Investing in Tax Liens and Tax Deeds
The market is hot right now-don't wait to get your share

By Thomas J. Senatore

Tax liens and tax deeds have always been an exciting way to profit from real estate without actually purchasing property. In recent years, their popularity has increased, primarily due to high interest rates. For example, in Illinois, it's possible to earn 18 percent every six months on a tax lien and in Texas, you can earn a 25 percent every six months in the form of penalties on a tax deed and also have the potential of redemption on investment properties.*

Of course, these attractive yields have caused an increase in attendance at sales, although the number of active bidders has not risen proportionately. While it's common to see 40-60 people at a sale, generally only a fourth or fewer will ever bid. Why? The reasons vary, but here's a possible explanation.

Recently the tax collector in Collier County, Florida held a mini-class on the tax lien sale process in his county prior to an actual tax lien sale. The class was attended by about 25 people and it was informative-but the tax collector's presentation essentially scared most of the prospective investors out of bidding. While you can definitely learn from such a class, you're unlikely to get the degree of education you need to be a savvy, confident tax lien investor.

Here's what happened after that class: The tax collector required a deposit equal to 10 percent of maximum bidding in cash. I placed a $1,500 deposit, was assigned a number, and had the potential to win up to $15,000 in tax liens. The bidding was fierce and competitive. The top five tax lien investing companies had each sent four or five individuals to bid and they drove the yields down to as low as ¼ percent and spent hundreds of thousands of dollars on the tax liens.

I applied a different strategy. Rather than bidding against the big guys and driving down the interest rates, I waited for the properties that were bid on by local investors. I knew that the tax collector would make sure that all of the local investors got at least a few liens each at a strong rate of return; this is a common approach at live sales. All of the tax liens I bought that day will earn 18 percent. I had researched them online in advance of the sale. They are all good properties and chances are excellent that the liens will be satisfied, but if they aren't, I will happily take possession of the real estate involved and probably end up earning many times more than 18 percent on my investment.

Buying Tax Liens in the Virtual World

It's a little different-but still potentially very profitable-when the tax lien sale is online. It's not always easy to figure out how the tax liens are awarded in an online sale; you just have to place your bids and see what happens.

Because it is becoming increasingly common for tax liens to be sold through online auctions, people who want to actively invest in tax liens but find it impractical to travel to different states for sales are now able to take advantage of some great investing opportunities. Single parents, stay-at-home mothers, caregivers to the elderly or infirm, or people who for whatever reason are unable to attend tax lien sales are now able participate in this lucrative investment opportunity. You can check out the properties and place your bids online any time of the day or night. Not long ago I was in Chicago and placed bids on 140 different tax liens in Lee County, Florida from my hotel room. I was able to wire the deposit the tax collector required, and I ended up with 10 tax liens at an average interest rate of 17.25 percent-not a bad return for a couple of hours at my computer.

Anyone can make money with tax liens and tax deeds if you understand the process and have confidence in your ability. It's absolutely reasonable to expect returns of 18 percent or better if you follow the proven techniques that allow you to successfully compete against the large corporate investors. No matter how competitive the field gets, there will always be opportunities for a savvy, educated investor.

*Examples provided were accurate at the time of initial publication of this article.