In February 2008, I first read the book, “Multiple Streams of Income” by Robert G Allen. I was looking at other ways of generating income for my family as we were soon expecting our second child. It talked about an investment vehicle called tax liens, and said that anyone could earn 12-24% interest annually, and that you could own either land or a house free and clear with a few thousand dollars. I remember blazing through the chapter and not being able to put the book down. I couldn't believe that there is an investment out there that can earn this type of interest and I had never heard of it before. Was this true? Or was this author making this up? Within the week I had to find out more information, so I bought the book “Profit by Investing in Real Estate Tax Liens” by Larry B. Loftis. In both books I learned a number of things, and quickly signed up for my first lien sale in Nebraska.
Here are a few of the basics I learned along the way that might help you.
What are tax liens?
Tax liens are basically where the county has a property owner that hasn't paid their taxes on time, but still need to generate income in order to pay for their services and utilities (like school teachers, firefighters, building rent, roads, and other county services). So in order for the county to make sure those utilities are still paid, the county has the right to offer a lien auction. This is where investors or individuals have the right to pay the owner's back taxes and hold a lien on your house. In exchange the investor is paid at a certain interest rate defined by the county. In Nebraska – most typically – this is 14% annual interest. If the owner doesn't pay back the taxes within three years, and the lien investor keeps paying the subsequent taxes, then the lien holder has the right to foreclose on the house/land (more to come on how this process is done in the future).
When are Nebraska tax liens sales?
Tax lien sales occur the first Monday in March every year.
How much interest does the county pay?
Most counties in Nebraska pay 14% annually, but some counties offer auctions that allow bidders to competitively bid down the interest rate, so whoever is willing to accept the lowest interest rate wins.
How do I get started in investing in tax liens in Nebraska?
First off, get a full list of the counties auction lien list. Usually this is published both in the county newspapers and online three weeks prior to March's first Monday. Make sure to get a full list that has all the parcels, lien #'s, addresses, back taxes owed, and most importantly the assessed values. Most often these list (online lists) are in excel format, and are easy to manipulate the data to find what properties are the most ideal to invest in. You should also find yourself a calculator for taxes, just for good measure.
Can I lose money on Nebraska tax liens?
Yes. Like any investments there is definitely risks, and tax liens are no different. However, most of the risks are foreknown in tax liens, and can be avoided. Investors can lose money by buying liens on properties where the back taxes are more then the assessed value. Another way, is when some investors buy liens on properties which can't be developed on, which might include swamp land, utility ditches, or non-conforming property lines. In either scenario the investor can get caught owning property that is essentially worthless, and impossible to recoup their principal.
In part 2 of my series on “How to invest in Nebraska tax liens“, I'll discuss some of the pitfalls, process of foreclosing, and how to help ensure you will make money on your Nebraska lien.
What if you (investor) pay the taxes then the owner pays within a couple months, do you get payed interest for the whole term of the certificate?
@Al – thanks for the positive feedback!
@Kevin – I’ll answer your first question in my next post on the foreclosure process. The average delingquent tax lien amount varies from county to county. As a general rule of thumb it’s unprofitable to invest in $400 or less tax liens. Lastly, Yes a lot of people do this full time. There is even mutual funds out there the exclusively invest in tax liens too. At my first auction I met someone there from California that invested in liens full time and had multiple companies at the auction he was representing under his name.
So if the owner doesn’t pay the tax lien, the investor pretty much has rights to the property and can do whatever they want with it? Just out of curiosity, do you know what the average delinquent tax lien amount is? And do people actually do this full time?
Very good info Charlie, looking forward to read part 2.