The worst form of lien that is rare, but you still may find, is an IRS lien. IRS liens don’t go away; they attach themselves like glue to the property of the delinquent taxpayer. It does not show up very often, but it does happen. The property owner, the seller, did not pay their income taxes and the IRS slapped a lien on their property and recorded it in that county. Now anything that person owns in that county has that lien attached to it, and the lien follows the property wherever it goes, meaning even if you don’t see this lien, the lien still comes with it. So if you buy a $10,000 property with a $50,000 lien, guess what? The Lien came with the property and now whenever you want to sell that property any sales proceeds would go to the IRS to help settle that debt, and you would get NOTHING!!! So that’s something you want to look out for!

If you do find an IRS lien, see if it still makes sense to proceed, it might. Let’s turn this around: if you find a property worth $50,000 that you only pay $10,000 for with a $5,000 IRS lien against it, that’s probably worth buying whether you pay $15,000 outright or you get the seller to accept $5000 in light of the lien and you pay $10,000 total. So play it case by case. What I want to say mainly is that these do not happen very often but when they are present, they can be disastrous, so do look out for them.

Let me clarify something:

I think HIGHLY of the need for a very detailed title search. I would NEVER purchase a property without having done a detailed title search and being comfortable that I have uncovered and am aware of any and all skeletons in the closet of that particular property.

However I do NOT think very highly of title insurance.

What is the difference?

Title Insurance is issued by a Title company AFTER they have run their title search and have satisfactorily identified and removed any clouds on title that they found. Until this point, I am all for it and I LOVE it. However once they have satisfied these requirements they then agree to, for a fee, issue Title insurance on this property.

I recommend learning how to do your own title searches. This can be easily done if you know what to look for and most counties nowadays store property records online, so you can even do your research from the comfort of your own home. If a county does not provide online access to their database you will then need to actually go to the county courthouse and do your research there.

A mechanic’s lien is a security interest in the title to property real estate, usually used by individuals who have supplied labor or materials to the owner that have improved the property. Mechanic lien’s exists for both real property and personal property. In the realm of real property or real estate, it is called by various names, including generically a construction lien. It also can be called a materialman’s lien or supplier’s lien when referring to those supplying materials.

For individuals or companies that supply labor the mechanics lien may be called a laborer’s lien or a design professional’s lien when referring to architects or designers who contribute to a work of improvement. In the realm of personal property, it is also called an artisan’s lien. The term “lien” comes from a French root (via William the Conqueror), with a meaning similar to link; it is related to “liaison.” Mechanics liens on property in the United States date from the 1700s.

Mechanic Liens are severe liens that are commonly used when a mechanic or handyman works on a house and the owner fails to pay him, so the mechanic or handyman puts a lien against the house and any other property of the owner’s in that county. The buyer or title company would have to pay this person off before the seller gets the difference and the house is sold. Now this could be a deal-killer if you are looking to invest in a $10,000 property but there’s a $50,000 lien against it. In this case even though the lien might be wiped out you might face the anger of the person who put that lien up and they might challenge this in court. So better make sure that the numbers work and if they don’t stay away from properties with high mechanics liens.

In the housing world usually most houses have mortgages. A Mortgage or A Deed of Trust with a Note is a lien against that property. However legitimate mortgages are not a problem. They technically are clouds, but they are so common that it’s just expected for them to exist. And they are easy to remove; they just need to be paid off before property ownership transfer.

Actually in many states any other lien except for government liens will be wiped out when buying Tax Liens and later foreclosing on them or when buying Tax Deeds. Make sure you check with the county officials and the statutes for your state. But if your state is one of them, then you can easily go and pretty much disregard mortgages. They just mean that the property is more likely to be redeemed because the entity holding the mortgage will not let the property go for taxes and rather redeem it themselves. But in that case you get your money back PLUS a great interest rate (usually).

When buying properties directly from the owner, you will need to find out the pay-off amount so you can determine if this property is worth your efforts. This is easily obtained by having the seller sign a simple form authorizing you or the title company to talk to the lender to get the figure, and then basically as part of the closing process you pay, or the title company pays, it off (and of course that amount is subtracted from what the seller gets for the property).

Generally identifying if a property has a marketable title is basically making sure that there are no liens and that the ownership is very clean and clear. There is no hidden interest in the property or an old interest in the property. The owners are alive and you are in contact with them.

The key to look for is whether you can follow the chain of title on a property from owner to owner without coming to an unpaid lien or an unrecorded death certificate and so on.

As you find those just mark them as clouds on the title, and then it’s a matter of “Can they be resolved?” That is always the question. If yes, how much effort is it? If it’s easy, great! If it’s not easy, is it still worth it to do for the profits of this property? If yes, great! If not, kill it.

Every year I probably have 50 to 100 properties that I cancel for these reasons because it’s just too much of an effort to go through that. I like easy closings and so will you. But with a lot of clouds on title, it can be simple to clear up as you do your title search, or the title company does their title search. Either way you’ll come up with the results and then you analyze them and determine what is worth your time and energy and what is not.

I recommend doing a title search yourself on all properties you plan to buy. You will end up throwing away gobs of money if you use a title company for each property you are interested in. It is well worth the time it takes for you to learn how to do a title search yourself. For the most part this is an pretty simple and straight forward process and can easily be learned. My advice is spend some time to educate yourself in this area if you are truly interested in becoming a successful real estate investor.

Sure you can hire a title company to do a preliminary title search for you on the property that you are interested in buying. But I would NOT recommend it… because in most real estate investment cases where you have found a good price for a property either from an individual or from the Tax Lien or Tax Deed Sale, you don’t want to be paying for title searches on properties that you have no idea on whether or not you actually will be able to buy the property or not.

Instead you need to learn how to do a quick and preliminary check for red flags with the county. Of course the Title Companies want you to believe that you MUST have a professional title search done and that ONLY THEY can do that, …that what they do is complicated, important and that only they can do it the right way.

Although title companies have their place in the Real Estate world, I do think that in most cases you can do your own title work and it does not take that long to do!!! Whenever you act in the Tax Delinquent Property world, you DO want to make sure that what you invest in, has Marketable title, but in most cases you can determine this for yourself without necessarily paying for the help of a Title company.

If you decide you want do your own title search, you need to understand the basics of what constitutes a cloud on a title, and what represents a clean title chain. Once you understand that, you will be able to do what they do and save lots of money in the process.

The criteria of marketable title are the following:

- At time of closing and ownership transfer, there are no liens against the property

- The Chain of title is clean and without gaps.

So as long as they are no hidden liens against that property at time of closing and as long as the property changed hands in the past properly, leaving nobody out of the loop, any title company will insure the title to such a piece of land or home.

Many counties nowadays provide most of their information through excellent online databases, so you should be able to easily do your research even from the comfort of your own home. All you need is a computer and internet access. If the county does not provide this service, you sill can go down to the county offices and spend a couple of hours there doing that research. When you start out, I recommend doing this anyways, so that you can get familiar with the different departments and the way the county offices work.

When you do a title search basically what you are looking for is Marketable Title. Marketable title is really the absence of liens and clouds, the absence of IRS liens, and the absence of missing links in the chain of title.

Missing links in the chain of title could be for example when the original a person owned a property for 40 years and then passed away and his kids started paying the taxes and eventually they want to sell the property. Well if there was no probate or no will or anything like that, then there is no indication of who should receive this property. It might be that the deceased’s will was to give it to his church. It might be that he mentioned to somebody, “You know what, when I die you’ll get this property,” and this person might even have a witness. Nobody can prove anything and the only solution here is to have the heirs go through a probate procedure to clear the title. For that you or they will most likely need to hire an attorney and it will take a few months.

If you invest in such a property through a Tax Lien Sale, or buy the actual property at a Tax Deed Sale you don’t have to worry about that, on the contrary, if you find information prior to the auction that shows such an issue existing it is a Sign indicating to you that is property is more likely to go all the way to tax Lien foreclosure or all the way to the Tax Deed sale. If your investment strategy is to get the actual property, then that is a property you WANT to focus on.

Now just as a side note. Even if you buy Tax Delinquent Properties directly from the long time owners, some of my best deals came from situations like that. I bought a property in Florida where I paid for the Probate procedures having a written, legally binding commitment from the heirs to sell that property to me for around $350.00 after the probate was through. The probate cost me $2500.00 for a total cost of purchase of $2,850.00. Days later I sold the property for just under $30,000.00 CASH.

Probate issues do come up in the Tax Delinquent Property arena, but it’s usually quite easy to fix them. Most sellers were smart enough to buy a piece of land or a property or a house and take title as what is called joint tenants with right of survivorship. It means very simply that if there are two people on the deed and one of them passes away, the other one automatically owns 100% of the property. All that is needed to get the deceased party off title is to record a death certificate. But if a death certificate is not recorded, then the county does not know that that person has passed away, so therefore if the widow now wants to sell this piece of property, then there’s a cloud on title. If you buy it from her, you’re not going to have a clear title to sell until her spouse’s death certificate is recorded.

There are a few things you can do about competition at Tax Deed auctions.

1. Look for more remote counties where less people live.

I find that people are lazy. They are not willing to drive 1-2-3 hours to for anything so they just go to their local Tax Deed Auction in their metropolitan city. But if you go to an auction where millions of people are living, more people are going to show up and competition increases. At the same time a higher density of population does not automatically mean that more properties are available for sale. On the contrary counties which are almost vacant of people often have tons of tax delinquent properties coming up for auction and since almost nobody lives there and the people from the big cities are too lazy to drive there for the auction, competition is minimal.

2. Target properties that other people ignore.

There are some kinds of properties which a lot of investors are interested in and some which very few are. Instead of competing with everyone else for the few high dollar items and bidding these prices up to 70%-80% of market value or even higher you could focus on the lower priced properties perhaps located in more rural parts of the county which most investors would not be interested in. There are many different ways to sell these properties at huge profits of $5000, $10,000 or even more and turn them into an ongoing cash flow stream. This is an area most people overlook and where millions can be made. For more information please go to www.SecretlandProfits.com or www.LandforPennies.com

Tax liens are an excellent way to make a high interest rate on your money and if you apply some advanced logic to your investing strategy you can quite often hit the jack pot and become the owner of the actual property.

However like everything, there are some issues with this. I have mentioned a few of them in my article “Disadvantages of Tax Deed and Tax Lien Investments” but today I want to talk about a different and mostly forgotten one.

What I am talking about is that as an investor waiting for a property owner to redeem the property tax lien, you never know when that will happen.

Many people think that as a tax lien owner you will receive monthly interest payments from the owner but that is far from how it works.

The truth is, that the property owner does not pay any interest until he completely redeems the tax lien. At this point and only at this point will the investor receive his investment back plus the interest pro-rated to the day of the redemption. So from a Cash flow point of view Tax liens are not a very good investments.

However if you have spare money left over and don’t mind waiting anything between 1 month and 3 years for your money back (of course plus a high interest rate) than this is a great investment tool for you. You just never know when this will happen or even IF it will be happen. Because if it never happens, you will have to foreclose on the property, take ownership and possession of the property and then sell it. Quite a lot to do to get your money back. But the good news is that if you get to the point of actually getting the property ownership of a property, you usually have hit a major financial Home-run and can not only recover your money but also make a high multiple of your investment back.

I have done and seen property deals where the Investor bought tax liens on a property for a total of approx. $15,000 and then was forced to foreclose on the lien. The property he foreclosed on and ended up with was worth over $500,000.00 all of which went to him. That is a return on investment of over 3,200% or a profit of $485,000 over the 3 years it took to get this done.

Tax Lien Foreclosures are a little known method to acquire properties for as little as 5-10% of the true market value of a property.

In the US, every year hundreds of thousands of property owners do not pay their Real Estate property taxes on time. As a result in 18 states there are laws allowing the Counties to do so called “tax Lien Auctions” and auction off the Delinquent Tax obligations to investors in exchange for them receiving several rights.

Right #1: the right to collect a (usually high) Interest rate:

In many states these interest rates are 16% and higher and (in Illinois they are 18% per half a year for a total of 36% per annum). Usually the rates are between 12% and 36% with some exceptions where instead of a rate which is prorated if the owner “redeems (= pays off the taxes), the state allows for a Penalty, meaning the property owner has to pay a fixed percentage no matter if they redeem the property in 1 day or 11 months and 30 days.

Right 2: The Right to Foreclose on the property:

Once the investor pays the outstanding property taxes to the county, a lien is being placed against this property to make sure the Investor get’s paid back his investment plus interest when the property is sold.

However if the property is not sold or the owner does not redeem the Tax lien Prior to a Tax Lien Redemption period, the Lien Holder has the right to foreclose on this property.

Redemptions periods very from state to state but usually range between 3 and 5 years.

Depending on which state it is, the foreclosure can be fast (in some cases the State does the foreclosure for the investor) or take up to a few months. But in most states, the Tax lien supersedes most other liens including Bank Mortgages and Mechanics liens. The only exceptions are Federal and State IRS Liens and very few other, rare liens. As a result a Tax Lien Foreclosure usually leads to a free and clear title to the property.

Right 3: To buy the subsequent year’s Tax liens in advance without competition.

Most Tax Lien States have a provision in their statutes allowing Holders of Tax liens to purchase the next year’s delinquent property taxes as soon as they become delinquent, without competition and therefore months in advance of the next tax lien auction.

As a result Tax Liens are a very safe investment which in the worst case results in the investor making an EXCELLENT return on his/her investment and in the best case results in the investor making getting the actual real Property worth up to 20 times the amount the investor paid in property taxes.

Example (assuming the property owner does not redeem the tax lien and the Redemption period is 3 years):

Property value: $100,000

Annual Property Taxes (including some fees and Penalties): $1,500

In this example:

The Investor Pays to the county:

- In year 1: $1,500.00 in exchange for a TLC for that amount.

- In year 2: $1,500.00 in exchange for a TLC for that amount.

- In year 3: $1,500.00 in exchange for a TLC for that amount.

After year three is over, the investor forecloses on the property which costs him another $1,000.

Total investment made:

$5,500 and the value of the property is $100,000.00

The investor now hit the “jack-pot” and can decide what to do with his property. Sell it, move in, build on it (if it is a vacant land parcel) or just hold on to it for future appreciation.

I have received this question a lot from my friends in outside the US who hear about the concept of Tax Lien investing.

“Can I invest in Tax liens and Tax deeds even though I am not an US citizen.”

The question is yes. As long as you have a valid ID with a social security number or even only a US TAX Identification number, which you can get even as a foreign citizen and even if you don’t live in the US, you can invest in Tax Liens and Tax Deeds.

If you have these you are ready to invest. Attend the auctions live or online, and buy and bid with confidence. More and more states and counties do online auctions so you can even save the travel expenses.

However make sure you do your due diligence on VALUE, LOCATION, ENVIRONMENTAL ISSUES, and, LOOK AND CONDITION of the property prior to investing your money. If you live far away from the property, you can do this via phone, Google Earth, county provided aerial pictures. If that does not satisfy you, you can always hire the services of a Real Estate professional who for a small fee is more than willing to visit the property for you, take some pictures and do some of the research for you.

Then if the auction is online, you are set. But if it is live, you might again want to hire someone to go to the auction for you. But make sure you give that person exact directions on what they should bid on and how low or high they are allowed to go. Otherwise you are up for a surprise.

Another option for you would be to look at “over the counter” tax lien investments, which have the advantage that you can do all the work without particular time pressure from home on your phone and computer and then once you are ready you just send a cashier’s check (or wire) to the county with the property ID, Tax lien ID, your Bidder ID and they in return will mail you the Tax lien Certificate.

It is very simple, just use the modern technology and you can do it.