Investing in tax lien properties can stir up controversy in some circles, but the purpose of this article is not to debate the pros and cons of tax lien investing. It is simply to outline how a real estate investor would invest in tax lien properties.
Having personally done this in New Orleans, I will refer to the guidelines set out by the State of Louisiana. If you are interested in buying tax liens in another state, this article will be a good introduction to the process which is similar in many states. However, laws do vary from state to state and I recommend learning the laws in your state before making any investments.
Where can I buy property tax liens in New Orleans?
Prior to 2008 the City of New Orleans would auction off the tax title to properties with delinquent tax liens downtown. Since 2008 the auctions are held entirely online, through a private company Civic Source. Leading up to the 3 day auction(yes, the auction is open for three consecutive days) properties with delinquent taxes are listed on the Civic Source website. The properties are listed by address and by dollar amount of delinquent property taxes including auction fees, interest and penalties assessed by the City of New Orleans.
How does the bidding process work?
Anybody can bid on the tax liens as long as they were registered with Civic Source before the auction. The easiest way to do this is to set up a bank account in your user profile. It doesn’t cost anything to do so.
Once the auction opens bidders bid on a percentage interest in the property, should title pass to the winning bidder, rather than on how much they are willing to pay for the tax title. In other words, the amount paid by the winning bidder is equivalent to the delinquent taxes and penalties assessed for the tax bill, but the bidder willing to take the smallest interest in the property wins. And the earliest bidder wins, trumped only by a bid for a smaller ownership interest the property.
How do I make money investing in tax lien properties?
In Louisiana any tax lien title holder is entitled to the following returns on his or her investment:
- A 5% penalty accrues immediately in favor of the tax lien investor on the full amount paid at the auction to acquire the tax title.
- An additional 1% per month is calculated not only the amount paid at auction, but also on taxes paid for additional years.
-Annualized return=17% on first year, 12% on each additional year.
-Your interest in the property is protected by state law as the tax lien takes precedence over all other liens, including first mortgages on the subject property.
What happens next?
The owner of the property has three years to redeem the tax lien by paying the City of New Orleans the full amount of delinquent real estate taxes, penalties and interest. The city then disburses the funds to the investor, or tax lien title holder.
If the property tax lien is not redeemed in three years, the investor can move forward with a court proceeding to “quiet” the title, in which case when granted he or she would become an owner in the property, free of all existing mortgages.
There are more details involved in this process so consulting an attorney or reading the real estate law around tax liens in your state is a good idea.