When you own a piece of property, the county's tax collector will send you a bill every year for property taxes. In most cases, the respectable individuals pay the bill and nothing more is heard of them again. Every so often, they don't... for a multitude of reasons. A business might not pay because the penalty is lower than the interest rate they'd get on a loan, so it's like a short-term business loan without all the paperwork hassles. For a single homeowner, maybe they're down on their luck or they too want a short-term loan without the hassles of going to the bank. Either way, when the homeowner doesn’t pay the county, then they sell the tax lien in their annual tax sale.

If you do a Google search on Tax Liens, you'll find a huge number of resources detailing the miraculous money making opportunities of purchasing Tax Liens. Purchasing a tax lien is not like going to a foreclosure sale - it's one step away from it.

$$$ - Why Do People Buy Tax Liens

Let me cut to the chase before I explain how people go about participating in tax liens so the headings makes sense. When you purchase a tax lien, one of two things will happen:

1. Owner Pays Off Lien - The person who owes the money will pay off the amount they owe, the fee Howard County assessed for the sale, and the interest penalties they owe - which go to you. In Howard County, Maryland - the interest rate is 18% APY calculated daily.


2. Owner Does NOT Off Lien - The certificate is valid for two years, but if after six months the owner doesn't pay off the lien, then you are able to start foreclosure proceedings.

The Basics:

In Maryland, every county holds a Tax Sale each year. For four weeks prior to the sale, they advertise the tax sale in the county newspaper of their choosing. Anyone may attend a tax sale as long as they register for it, which consists of filling out some personal or company information, W9, and putting down a fully refundable deposit. For Howard County, you may register by mail starting three weeks prior up until the morning of (8am to 10am) of the sale - though for many others, the pre-registration route is required.

Pre-work:

In addition to the advertisement of the tax sale itself, a listing of the properties for which there are outstanding liens will be listed. The listing will typically be listed online as well as in print and includes the county parcel ID, a short description, its address, the value of the property (as determined by the county), the owner's name, and the amount of the outstanding tax. The point of pre-work is to check out the properties and try to figure out why they haven't paid taxes. One of the pitfalls of Tax Lien investing is trying to foreclose on a worthless property that may have environmental or weird problems. It can also help you decide what to bid on if you know the conditions of the property. If it's a business that's doing well, you probably only want to snatch it up if you want the interest payment.

Tax Sale Day:

The Tax Sale will work like an auction, with the starting bid being the amount of the tax plus fees. Then it works like a typical auction. If you happen to win an auction, what is actually due is the amount of the tax, the fees (so the starting bid price), plus any high bid premiums.

The high bid premium kicks in when the bidding exceeds the assessed value of the property. The premium is typically 40% of the assessed value of the property. So if bidding on a $1M property exceeds $1M, then the winner must pay the tax, fee, and high bid premium of $400,000. This is to discourage ridiculous bidding on "sure things."

After Tax Sales:

The tax lien certificate and your payment are held in escrow so you may never have to deal with the original owner. After four months (in Howard County) though, the owner must then reimburse you for expenses and attorney's fees and receive a letter of release from you before they can pay it off. If after six months and still no word, you can being foreclosure proceeds.

Pitfalls of Tax Liens:

1. Bankruptcy - If the owner files for bankruptcy, creditors and the IRS take precedence over you.
2. Worthless Property: - Again, a pre-work issue - if the place is worthless or would cost a tremendous amount to fix (environmental damage), then you could be holding a worthless property.

I'm going to try to participate in the Howard County Tax Sale on May 24th, I'll report what happens and how it goes.

This post was originally published at Blueprint for Financial Prosperity. If you'd like to leave a comment, please do so here.mortgage calculator