What is the truth about tax lien investing?
What is tax lien investing anyway and why is it such a good investment?
What is the difference between tax liens and tax deeds and what are some of the misconceptions about them?
Read on the find the answers to these questions and the truth about tax lien investing…
Local governments in the U.S. – counties and municipalities, depend on money from property taxes to meet their budgets. When property owners don’t pay their taxes, the some counties or municipalities will sell the taxes to an investor at an auction. The investor does not buy the property at the auction. But bids for the right to pay the taxes on the property and put a lien on the property.
Why would an investor want to do pay someone’s property taxes?
There are 3 main reasons why this is an attractive investment:
- Very high rates of interest are possible with tax lien certificates – anywhere from 8% – 36% per year.
- A tax lien comes before most other liens, so the investor is first in line to get paid on their investment
- The investment is backed by real estate, and if the lien is not paid in a certain amount of time – known as the redemption period, the lien buyer can foreclose on the underlying property.
Not all states sell tax liens
In some states, when a property owner does not pay their taxes, instead of selling a lien on the property, the county or municipality will sell the property at a tax deed sale. In states that sell tax deeds you are actually buying the property. In some states the property is sold for back taxes and penalties, in other states the property is sold for a certain percentage of assessed value and in other states the property is sold at market value. A tax deed can be a good investment, especially in states that sell the property for the back taxes because the investor has a chance to buy real estate at under market value.
Some states sell redeemable tax deeds, in which the county does sell the deed to the property at the tax sale. But there is a redemption period in which the delinquent taxpayer can come back and redeem the property. In redeeming the property they must pay the investor either a penalty or interest on their investment. Some redeemable deed states have a penalty and some have an interest rate. In some states the penalty or interest can be quite high, making it very attractive to the investor.
Because people have been told that tax liens are a great investment and that they can make such good interest rates, they assume that interest is paid out by the county or municipality on a regular basis. The truth about tax lien investing is that you do not get paid a cent until the delinquent property owner decides to redeem the lien. If they do not pay during the redemption period (which is different for every state) then you can foreclose on the property in order to get satisfy the lien.
Another misunderstanding about tax lien investing is that after the redemption period is over, the lien holder will automatically get the deed to the property. The truth about foreclosing on a tax lien is that in most states you need a lawyer in order to foreclose and get the deed to the property, and in other states (Florida for example) the property will be sold in a tax deed sale, and will be auctioned to the highest bidder, so your chances of coming away with the property for what you have invested in it are not good.
Some people have the misunderstanding that tax lien investing is a good way to buy properties for pennies on the dollar. This does not happen very often. Especially in states where the value of real estate is very high, the tax lien will almost always redeem sometime during the foreclosure process. Tax lien investing is a way to get a high return on your money. If you are interested in buying property for under market value, you are better of with tax deeds or redeemable tax deeds.
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