Tips for Preparing for a Property Tax Auction

When a property owner fails to pay their property taxes, the past-due amount becomes a lien, which generally has priority over other liens, including mortgages. In Alabama, when taxes are delinquent, the taxing authority will eventually sell the lien in the form of a tax certificate at auction.

The high bidder at a tax lien sale won’t immediately get the title to a property, but they will have an interest and sometimes it’s a good investment. If you are planning to participate in a property tax auction in Birmingham, AL, here is what you need to know.

What is a Tax Lien?

Tax lien investing is a type of real estate investment where individuals buy tax lien certificates. Local governments create these tax lien certificates on properties in response to unpaid taxes. A tax lien will eventually give the purchaser the right to claim ownership of the property if the owner doesn’t pay their obligations.

The Pros and Cons of Tax Lien Investing

Tax lien investing can be lucrative. But it’s important to understand its potential risks.

The Pros of Tax Lien Investing

• Rate of return — Most of the profits from tax lien investing come from the interest property owners have to pay to investors when paying off their debt, which is set at 8% in Alabama.
• Get the property under market value — If the property owner fails to satisfy their debt, the tax purchaser will get the deed to the property. When this happens, the investor gets a property for a fraction of market value.

The Cons of Tax Lien Investing

• Require research and organization — Tax liens are not passive investments because you’ll need to do a lot of work upfront and keep track of dates to get the best results.
• May need repairs — Some homes may need costly preservation improvements to keep the property in safe and habitable condition.
• Other liens — There might be other liens on the property, which can complicate the process of getting a clear title.

How Tax Lien Auctions and Investments Work

Tax lien auctions can be an excellent investment when approached properly. If you are planning to attend or participate in a property tax auction in Birmingham, AL, here is how you can prepare.

1. Conduct Plenty of Due Diligence

Because there is some risk involved, it’s critical to do thorough research leading up to a tax lien auction. To start, you should be familiar with the neighborhoods in the Birmingham area so that you can quickly gauge whether one tax lien might be more valuable than another.

Next, you’ll want to put eyes on the property to get an idea of any major defects that you might have to address. Finally, it’s important to verify the value of the property and search for any existing title defects or liens.

2. Be Ready for Competition

While tax lien sales were once an obscure form of investment, they have grown in popularity. As long as you aren’t purchasing the least desirable properties on the list, you have a good chance of making a return on the interest rate the state sets for delinquent taxes, which is 8% in Alabama. More and more investors are turning to tax lien auctions because of their advantages.

3. Have Sources for Preservation Improvements

Some of the tax certificates you might purchase at an auction will be in poor shape or neglected. This is information you should uncover in your preliminary research. But, if you do get one of these properties in your portfolio, you have the right to make preservation improvements.

These are any improvements made to keep the property in repair for its reasonable and proper use. Some examples include exterior painting, termite control, and water leak repairs. Even if the property owner exercises their right of redemption, they will have to reimburse you for the reasonable cost of any preservation improvements.

4. Get Your Dates in Order

Tax certificates are not passive investments, meaning you have to do some legwork to achieve the desired return. Even if you win an auction, you’ll need to immediately place the property owner on notice and demand possession. Then, if they haven’t vacated after six months, you can file suit. Finally, there are dates to track with respect to the owner’s right of redemption, after which you can file to get the deed for the property.

Tax lien investing is an indirect and potentially profitable way of investing in real estate by purchasing tax certificates at an auction. For help with or questions about tax lien purchases, contact BHM Law Group, LLC at 205-994-0902