Tax Liens

In today’s economic climate, one great way to increase your wealth that is often overlooked is investing in property tax liens. This type of investment excellent rates of return, although they can sometimes carry a great deal of risk. Before you start investing in tax liens, you need to know the rules as well as the potential hazards that are involved with it. Here are a few basics to get you started.

What is a Tax Lien?

A lien is a legal claim against a property that occurs when the property owner does not pay the taxes that are owed on it. The lien is equivalent to the amount of taxes that are owed.  If a property has a lien on it,  it cannot be sold or refinanced until the taxes are paid. Tax liens can be bought at auctions just like physical properties can. When someone purchases a tax lien on a property, the local government benefits because it recoups the taxes that are owed on the property.

How to Invest in Tax Liens

The process of investing in liens is fairly simple. They are made available to the public through the following process:

  • The lien is issued
  • A tax lien certificate that specifies the tax amount that is owed is created by the municipality where the property is located. It also includes any interest that has accrued.
  • The certificates are auctioned off and issued to the highest bidder.

How Expensive are Tax Liens?

There is no exact amount that a tax lien costs, as it depends on the number of bidders there are for it and how high any of the bidders are willing to go. Also, the size of the property can dictate how much the lien will go for at auction. Small properties can often be won at auction for as little as a few hundred dollars. Larger properties can cost much more.

What Types of Properties can you Purchase the Tax Liens of?

Any property that has a tax lien on it can have the lien purchased by an investor. Some of the most common types of properties that fall into this category include:

  • Residential
  • Commercial
  • Undeveloped land
  • Properties that need improvements.

Where are Tax Lien Auctions Held?

Tax lien auctions are held both in physical locations and online. Whichever type of auction you choose, you can bid down on the interest rate or bid up on the amount you are willing to pay for it. You can expect to get into bidding wars with other prospective investors and that will drive down the rate of return the winner can expect to get.

Getting Started on Investing in Tax Liens

To get started investing in tax liens, you first need to decide what type of property you want to hold a lien on. There are advantages and disadvantages to each type of property, so it is simply a matter of personal preference. When you decide which type of property is best for you, you can contact your local municipality to find out when the next auction is being held. You can also get a list of available properties  from your local treasurer’s office. The treasurer’s office will also give you a list of rules for how the auction will be conducted.

Do Your Research

A crucial step in purchasing a tax lien as an investment is performing some research on the property. In many cases, the value of the property is less than the amount of the lien. In these instances, it may not be a wise investment for you.

Realizing Profit From the Lien

If you purchase a property tax lien, you will be expected to pay the full amount of the lien (including interest and penalties) to the municipality that issued it. The property owner must then pay you the the entire amount of the lien plus interest. A repayment schedule can be arranged so the amount can be paid off over time. The schedules can be set up anywhere from six months to three years. If the property owner cannot pay the amount in full by the deadline, you have the right to foreclose on the property.

Disadvantages of Investing in Tax Liens

Although a property lien can yield a significant amount of interest for you, they have some pitfalls that you need to be wary of. Investing in tax liens can be tricky and are not a great choice for novice investors or anyone who does not have a strong base of knowledge in real estate. It is also important that you are familiar with the property you are bidding on. There are often good reasons why a particular property might not be a good investment, such as close proximity to a dilapidated neighborhood. Further, once you take ownership of a tax lien, you must take on some responsibilities that go along with it. You will be required to notify the owner of the property in writing that you are the new holder of the lien and then follow up with a second letter if payments have not been made in full at the designated time. Tax liens do not last in perpetuity. Once the expiration date comes, you will no longer be able to collect any unpaid balances that are owed.

If you have any questions regarding investing in tax liens, contact us today.