The Investor’s Guide To Tax Liens

Key Takeaways

  • Tax lien investing is better left for the seasoned professionals that know what they are doing.
  • While lucrative investment vehicles, tax lien certificates are not without their risks.
  • Investing in tax liens is a lesser-known, but still viable strategy for anyone with enough knowledge of today’s real estate landscape.

As their names suggest, real estate tax liens are penalties levied on homeowners that have neglected to keep up with their tax obligations. That said, any homeowner that fails to pay taxes on his or her property is at risk of having a lien placed against their home. Otherwise known as legal claims by local governments, tax liens can significantly detract from any intentions the owner has to sell, refinance or borrow against the property. It should go without saying, but tax liens are best left avoided.

It is worth noting, however, that while homeowners may detest the idea of real estate tax liens, investors are quite fond of them. In fact, real estate tax liens award savvy investors the ability to earn attractive returns if they play their cards right. Done correctly, real estate tax lien investing can result in a relatively lucrative career path, but I digress. Investing in property tax liens is not without risk. It is absolutely imperative that tax lien investors understand the rules and potential hazards associated with such an exit strategy; only then will they be able to capitalize on this particular niche.

What Is A Tax Lien?

In their simplest form, tax liens are nothing more than a last resort on behalf of government entities to force someone to pay any back taxes they may have incurred in the past. In other words, they are a legal claim on behalf of the government against a taxpayer’s asset that has failed to keep up with their taxable obligations. That’s an important distinction to make: in the real estate landscape, tax liens are levied against assets. When a homeowner fails to pay their property tax, for example, it’s within the rights of local municipalities to place a tax lien on the property in question.

In the event a taxpayer finds them self with a lien against their property, they must pay what they owe, get the debt dismissed in bankruptcy court or reach a compromise with the proper government authority, or run the risk of several consequences.

According to Investopedia, “the tax authority can then use a tax levy to legally seize the taxpayer’s assets (such as bank accounts, investment accounts, automobiles and real property) in order to collect the money it is owed” if the tax continues to go unpaid. Additionally, real estate tax liens can impede the sale of properties, prevent refinancing, and even stop the delinquent taxpayer from borrowing money. There’s no doubt about it, the repercussions that have become synonymous with real estate tax liens are serious.

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Tax lien investing

The 6 Steps Of Buying Tax Liens

  1. Mind Due Diligence: As I already alluded to, tax liens represent a high risk and high reward opportunity for those willing to take them on. Done correctly, tax liens can serve as a great investment vehicle, but I place a strong emphasis on correctly. As a result, it’s in your best interest to mind due diligence and learn everything you can about the process of tax lien investing. Leave no stone unturned; learn everything you can about the tax lien auction process, potential risks, rewards, how money is made, where to look, what your responsibilities as a lien hold will be, and, perhaps even more importantly, what will be expected of you in specific municipalities. The idea here is to know the ins and outs of the entire process. Do nothing — I repeat, nothing — until you are confident you know how to proceed.

  2. Find A Lien To Purchase: Do you know how to find tax-delinquent properties in your area? Tax liens are public record and are, therefore, made available to those that know where to look for them. More importantly, tax liens are issued in the form of certificates, each of which are auctioned off. As a result, you’ll be able to find tax lien certificates at local auctions, not unlike a foreclosure auction. Tax lien certificates can, therefore, be purchased by the highest bidder at an auction. These certificates can rage anywhere from a few hundred dollars to significantly more, so be prepared. It’s not uncommon for tax lien auctions to take place online or in person, so talk to your local government to identify where the best place is to find a tax lien auction in your area.

  3. Submit A Winning Bid On a Property That Meets Your Criteria: It isn not nearly enough to bid on any certificates that come your way. Smart investors need to bid on tax lien certificates that make sense for their particular exit strategy. In other words, investors need to know the property in order to confirm whether or not they will be able to make money by acquiring the tax lien. A dilapidated property located in the heart of a slum neighborhood is probably not a good buy, regardless of the interest rate that is promised, because the property owner may be completely unable or unwilling to pay the tax that is owed,” notes Investopedia. Only once you are certain the lien is a good investment should you bid.

  4. Pay The Amount Of The Lien In Full: In the event an investor submits a winning bid, they will be required to pay the amount of the lien in full, immediately. In doing so, the investor assumes ownership over the tax lien certificate.

  5. Set Up A Repayment Schedule With The Owner: As the legal owner of the tax lien, the homeowner is now required to pay the investor the entire amount of the lean, plus interest. Interest rates will vary dramatically from state to state, but will typically reside somewhere in the neighborhood of 5% to 36%. Most investors will have the homeowner pay off the lien in installments, ranging from six months to three years. Investors that strike an agreement with the homeowner stand to collect installment payments till an agreed amount is paid in full.

  6. Foreclose On The Property: While rare, homeowners that fail to pay the investor by a specified deadline, run the risk of the investor actually foreclosing on the property — just as the municipality would have if they still held the tax lien certificate.

Tax Lien Investing Risks To Be Mindful Of

Tax lien investing can yield significant dividends for savvy investors, but it’s not without its risks. Those interested in tax lien investing should be mindful of the potential pitfalls of buying tax liens at auctions, not the least of which include the following:

  • Not All Homes Are Viable Candidates: Investors need to be mindful of the liens they bid on at auction, as not all liens are worth their commitment. Some properties, for that matter, are so far beyond repair that the lien may not be worth the hassle, or the cost.
  • Not All Owners Are Willing Or Able To Pay The Lien: Some homeowners may be unwilling to pay what they owe to investors. And, even in the event the home is foreclosed on, evicting the homeowners can be a lengthy and costly process.
  • Tax Liens Have An Expiration Date: Tax liens are not evergreen, meaning they can expire. More importantly, once a lien expires, the lien holder is unable to collect any of the unpaid balance.
  • Foreclosure Risks: If the property does fall into foreclosure, there may be more liens on the property making in impossible to obtain the title.

Buying tax liens

Tax Lien Investing Secrets From The Pros

  • Bidding Lowers Returns: Tax lien investing has proven to be a lucrative endeavor, which means there’s usually stiff competition for the tax lien certificates at auction. It is worth noting, however, that bidding actually brings down the rate charged. Bidding wars, for example will actually drive down the rate of return for winning bids.
  • Interest Rates Aren’t Everything: Sure, investors will covet tax lien certificates with high interest rates, but they aren’t everything. Sometimes it’s smart to take a lower interest rate if there is the potential for more delinquencies in the future.
  • Location, Location, Location: You can argue that tax lien investing is better left closer to home. If for nothing else, it pays to know the local market. The lower the taxable percentage is in a given area, the more secure the investment is.
  • Don’t Expect It To End In Foreclosure: While it’s possible for the investor to foreclose on a property if the debts aren’t paid in time, don’t count on doing so. A very small percentage of tax lien certificates actually net a property for respective investors.

In Conclusion

Tax liens have proven that they belong in a savvy investor’s portfolio, but not without the proper preparation and a mind for due diligence. For as lucrative as tax liens can be, they are fraught with pitfalls and risks. In other words, investing in tax lien certificates is not for the inexperienced, or even the average real estate investor, but is rather best left to the seasoned professionals. That said, those that can navigate their tricky waters could find themselves with a great exit strategy on their hands.

*The information contained herein was pulled from third party sites. Although this information was found from sources believed to be reliable, FortuneBuilders Inc. makes no representations, warranties, or guarantees, either express or implied, as to whether the information presented is accurate, reliable, or current. Any reliance on this information is at your own risk. All information presented should be independently verified. FortuneBuilders Inc. assumes no liability for any damages whatsoever, including any direct, indirect, punitive, exemplary, incidental, special, or consequential damages arising out of or in any way connected with your use of the information presented.
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