Investing in tax liens and deeds can be a great option if you’re looking for ways to grow your retirement savings quickly. If done correctly, tax-lien investing can generate higher than usual returns on a regular basis.

Investing in tax liens and tax deeds can be a good choice for those with a limited budget, as these assets can be obtained for a relatively low cost. This enables investors to either participate with less money or to spread their investments around more if they have more money to work with.

We walk through some of the mechanics of tax lien investing because it is very popular with self-directed IRA and Solo 401(k) plan holders.

Understand the Strategy

If a property owner falls behind on their property taxes, the city or county where the property is located can put a lien on the property to collect the taxes owed.

Each municipality has a different way of using this lien power to fix the problem. They may simply apply the lien with interest and penalties over a certain redemption period, which can range from a few months to several years.

Research your Chosen Market

It’s important to spend time learning about the way a market works that you’re interested in investing in, including the process, auction timelines, deposit and payment policies, and redemption methods.

Some tax authorities hold periodic live auctions. Some companies may give you the option to get a lien or deed online, or through the county clerk’s office.

Setup Your Checkbook IRA or Solo 401(k) Plan

It usually takes 3-4 weeks to set up and finance a Checkbook IRA LLC or Solo 401(k) plan. In order to participate in a tax auction, you need to have a plan set up in advance.

Register with the Auction

Many live auctions require pre-registration. Some may also require a registration fee or deposit. Be sure to understand your requirements and attendant timelines.

The registration must be made in the name of your IRA-owned LLC entity or Solo 401(k) trust, not in the name of the individual. All fees or deposits must be paid using the funds from the plan. If you introduce your own money into the situation, you could end up breaking the law and owing taxes.

Prepare for Your Auction

You not only need to understand how a particular auction works, but you also need to research the lien or deed assets that will be available. You can research properties by using the Country Treasurer, County Assessor, Valuation Sites, County Recorder, and County Surveyor.

Bid on Liens

The bidding process for tax revenue varies among taxing authorities. Before attending an auction, make sure you understand how the bidding process works. Some of the common bidding formats are outlined here:

Price Bidding

This conventional auction format allows bidders to compete by raising the price they are willing to pay for a lien or deed.
Opening bids usually start at the amount of taxes, interest, and penalties outstanding at the time of auction.
In a lien auction, bidding above this amount will secure the rights to the lien but will reduce your overall yield from the investment.
In a deed environment, the bid amount represents what you are willing to pay if the property is foreclosed, and any amount above the tax and penalty balance reduces your potential equity in the property.
It would be counterproductive to bid an amount greater than the property is worth in these scenarios.

Interest Rate Bidding

Some states, such as Arizona, allow investors to compete by bidding down the rate of interest they’re willing to accept for a lien.
If the standard rate is 16%, bidders can offer to accept less.
The difference will accrue to the taxing authority.

Bid Premiums

Some localities that offer traditional price bidding auctions will implement a bid premium to prevent frivolous overbidding.
If the bid amount is greater than the property value, a certain percentage of the amount over value must be provided as a premium or deposit to the taxing authority.
Because this premium is held interest-free by the county for the redemption period of the lien or deed, it’s a disincentive for overbidding.

Lottery

A handful of auctions are run on a lottery basis.
For each auctioned parcel, a lottery number is drawn.
If the selected participant wants the property, they can generally win the auction with a minimum bid.
If they decline the parcel, the next lottery number is drawn.

Post-Auction Purchase

Some places will offer parcels for sale after the auction in some fashion if they aren’t sold live.
This can take the form of “over-the-counter” sales at the county clerk’s office or via a normal real estate sales listing offered by the taxing authority after they foreclose on a property.

Pay for Liens

The beneficiary of a self-directed IRA or 401(k) has checkbook control, meaning they can execute contracts and fund transactions immediately without intervention from a third party. Investing in tax lien auctions is hard if you’re using a self-directed IRA custodian because each investment transaction involves a lot of paperwork and processing delays.

You can act immediately when you hold plan funds in a bank account of your choice. You need to know the payment policies of an auction in advance and prepare for them.

Make sure to buy everything you need for your plan from your account. The method of payment doesn’t matter. The proper flow of funds is of critical importance.

Wait out the Redemption Period

Most states have a procedure surrounding a redemption period. The property owner has a limited time in which they can pay their taxes and penalties to avoid foreclosure. Redemption periods are the amount of time you have to pay off a debt. They can range from a few months to a few years.

Receiving the Profit

If the property owner pays their tax obligation at any time during the redemption period, your investment will mature. If you follow the plan, you will get your original investment back, plus any interest and income from penalties.

If the taxpayer does not pay their debt, then the lien or deed will go into foreclosure. Depending on the way the area operates, you may have the first right to buy the property, or you may have the option to be paid the amount of taxes and penalties that are owed from the amount that is bid on the property when it is purchased by another person at an auction.

Any money earned from the investment goes to the retirement plan and must be put in the associated bank account.

Expense Considerations

If there are expenses related to investing the money in the plan, they should be paid using the money from the plan. The only time this would not be the case is if you plan to invest your plan and non-plan money into a specific auction. Using the plan’s money for your own investments could be considered self-dealing.

You are not an active employee of your IRA LLC or 401(k) trust. In other words, don’t spend any personal money on business expenses, and don’t ask to be reimbursed for any expenses you may have already paid. You are responsible for managing the plan and using its funds effectively.

What are Tax Liens and Deeds

Property taxes become delinquent on April 1st of each year. The Tax Collector begins preparing for a tax certificate sale at that time. A tax certificate is sold for all taxes not paid by June 1st. The certificate gives the buyer the right to collect taxes from the property owner. A tax certificate is a legal document that gives the holder the right to collect on delinquent property taxes. The certificate holder is not allowed to have any rights to the property. If no one buys a tax certificate for a piece of property at the sale, the county will get the certificate. Individual tax certificates are used to record the ownership of real property taxes. County tax certificates are used to record the amount of taxes owed on real property. The party who owns the certificate or is interested in it may redeem it at any time by paying the overdue taxes and the interest earned by the holder of the certificate to the Tax Collector. (Chapter 197 Florida Statutes). The tax certificate will expire after seven years.

If a certificate is not redeemed, the certificate holder may get a Tax Deed by making an application. You can’t apply for a Tax Deed with a certificate that’s less than two years old. The first step in the process of obtaining a Tax Deed for a property is to apply for the deed in the Tax Collector’s office. The Tax Collector will complete the necessary paperwork, including a Tax Collector’s certificate and the legal description of the property. They will then send this paperwork to the Clerk’s Office. The Clerk’s Office handles the legal advertisement for the newspaper, sends out certified mailings of notices for the pending sale, prepares the civil process to be served by the Sheriff’s Office, and handles the calculation of the opening bid. The Clerk’s Office provides assistance to the public and prepares for sale day. The owner or interested party may redeem the property at any time up until the last minute before payment for the property is complete. All redemptions are made at the Tax Collector’s Office.

General Information

The Tax Collector will issue a tax certificate if a property owner does not pay their annual property taxes. This will then lead to a Tax Deed sale. The birds are kept in accordance with Chapter 197 Florida Statutes. If you default on your taxes, the Circuit and County Court Clerk will auction off your property to the highest bidder.

The amount required as a deposit for tax deed sales in Florida, as specified in Chapter 197 of the Florida Statutes, is either five percent of the bid price or $200, whichever is greater. This needs to be done when the sale happens, and the deposit will go toward the sale price when the full amount is paid. You must pay your deposit for the Tax Deed sale before 4:00 p.m. the day before the sale. You can pay with a cashier’s check, certified check, money order, or Bank wire.

Winning bidders must pay the Clerk of the Court by cashier’s check, certified check, money order, bank wire, or deposit through their online account by 4:00 p.m. the day after the auction. If you do not comply, you will not be allowed to participate in future Tax Deed auctions and will lose your deposit.

There is no guarantee that these properties have clear titles. Properties are sold with the understanding that it is the buyer’s responsibility to search the title for any recorded liens. This means that even if you buy the property through a Tax Deed sale, you will still be responsible for any liens or judgments against the property that the government has.

This means that the property is being sold in its current condition, as is, and that the deed conveying the property is a tax deed. No promises are made about the condition of a parcel, the quality of its title, how easy it is to get to, or how big it is. The charges for professional services such as “Quiet-Title” suits are the responsibility of the buyer.

If a property is not paid for by the high bidder, it will be advertised again and resold no later than 30 days after the original sale date. This is governed by Florida Statute 197.542(3). The resold sales are held on Wednesday after the original sale unless the Tax Deed office has said something differently.

Your deeds will be recorded under the name you provide on the Real Auction website. Be sure to check that this information is correct when you make the final payment. The person who wins the auction will be responsible for making any changes to the deed after it has been recorded. An additional $1.00 fee is charged for each party beyond the four listed on a deed.

Tax Deed Sale Rules

This is a “buyer-beware” situation. The auction for each property will begin with the opening bid, which will include the amount of taxes and fees owed on the property.

The high bidder will be asked to post a nonrefundable deposit with the clerk of five percent of the bid or $200, whichever is greater, in accordance with Section 197.542(2), Florida Statutes. The deposit must be paid at the time of sale and will go towards the full purchase price. This deposit must be placed the day BEFORE the sale, no later than 4:00 p.m.

Your bid amount and all the associated fees for filing your deed must be paid no later than 4:00 p.m. the following business day after the sale. You can pay for your tax deed with a cashier’s check, a certified check, or a money order in the Tax Deeds Department, which is in Room 1260 of the Duval County Courthouse. You may also make your payment via Bank wire.

If you are planning to bid on something and you will be using cash for the transaction, and the amount is over $10,000, you will need to fill out an IRS form 8300.