax deed process, but right now we’re talking about the tax lien process.

And there’s another set of states that follows a different process called the tax deed process. The tax lien process is a process where when somebody doesn’t pay property taxes, either they forgot or they don’t want the property anymore or they passed away for that matter, or they just don’t have any money right now to pay for it. If they’re late on that within like half a year to a year the county says, “Come on, I need my money.”

And the county then goes and slaps a lien against that property. So, basically, they issue a lien against that property. A lien is a financial IOU that is [inaudible 00:02:54]. When you have a mortgage against a house, you buy a new house and you got a mortgage on it, that’s a lien against it. If you have some house repairs done and you don’t pay the contractor, the contractor can file what’s called a mechanic’s lien against the property. Well, when you don’t pay the state, when you don’t pay the county the property taxes, the county can slap a tax lien against that, right? Now, slapping a tax lien against it doesn’t give the tax authority, doesn’t give the county any money. So, what they do next is then they put up an auction and they sell that lien in a public auction to the highest bidder. That’s how it works.

Now, when that highest bidder has the lien, they pay the money for the lien, let’s say is the $2,000 property tax bill that the owner of the property just doesn’t pay. And like nine months later or so, the county’s like, “We need our money.” They slap a lien against it and then shortly afterwards, they put up the tax lien auction. Somebody comes at the auction and they pay the $2,000 and then they get what’s called a tax lien certificate. It’s literally a piece of paper if you want to see it, it’s a little receipt that they give you and you can keep that in your file. Even if you lose it, no deal because the county has no problem, because the county has an actual record of it too. But you have that tax lien certificate, also sometimes called TLC for tax lien certificate, and you keep that until one of two things happen. Number one, the owner comes to the senses, gets money or the owner sells the property and then out of the closing process with a buyer proceeds the taxes are being paid off or the seller changes his mind and all of a sudden wants the property again and pays the property taxes, and so on so forth.

Whichever way, whatever the reason is, once the seller pays the property taxes again, the county will receive that money. The county will then issue, and they don’t just have to pay property taxes, they actually have to pay property taxes plus a little penalty and plus an interest rate. And that interest rate is different from state to state. It can be as little as 12% in some states. It can be as little as 36% per year in other states, so, let’s say middle-of-the-road interest rate, 16%. So, half a year later and say that owner comes to his senses, decides to pay the property taxes, now you receive your original money back plus interest 16% of interest annualized for six months is half of that, so basically 8% interest. So, you paid $2,000 and now what is 8% of $2,000? This is $2,200, $160 in interest. So, you basically get back $2,160. Now, if you think about that, it’s like, “Well, that doesn’t sound very exciting.” Well, if you invest $100,000 into that and after one year you get 16% of that, if they paid off after one year, you might make entirely…what’s that? $3,200, what’s that, 16%? No. How much is that 16% to $16,000 on $100,000. So, on $200,000 that is $320,000 in interest.

Now that’s a good return that you usually don’t get in the bank, you usually don’t get in the stock market, it’s also typically guaranteed by the government. So, what that means is that that’s a good scenario too. So, scenario one was, either you buy your tax lien, half a year later, a year later whatever it is, then paid back taxes. You get your money back plus that nice high interest rate. So, if you have extra money to invest and you know you don’t need it or anything else, you can go in and invest some serious money to tax liens and then you get some very good returns better than the stock market, better than the bank.

The second option is what happens if the owner never pays the back taxes? What if they passed away? What if…just they decided they don’t want anymore? What if they moved away…they’ve even forgotten that they own this property? Well, whichever way the case is that after a certain time period is over, usually it’s between two and five years depending on the state you’re in. like in Arizona it’s three years, in other states is two years, in other states, it’s five years and so on, so, it depends on the state. After that, let’s call that redemption period is over, that redemption period is a time period during which you cannot do anything but sit back and wait.

So, once that time period is over, you can now go and file for a foreclosure on that tax lien, because when you own the tax lien, you own the highest level lean on that property. So, your tax lien is an even higher grade lien than a mortgage. So, in other words, if you buy a tax lien on, say $100,000 house, $2,000 a year in back taxes, you buy the tax lien in year 1, buy it in year 2, buy it in year 3, let’s say the redemption period ends after year 3. You’ve spent $6,000 because you bought three years of tax liens, every year you went back and bought the other one. And now you go for close on that thing. If that thing has a $60,000 mortgage, once you foreclose on that tax lien, the property is yours and the mortgage is wiped out. This is absolutely crazy.

So, this is a great opportunity to get some deals, right? You buy the tax lien, you wait, you buy the next year’s, you wait, you buy the next year’s and then you file for tax lien foreclosure. Now in some states that has to be a judicial foreclosure and in some states you all you need to do is fill out the form with perhaps a $400 fee and send it to the County Treasurer. And then the Treasurer will review its files, make sure they did everything right, and then issue a treasurer’s deed. In a judicial state, you actually file it, and then the judge decides that you get the property. But either way one costs a little bit more, the judicial one might cost about $1,500, the non-judicial, the one we go directly to the county, costs $400. But the state statutes determine which state follows which of these routes. You have two methods to make money. Method 1, you get an interest rate and then you get a nice interest better than in the bank and even in the stock market. Option 2, if the owner never pays the back taxes after a few years, you could foreclose and get the property.

That’s how tax liens work. It’s really that simple. The only thing is that a couple of pieces of advice when you buy a tax lien only invest money into it that you know, you won’t need for the next three years because it’s not a cash flow that you’re getting. When I talked between 12% and 36%, you don’t get monthly payments. What you get instead is you accrue interest. So, the interest on the account goes up, and up, and up and up but you only get it paid one time when the owner pays back the back taxes, [inaudible 00:09:52] the back taxes are being paid out, whichever of the sale of the property or whichever way they’re getting paid, that you get your original investment back plus the interest. So, make sure you only invest money that you don’t need for the next few years because you don’t know if that owner pays the back taxes two weeks later, or two years later, or never. So, it has happened, I’ve heard about cases where people said, “Well, this is awesome, this is cash flow.”

Well, you can use it as a cash flow method but you got to be careful. But ideally, you can use it as a cash flow method if you buy like, let’s say, 100 tax liens, like 100 different tax liens, let’s say each $1,000. So you invest $100,000. If you have that kind of money, you invest it. And then what’s most likely is that, of these 100, 95 are being paid back in the next two years, or two or three years. So, it’s almost like every year there’s gonna be like 30 or so of them being paid off, 32 to 33 paid off. So, it’s almost like every few weeks you get a part of your money back plus some interest. Then you get another one back, another $1,000 back plus some interest and so on. Then you take that and you reinvest it. So, you think can make that into a model that you can build your income at 12% to 36% interest. Like, for example, if you invest in Florida, I believe it’s 18% a year in interest, right? In Illinois, it can go up to 24%, and even in some cases higher than that, right?

So, you can pick the state where you get a really high interest rate, where there’s a lot of property, [inaudible 00:11:20] is a big city usually. That’s the best place to go for tax lien investing where there’s a big, big city, where there’s thousands and tens of thousands of tax liens. Like in Phoenix, Arizona when they do their tax lien sales and there’s some years there’s 30,000 tax liens that they’re selling. So, you can go and just do multiple states. When one gets redeemed, you go into another state and you’re invested right there again if there’s nothing more available over here. And then you let your money roll and your money keeps growing and like it’s here an average annualized 18%, which is obviously very, very cool. It’s already been reinvested. The only thing you don’t know is, as I said, when do you get each of those back? So, if you invest in enough individual ones, then it’s highly likely that every month one or two or three are being redeemed, and you get your investment back plus the interest rate. But if you just buy one, it’s a crap shot. You don’t know if it’s gonna get back next week, next month, next year or never. And if it’s never, you end up foreclosing and are buying a property.

That leads me to another point. Make sure you only invest in tax liens on properties that you would not mind owning at the end of the day, right? Very important, because before you invest into a tax lien, you always want to research the property a little bit, because you want to make sure number one that if it’s a house, it’s still there. Has it happened? I’ve seen I’ve seen it happen that investors invested in a tax lien on a house, they looked it up on Google Maps, it was a beautiful house. Then once the auction was over, they wanted to go see the house and what they came by is an empty property with a burned down house, right? And the reason why the owners no longer pay property taxes was that the house was burned down. So, you gotta be careful with that. You got to do your research first, otherwise you’re stuck with a tax lien on something that is not as much worth as you actually think it is. Make sure the property is billable. If it’s land, make sure it’s a good piece of land that you would want to have afterwards, so you can go flip it.

Obviously, you know us as the land guys here, the land proper generator community, the landprofitgenerator.com program. We teach flipping land, we teach how you can do this and in our early days, we went to tax lien auctions. We bought properties at tax lien auctions, bought liens and then foreclose on them. We bought properties at tax lead auctions. We no longer do that. We go straight, buy direct [inaudible 00:13:36] owners is a much more scalable, better system. But when you invest in a tax lien or even a tax lien option, make sure that you know what to invest in, that you check out the property, that you make sure there’s no baggage that comes with it, and then you will make sure, therefore, your investment is absolutely safe afterwards if you’ve done the proper steps before. And you can make a really good money with that.

It’s a great, great method and there’s even additional techniques that I will talk about on another podcast that you can jump into the tax lien world to make extra money. So, with that, if you enjoyed this podcast episode just make sure that you go below, comment on it. If you’re watching this on YouTube, if listening to this on iTunes, then make sure you leave us a five-star review. Don’t just pass the five-star…that is awesome, do that too, but actually go in below and post a little blurb about the information we just shared. And then share it with other people, go on Facebook, go on Instagram, go on Twitter, go share the episode, share with people what you just learned and reach out to us. You can reach out to us and you can find us at www.landprofitgenerator.com. Thank you very much. Bye-bye.

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