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Investing in tax liens can be an intriguing opportunity for those looking to diversify their investment portfolio while potentially earning attractive returns. However, like any investment, it comes with its own set of complexities and risks. Read our guide to understand the process and special considerations that come with this unique type of real estate investment.

What Are Tax Liens?

Homeowners are charged property taxes by the local government as a source of funding for public services. If an owner fails to pay their taxes within a certain time frame, the county or other municipality will place a tax lien on the property and generate a lien certificate. The lien certificate includes information about the amount owed and any interest/penalties associated with the late payment. It forms part of the chain of title of a property. 

How Does Tax Lien Investing Work?

Step 1: Purchase a Tax Lien Certificate at Auction

In an effort to recoup lost property taxes more quickly, many local governments allow for the sale of tax lien certificates to private investors (this includes Colorado). Certificates are typically auctioned to the best bidder. 

This is not necessarily the highest bidder. In fact, most tax lien auctions are “bid-down” auctions. This means that the bidder willing to charge the lowest interest rate on their investment wins the right to purchase the certificate. 

Step 2: Pay Off Outstanding Taxes

Once you win the tax lien certificate, you must pay off the delinquent taxes, along with any fees and interest that have accrued. 

Step 3: Earn Interest on Delinquent Property Taxes

Once you’ve purchased a tax lien, you become the lienholder, and the property owner is now responsible for paying you the overdue taxes plus interest and penalties specified in the certificate. 

Allowable interest rates vary depending on your location. In Colorado, you can charge as much as 11 percent interest, which you will collect over the repayment period (this also varies).

Step 3: Potentially Acquire The Property

In general, the property owner must repay the outstanding taxes and accrued interest within 2-3 years. Should they fail to do so, you may have the opportunity to foreclose on the home or purchase a treasurer’s deed and claim ownership. 

Finding Properties for Tax Lien Investing

Finding properties with tax liens requires research, but information is usually readily available if you know where to look. Here are some common methods investors use to identify potential investment opportunities:

Tax Lien Auctions: Many local governments hold auctions where tax liens are sold to the highest bidder. These auctions are typically advertised publicly, and interested investors can participate either in person or online.

Tax Lien Lists: Some counties publish lists of properties with delinquent taxes, including information about upcoming auctions or direct sale opportunities. These lists can usually be found on county websites or obtained by contacting the local tax assessor’s office.

Third-Party Services: There are companies that specialize in compiling and selling lists of properties with tax liens. While these services can be convenient, they often come with a fee and may not offer any significant advantage over conducting your own research.

Drawbacks to Tax Lien Investing

While investing in tax liens can offer attractive returns, it is not without risk. Keep the following in mind before you proceed: 

Redemption Risk: there’s always the possibility that the property owner will redeem the tax lien, meaning you’ll only earn the interest specified by the local government rather than acquiring the property itself. Furthermore, if you bid down to a lower interest rate and the owner winds up repaying the amount quickly, it may not have been worth the time and effort. 

Property Condition: in the event of foreclosure, you may end up owning a property with significant maintenance or structural issues. The cost of repairs could significantly reduce any potential profit. 

Legal Complexity: Tax lien investing involves navigating various legal processes, including redemption periods, foreclosure procedures, and potential challenges from other lienholders. Consulting with a legal professional experienced in tax lien investing can help mitigate these risks.

Competition: tax lien investing is a potentially lucrative endeavor with relatively low up front costs compared to other types of real estate investment. That being said, you may face some stiff competition from more experienced investors or those with deeper pockets. Be prepared to lose a few auctions before you get the hang of it. 

Fast Real Estate Loans in Colorado

At Pinetree Financial Partners, we understand that timing is a huge part of successful real estate investment. In some cases, you can close on a bridge loan, land loan, new build loan, and more as quickly as a few business days. Call our office or go online to see how we can help you beat the competition and win that property today. 

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