There’s been some very bad press lately on tax lien investing – in the form of articles written by journalists who don’t know what they’re talking about! I think that their view of tax lien investing is a little skewed. I’ve read 2 such articles recently in the Huffington Post about how the big banks and hedge funds are taking advantage of Americans by investing in tax liens.

Now, I am a tax lien investor and I teach individual investors how to invest in tax lien certificates because it’s a safe alternative to the stock market. Individuals can invest in tax lien certificates with money from their IRA or 401(k) and it’s a much safer investment than speculative securities. As an individual investor I don’t like the competition from the big banks, but the authors of these articles have got their facts wrong. They make it sound as though the “greedy” banks and hedge funds are in tax lien investing to profit from the poor distressed homeowner who can’t pay their taxes. They make it sound as though the banks add interest and fees to the tax lien and go after the homeowner for the money or foreclose on the property. But that is not the way it works. The banks simply get what the county or municipality would normally charge the tax payer.

They make it sound like the banks are adding 18% or more to the lien, but the fact is that is what the municipal or county government charges for property tax delinquency – that is the default rate that the county charges and if the tax lien was not auctioned in tax sale, the property owner would always be charged that rate. But because the tax lien certificates are auctioned and the interest rate is bid down at the tax sale, the rate is actually lowered for the property owner. It is the competitive nature of the tax sale that lowers the interest rate that the delinquent tax payer must pay. In some states the interest on the certificate amount is lowered at the auction to zero or close to zero. Then if the owner doesn’t pay the subsequent tax, the investor can pay the subsequent taxes and make the maximum interest rate on the sub taxes, but that is exactly what the county would charge. The property owner also has the ability to pay the subsequent taxes and avoid anymore interest altogether, even without paying off the tax lien.

Also the investor cannot go after the property owner for payment. The article that I read falsely accused Plymouth Park Funding of charging an “upfront fee” to redeem a tax lien and adding 18% interest to the lien. In fact it would be illegal to charge an “upfront fee” other than the amount of back taxes and penalties owed to the county, and the 18% interest rate was not added by Plymouth but is dictated by the county. In most states, the property owner must pay the tax collector, not the investor in order to redeem the lien. the tax collector notifies the investor, collects the tax lien certificate from the investor and forwards a check from the county (or municipality) to the investor after they have collected the redemption amount from the tax payer. It is all controlled by the local or county government. In most states, there is a generous redemption period in which the delinquent tax payer has to pay a tax lien, usually 2-3 years depending on the state.

This really is a good system for all concerned; the county gets the money they need to meet their budget, the investor gets a better deal then they would at the bank in a safe – though not liquid investment, and the homeowner gets more time to pay their taxes – it’s as if they are getting a loan without having to qualify for one, though it could be a high interest loan. But think of what the alternative would be. States that do not sell tax liens to satisfy unpaid taxes just sell the property right out from under the owner. Which would you prefer if you were the homeowner? The one thing that I’ve learned from this business is that you have to pay your taxes!

We are all under the delusion that we own our property. The reality that is that the government owns it and we rent it from them. You can’t blame the investor for that!

What is your opinion? Leave your comment and let me know.

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