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The Legwork of Tax Liens

I discussed in an earlier article about how Tax Liens are better than CDs [3], but featured prominently in that article is the fact that there are huge pitfalls in Tax Lien investing. The top two are if you purchase a lien on a property when their owner is about to enter bankruptcy (you go from first in line, to basically last) or if the property is worthless (or would cost you money to fix up and sell, like an oil spill). To earn the percentages, you have to do the pre-work or you’ll find yourself on the wrong end of a raw deal.

Step 1: Find The List of Tax Liens
You obviously need to find out what properties to look at before you can do anything, right? The best place is to find the county’s website, I’ll use Howard County’s website as an example. (Click here [4]) I suggest you do a search in Google for “Tax Sale [your county name]” or “Tax Lien [your county name]” and you should find it pretty easily. Or you can pick up your county newspaper.

For Howard County, the list is readily available (it should be, they want as many people as possible to know about it) in the right sidebar listed under “2005 Tax Sale Listing.” It’s an Excel file so it’ll be easy to navigate, sort, filter, and play with. The rules of the Tax Sale are also available in that sidebar too. You’ll need that to find out if you need to preregister or just show up with the deposit (as is the case in Howard County).

Step 2: Massage the List of Tax Liens
If your county is anything like Howard, you’ll have hundreds of listings. In 2005, there are close to six hundred tax liens up for grabs at the auction on May 24th. There is no reason why you should visit each of these, so this is where you need to filter the list down to the ones that should really interest you. You will have to decide – do you ultimately want the tax lien to be redeemed (you earn interest) or do you want to foreclose on the property? The answer to that question will direct you to which properties to visit and research.
a) Earn the Interest – This is only my personal view, but you should look at properties where the value of the parcel is very high compared to the taxes due. If I owned a million dollar home and happened to misplace the bill of $1,000 to Howard County – I’ll probably pay. In the event I don’t, the tax lien investor has “hit a home run.”
b) Foreclose – The tax due is a higher percentage of the assessed value of the home, there’s a possibility you’re looking more at hardship and less at a mistake or an error.

Step 3: Visual Inspection of the Property
Check out the description for this property: Parcel # 01-280244, located at Montgomery Rd, Elkridge. Owned by a John Rice, the value of the tax lien on this property is $37.64 with the assessed value of the property pegged at $300. What’s the description? “1100 SQ FT 5″ STRIP” If you didn’t look at it and didn’t have the benefit of the description, you would own a really long five inch strip of land. There’s a reason why it’s worth only $300 and why John doesn’t pay his taxes – the land is worthless. If I was him, I wouldn’t pay taxes either.

This is where the satellite images from Google Maps [5] come in extremely handy – especially if you’re not familiar with an area. The images aren’t real time (or sometimes not even close) but you can figure out if you’re talking a residential area or a commercial area, water front or land locked, a nice area or in the middle of a landfill. The listings usually will have an address so just pop it into Google and see where it is.

Step 4: Check Out the Owners
Usually a company won’t let you take their property – there are simply too many eyes watching out for the best interests of the partnership or corporation for something to slip by. As long as the property is legit and worth something, they’ll probably pay off the debt and you’ll earn your interest. Take this listing for example: Parcel # 01-161679 is owned by Corridor I Limited Partnership and the property is in New Colony Village. I personally know where New Colony Village is and it’s a neighborhood of newly built cookie-cutter homes. With an assessment of $6.39M, if you bought the $783 in debt you’d probably be paid off pretty quickly.

Do your due diligence with regard to the financial status of the owners. If they go into bankruptcy, you’ll be hosed. If they are strong and viable, go after it if everything else smells right.

Step 4: Check Out Property Records

Disclaimer: I am not a financial expert and I have never purchased a tax lien. I haven’t even been to a tax sale yet (I plan on going May 24th!) and I am not responsible for any decisions you make with regard to your finances. Consult your financial advisor before making any decisions.