How much can you earn with tax liens?

Much of my discussion here has been about acquiring the actual title to homes through county tax auctions, and there’s certainly no greater thrill than bidding a couple thousand dollars for a lien and then acquiring a property worth thirty or forty thousand.

But most investors actually go to the tax auction to get financial reward, not property. That is, they bid on property that is likely to be redeemed by the owner, for the purpose of getting the interest and penalties. Here’s how it works. After you get the tax lien at the auction, the owner gets a period of time (usually one year) to redeem their property. When they do, they have to pay back all the taxes, along with penalty and/or interest. You get back your original investment, plus the penalty and interest, which is usually at least ten percent.

Here in St. Joseph County, which is fairly typical, the penalty is 10 percent if it is paid back within six months, and 15 percent if it is paid back after six months but before one year. Besides the flat-rate penalty, there is also ten percent interest on any amount over the minimum bid that you paid for the lien.

Let’s say that a property was listed for a minimum bid of $1,000. That amount represents the amount of taxes that are due. The auction drove the price up to $5,000. Therefore, if the owner pays up within six months, you get a flat ten percent of $1,000, or $100; plus 10 percent per annum of $4,000.

Although ten percent per annum is nothing to sneeze at, especially when CDs at the bank are paying less than one percent, it’s the flat rate that is most attractive. Say for example, you buy a lien for $1,000, and the owner shows up at the county office the next day and wants to pay off their taxes. You still get your full ten percent, even though it’s only been one day. So, the flat penalty aspect of the auction actually has the potential to yield a much higher rate when you figure it on an annualized basis.

To learn more, get my book, “Learning to play the real estate tax auction game” by clicking here or visiting Amazon.com.