What are Tax Liens?
In the past few years smart investors have chosen tax lien investing as their investment strategy for a very good reason. Every single day in our country individuals fail to pay their property taxes. Why? The reasons vary but for some it’s just an oversight and someone just simply forgets to pay a bill. For others it may be due to financial hardships, someone in the family loses their job and there just isn’t enough money left to pay the taxes. Possibly, someone inherits a piece of property and never changes the billing address with the county clerk so the tax bills are sent to the wrong address. What ever the reason, when the property taxes aren’t being paid the county doesn’t have the money they need to function.
Once a person goes delinquent on their taxes the country will issue a tax lien against the property. Then, periodically (often once each year), some counties will sell the tax liens at public auction to investors as Tax Lien Certificates. The investor is paying off the property owner’s tax debt to the county and in turn the county gives the investor the right to collect on the lien. The property owner then has to pay the delinquent taxes, penalties and interest (which is a rate determined by the county) to the holder of the tax lien certificate (the investor) or risk losing their property through foreclosure.
Tax liens are not something new. In fact, they have been around for hundreds of years, but their just not an investment opportunity many people know about. Tax lien investing can be a profitable investment strategy and many individuals have chosen this type of investment to either, supplement their income or as their primary source of revenue. Following are a few facts to show how the tax lien process works.
Between $7 and $10 billion in property taxes goes delinquent each year. Failure to collect these debts creates a financial burden on state, county, and local governments. When a homeowner owes outstanding property taxes on their property, the city or county will impose a tax lien or judgment, against the house.
Investors are buying tax liens, effectively owning a claim against the property. In return, the county gets the money it needs to fund schools, pave roads, and pay for other infrastructure and services (Fire Department, Police, Road Maintenance).
A Tax Lien Certificate is assigned a fixed interest rate of (8% to 36% annually) by the city or county. Investors then hold the rights to these certificates and collect the interest when the debt is paid in full.
Tax sales are held in all 50 states. Some states sell Tax Lien Certificates and others sell Tax Deeds. A few states sell both. With over 3,000 counties in the United States selling Tax Liens or Tax Deeds, sales occur Year Round.
Investment opportunities - Receiving the title to a real estate property at a substantial discount makes for a great real estate
investment. The benefits of tax liens are potentially rewarding in a way that is rarely seen in real estate: a fixed interest rate of return, and the potential to purchase property at a
fraction of the normal cost.
Tax Lien Certificates can easily be purchased from the comfort of your own home. Each year more states and counties are hosting their Tax Sales online. This allows you to invest without taking time off work, or spending money on travel expenses.
Why Do Savvy Investors Buy Tax Lien Certificates?
If you invest in the stock market, you know it is subject to ups and downs, and how volatile it can be. Even when the market is doing well, you may find that your investment in tax liens are doing better than the stock market.
- Tax sales occur across the country throughout the year.
- The rates of return can be far higher than other investments. As a result of the mandatory high interest rate determined by some states, tax liens can provide rates of return that are superior to other forms of investment.
- Liens are secured by real estate – a stable investment. The property tax lien is usually for a small fraction of the properties’ market value.
- Usually, a property tax lien is superior to judgment liens, mortgage liens, and other private liens meaning the investor will get their money first.
- Tax Liens can be part of your IRA.
Summing it up:
Tax liens can be a great investment opportunity but you want to make sure your buying tax liens for the right reason. The main reason for purchasing tax liens is to receive a guaranteed rate of return on your money. Too often I hear of people buying liens because they heard some real estate guru claim they can buy tax liens for a couple thousand dollars and get to foreclose on a hundred thousand dollar home. Can it happen? Sure, it can and it does, but very seldom.
In most states (not all) a tax lien will be in first position above many other types of liens (mortgages, mechanics liens), and if the property owner does not repay their debt, the investors may be able to take possession of the property for a fraction of its value. Remember, this is usually not the case; most property owners repay the debt rather than losing their property to foreclosure.
Investors buy tax liens looking to profit from the interest they make on the liens and not to acquire property. If you’re looking to acquire property at below market value you should invest in tax deeds. If you need more information on the difference between tax liens and tax deeds take a look at my books.
Many people believe you need to spend thousands to start investing in tax liens. This is simply not true, tax liens are available for all types of properties (residential, commercial, industrial, multi-family, land) and in all prices ranges, and liens on just land only (no structures) can run as little as $50 or less. Just keep in mind that the smaller the investment the smaller the profit.
One item to keep in mind is that tax certificates are considered illiquid, although there is a market for selling tax liens, usually, once you purchase a tax certificate you have to hold onto it until the property owner repays their debt or you foreclose on the property.
However, if you just want to begin by testing out the tax lien investing waters you don’t need a large amount of money to get started. And with more states and counties selling tax liens online, you can invest without leaving your home. If online investing interests you, take a look at my book about buying tax liens online, where I have direct links to all the online auction sites. Acquiring Tax Lien Certificates Through Tax Lien Investing can be your road to financial freedom.
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