2021 Definitive Guide To Property Tax Lien
Have you heard of buying a Property Tax Lien?
If you are looking for an investment in real estate that doesn’t require a ton of capital?
You may consider one such investment – buying unpaid US Property Tax Liens.
Countless counties across the United States auction off unpaid Property Tax Bills to investors in the form of Tax Lien Certificates.
You can use your extra cash to purchase as the amount is what the Homeowner owes the County and not the property’s actual cost.
There are two types of Property Tax Bills – Tax Liens and Tax Deed Sale.
In this series of articles, you can learn how to use Tax Liens and Tax Deeds to own real estate free and clear.
Purchasing Property Tax Lien certificates are one way to get real estate exposure in the United States as a foreigner.
While a full-time professional real estate investor may invest millions to buy properties for flipping and rental, a novice may want to make decent returns by investing in Tax Liens.
Investing in Tax Lien is the entry tier of real estate investment in America that Asian investors have learned to capitalize on investing.
What is a Property Tax Lien?
Here’s how it works.
When a landowner or a Homeowner cannot pay the Delinquent Taxes on his property, home, or land – the local government or municipality of the county where the property is located can sell a lien on the unpaid Taxes.
Property with a lien attached to it cannot be sold or refinanced until the Homeowner pays the Property Taxes.
The County auction these Tax Lien Certificates off to the highest bidding investor.
As a beginner real estate investor, you can purchase Property Tax Lien for as little as a few hundred dollars.
A Tax Lien is the right to foreclose on a property when the owner has failed to pay taxes.
Before you decide to purchase a Tax Lien, take a look at the type of property you can hold a lien
- undeveloped land
- property with improvements.
When you invest in or buy a Property Tax Lien, you are the lien’s legal Certificate Holder.
Are Property Tax Lien Worthwhile Investment?
Unlike a fixed deposit with a bank, County-level tax liens in the United States is not a straightforward investment.
You have to understand the details of how it works.
How much Does a Tax Lien Cost?
The amount paid is the taxes owed.
When you win at a Tax Lien Sale, you need to pay full in cash.
The County does not accept partial payments.
What Does the Investor get in return?
The Certificate Holder has the right to collect back that money plus an interest payment from the property owner when he pays his Delinquent Taxes.
How much is the interest?
Interest rates or rate of return vary from county to county and on the jurisdiction of the state.
For comparison, the maximum statutory interest rate differs.
- Arizona – 16 percent
- Florida – 18 percent
Some states have a fixed rate; in Alabama, the rate is fixed at 12 per cent.
How do investors buy a Property Tax Lien?
Investors can bid for the liens in a Tax Auction.
Property Tax Lien are sold the same way properties can be bought and sold at auctions, either live or online.
There are two strategies for an investor to bid.
For the interest rate, he can either bid down or bid up a premium.
The successful Bidder is an investor who will accept the lowest rate of interest (sometimes 0%) or pay the highest premium is awarded the lien.
Sometimes Buyers may get into bidding wars over a property.
If the County as the Tax Collector cannot collect the Property Tax, how would you make this profitable?
What Are The Methods To Acquire a Property Tax Lien?
At all Tax Lien Sale, the county is only interested in collecting the unpaid Property Taxes from delinquent Homeowners.
Tax Auction Methods
Depending on the county, they hold public auctions either online or in person.
Either way, a Bidder gets to see a list of the Auction Parcel with a legal description only.
The onus is on the Tax Lien Purchaser to conduct his own due diligence on the property’s viability, not just base it on the list of parcels.
Bidding Down Interest Rate
The County establishes a maximum rate.
The Bidder who bids for the lowest interest rate beneath that maximum wins the auction.
Bidding A Premium On The Lien
The Bidder who offers to pay the highest rate above the lien amount wins the auction.
While Property Owner may pay the premium may be paid back to the lienholder with interest at redemption, sometimes this may not be the case.
Before Investing In Tax Liens
Individual investors who intend to invest need to know the property well and really understand what you are buying.
You need to know what and where the property is, its neighbourhood, community, and values.
You want to avoid derelict properties, fire, flood, or even environmental damage – where someone has dumped some properties with hazardous material or even toxic waste.
You don’t buy a lien that you won’t be able to collect, especially in a rough neighbourhood.
What are the Winning bids for a Property Tax Lien Auction?
According to the National Tax Lien Association (NTLA), typically, the investor willing to accept the lowest interest rate wins.
Nationally, Most Tax Lien purchased are sold at rates between 3 per cent and 7 per cent during the auctions.
Some investors even go as low as bidding at 0 per cent.
When you win a lien at a Tax Auction, it doesn’t mean you have a legal claim over the property.
What is the downside of Property Tax Lien Certificates?
Investing in a tax lien may kick start your own small business profits if Homeowners fall behind on Property Tax payments, may sound like a good plan.
These certificates pay investors’ interest and provide the County government with the money expected from the tax payments.
However, to the Tax Lien Purchaser, the lien guarantees payment only if the property is sold.
You need to consider the advantages and disadvantages.
Pros of Buying a Property Tax Lien
The Liens are first in line for repayment, even before mortgages make it a desirable investment.
The interest rate is higher than a Fixed Deposit Rate.
Cons of Buying a Property Tax Lien.
If the property owner cannot pay the Property Taxes by the end of the redemption period – the lien holder can start foreclosure proceedings to take ownership of the property.
This rarely happens as the Property Owners would pay the taxes up before the redemption date rather than lose their homes.
There are more disadvantages than outweigh the advantages of a higher interest rate.
Cash Flow Disadvantages
Unlike a Fixed Deposit Cert, when you purchase a tax lien certificate, you do not receive interest payments until the Homeowner pays off the tax lien.
It ties your money down, and you have no income until the Homeowner redeems the tax lien certificate.
Knowing the exact status of a Tax Lien Certificate in the event of foreclosure is important.
If they sell the home to pay off outstanding debt, and if other creditors’ claims take priority over yours – you may not get your money back.
The Internal Revenue Service (IRS) has first claims to the proceeds from the home’s sale.
If they sell the property off at an auction – your Tax Lien Certificates may never get redeemed if you are not first in line to be paid.
Lack of Liquidity
Once you buy a Tax Lien, you can’t ask for your cashback immediately.
The Homeowner must pay off the tax lien, and you cannot predict how long that will take.
Basically, your money is tied up in a loan that has no expiry or redemption date.
You could offer the Tax Lien Certificate for sale, but you may not find a buyer.
If you urgently need to use your principal sum, you may have to sacrifice your interest.
Research and having local knowledge are important.
You must make sure that you are not buying a Tax Lien on a property that no one wants, where the taxes may never get paid.
Once the current Homeowner abandons the property or dies, the Tax Lien Certificates becomes worthless.
Buyers need to do their due diligence on the properties.
Frequently, the property’s current value would be worth less than the amount of the lien as it is dilapidated or even burned down.
You must research the home and drive to the address to ensure that it has enough value to attract a buyer who can redeem your tax certificates.
You need to be aware of the cost of repairs, jointly with any other unknowns you handle once you assume ownership of the property.
Eviction Current Occupants
The other unpleasant tasks include taking possession of an “occupied” property and evicting the current occupants.
Some neighbourhoods can be rough.
Subsequently, you may not be able to enter and take possession of the property without the costly expense of hiring a property manager or an attorney.
What happens to the property owner when I own the Property Tax Lien?
The property owner has a redemption period (between one to three years) to pay the taxes plus interest.
At the end of the redemption period, if the property owner cannot pay the Tax Lien (plus interest) – the lienholder has the legal right to start foreclosure proceedings to take ownership of the property.
Why Do property owners forfeit paying their Tax Lien?
In counties or municipalities where property values are low, many owners don’t see a reason to continue paying taxes on a vacant or old decrepit house.
Tax foreclosure happens as many abandoned properties fall into the County’s hands.
What is Foreclosure?
In simple terms, Foreclosure occurs when a Lender (Bank) seeks to seize your property as collateral for failure to pay your mortgage on time.
The foreclosure process allows a lender to recover the amount owed on a defaulted loan.
The Lender takes ownership of the property and sells it to recover the loan amount.
Typically, there are six phases in the foreclosure process, and the exact steps vary from state to state.
Before the Lender forecloses a home, they give the Homeowners 30 days to fulfil their mortgage obligations.
Most Lenders would prefer to renegotiate terms rather than proceed with the legal process of foreclosing on a property.
How do I start Foreclosure Proceedings?
Foreclosure is the legal process that allows Lenders or Banks to recover the balance owed on a defaulted loan by taking ownership of the mortgaged property and selling it.
What is the Step By Step Foreclosure Process?
There are 6 Phases to the Foreclosure Action
Phase 1: Payment Default
Phase 2: Notice of Default
Phase 3: Notice of Trustee’s Sale
Phase 4: Trustee’s Sale
Phase 5: Real Estate Owned (REO)
Phase 6: Eviction
In the United States, tax foreclosure is a common occurrence. Over 330,000 properties undergo some stage either by default, auction, or bank-owned foreclosures with some variation from state to state.
Guide To Property Tax Lien Key Takeaway: Buyer Beware
While many investors get excited when they first learn about Guide to Property Tax Lien, it takes a lot of due diligence to win a Tax Auction.
Many investors are tempted by high-interest yields and rate of returns by putting their money in local Tax Lien Sales.
In the late 1990s and early 2000s, big institutional investors, including banks, hedge funds, and pension funds, got involved in auctions around the country.
The bigger investors helped bid down interest rates, so the smaller investors rarely make significant money on the liens.
For the work involved, by putting your money in as a loan hoping to gain higher interest and attractive liens – it’s difficult for an individual to compete against bigger investors.
Individual investors may encounter difficulty gaining title deeds to real property in the event of foreclosure.
Some properties may have other liens on them – this something the average investor doesn’t know.
Tax Lien investing involves so much due diligence that sometimes it is not worth it to go in alone with no backup plan.
A better option would be to invest in a Tax Deed which is a better investment per se.
Is Tax Deed Sale a good investment?
Buying Tax Deeds is may not a typical starting point for new investors.
However, this niche of real estate investing payoff as a great resource for buying properties at a steep discount.
As an investment strategy, buying Tax Deeds can be lucrative if you have the ready cash for your investment/
You buy a Tax Deed property at a Tax Auction, and it starts at a minimum bid.
With the “gaining when you buy” for the purchase price, you can use the huge discounts to fix and flip houses, own rentals, or want to earn a return on your money from the Sale of Property.
You might want to carefully consider the difference between a Tax Deed versus Tax Lien Certificate Sale before you start your investment journey.