Property Tax Liens arise
when a property owner fails to pay their property taxes. At this point, the local government places property tax liens on the subject property in their jurisdiction.
Twenty-eight states allow these property tax liens to be sold to private investors and billions of dollars of liens come up for sale each year nationwide. The other states issue “tax deeds”.
The local government gets their needed property tax income instantly. The property tax lien investor receives the right to collect the amount of their investment. In addition, the investor can normally collect further penalties and interest. Usually after a certain period of time the property tax lien investor has the right to foreclose on the property to receive payment. This is the redemption period which is can be as short as six months or as long as three years.
Property Tax Liens can be a safe and productive investment. Many investors receive great returns.
Property tax investors usually buy the liens in an auction format although it is possible in some states to simply purchase these property tax liens after the annual auction.
There are many positive aspects of investing in property tax liens.
Many investors like the fact that their investment is secured by the property. Other investors see such an investment as attractive due to the potential interest rates of upwards of 36% in some states.
The fact that property tax liens are first in line for repayment also make them attractive. In theory, the property tax lien is to be paid even before a first mortgage on the property.
Another sweet side to investing in property tax liens is the fact that it requires very little money to get started. You can honestly find delinquent property tax liens for as little as a hundred dollars. In fact, many investors only seek to invest in these smaller amounts. It doesn’t take a rocket scientist to figure out if you spend a hundred dollars and can charge another hundred dollars in fees that your return isn’t the stated 5% to 36% return.
Your expected return is also fairly stable. Once purchased, you have a pretty fair idea of your return. This is unlike flipping houses where the expected return can be pretty vague.
There are drawbacks however.
Believe it or not our local government can make mistakes.
You may end up purchasing a tax lien that was produced in error and you total return may be only getting your initial investment back.
You are also subject to the property owner filing bankruptcy which may zero your investment.
The interest rates make tax liens an attractive investment. Liens also are first in line for repayment, even before first mortgages.
But it’s complicated. You have to understand the details.
The procedure of investing in Tax Liens
As a small investor you will be competing with larger funds and banks to obtain the sweetest delinquent property tax liens. For myself, I found they are seeking the larger amounts which I had no interest in. I would much rather spread my risk around to a stack of property tax liens than have a delinquent $10,000 lien to collect on.
But a word of warning!
Learn the entire process of property tax lien investing. Become an expert on your own state laws. Also thoroughly understand the process locally. When you travel across that state line you might as well have dropped in on another planet.
Learn it locally first. Stay in your own backyard. Do NOT think the grass is always greener on the other side as you chase those 36% returns in another state.
As I may have mentioned earlier, become an expert in YOUR state first! There several different types of property tax sales.
Some property tax lien sales are conducted online. In other situations you have to actually attend an auction in person.
Still other states will allow you to simply walk in and purchase the delinquent property tax liens anytime of the year.
This makes it complicated enough.
It gets even trickier considering that some auctions are conducted by bidding down the interest rate. In other words the local government will establish a maximum rate and the winning bidder has bid in the lowest interest rate beneath that maximum.
See? It can be confusing!
An additional alternative involves you bidding a premium on the property tax lien. The winning bidder is the one who is willing to pay the highest premium above the actual lien amount.
Property Tax Lien investing can be lucrative but you have to do your homework in advance. Know the laws you are dealing with and know the property you are interested in.
Visit your local tax assessors office and visit the property. You will need to understand the value of the property. I have seen instances where the delinquent property tax lien amount is MORE than the actual value of the property. It happens.
You could end up with pennies on YOUR dollar or nothing at all. In certain situations you could end up owning a piece of property that nobody else wanted to own in the first place.
You’re not gonna come out ahead investing a thousand bucks in a delinquent property tax lien that has EPA issues and requires hundreds of thousands of dollars of cleanup. Again, visit your local tax assessor AND the property itself.
It’s possible the photo and information the local property tax assessor has is dated. A lot of things can happen to a piece of property in a short time frame. If you’re going to invest then get serious and do your homework. It may take your several weeks of inspecting various properties on your list to come up with your investments.
Once you purchase a property tax lien you have to thoroughly learn your responsibilities.
In each state, you are going to be required to notify the property owners. And you will have exact time limits on when this notification must take place.
Also understand that property tax liens DO EXPIRE! Learn this! In some states you may find that the property tax lien lasts for decades. In others, you may have a short time period on taking action to protect your investment.
Did I mention to learn your own state laws on the matter?
Tax liens also have an expiration date. “Sometimes it’s six months after the redemption period,” she says. “Don’t think you can just buy and forget about it.”
Also in some states you may want to pay the new taxes in the years to follow to protect your investment. Again, each state is different. In my state, I like to purchase the delinquent property tax lien and hope someone else buys next years lien. I do this in hopes they will be the ones to foreclose and to collect all I have to do is wait until they force a sale.