The increasing volatility of the stock market combined with
historically low interest rates has caused many investors to seek
alternative avenues that can provide a decent rate of return. One
investment niche that is often overlooked is property
tax liens.
This unique opportunity can provide knowledgeable investors with
excellent rates of return in some cases, but they can also carry
substantial risk, and novice buyers need to understand the rules and
potential pitfalls that come with this market.
What Is a Tax Lien?
When a landowner fails to pay the taxes on his or her property, then the
city or county in which the property is located has the authority to
place a lien on the property. A lien is a legal claim against the
property for the unpaid amount that is owed; property that has a lien
attached to it cannot be sold or refinanced until the taxes are paid and
the lien is removed. Similar to how actual
properties can be bought/sold at auctions, these property tax liens can be as well.
How Can I Invest in Them?
When a lien is issued, a
tax lien certificate
is created by the municipality that reflects the amount that is owed on
the property plus any interest or penalties that are due. These
certificates are then auctioned off and subsequently issued to the
highest bidding investor. Tax liens can be purchased for as little as a
few hundred dollars for very small properties, but the majority of them
cost much more. The auctions may be held in a physical setting or
online, and investors may either bid down on the interest rate on the
lien or bid up a premium that they will pay for it. The investor who is
willing to accept the lowest rate of interest or pay the highest premium
will be awarded the lien.
Those who are interested in
purchasing a tax lien can start by deciding what type of property they
would like to hold a lien on, such as residential or commercial, or
undeveloped land versus property with improvements. They can then
contact their city or county treasurer to find out when, where and how
the next auction will be held. The treasurer’s office can tell the
investor where to get a list of properties that are scheduled to be
auctioned as well as a list of rules for how the sale will be conducted.
These rules will outline any preregistration requirements, accepted
methods of payment and other pertinent details.
Every piece of
real estate in a given county that has a tax lien is assigned a number
within its respective parcel, and buyers can look for these liens by
number in order to obtain information about them from the county (this
can often be done online). For each number, the county has the property
address, the name of the owner,
the assessed value of the property, the legal description and a breakdown of the condition of the property and any structures that are located on the premises.
Reaping the Profit from the Lien
Investors who
purchase property tax liens are typically required to immediately pay
the amount of the lien in full back to the issuing municipality. The
investor must then notify the property owner that they are now the lien
holder. The property owner must repay the investor the entire amount of
the lien plus interest, which can range anywhere from 5 to 36% (the rate
will vary from one state to another). If the investor paid a
premium for the lien, this may be added in to the amount that is repaid in some instances.
The repayment schedule usually lasts anywhere from six months to three
years, and in most cases the owner is able to pay the lien in full. If
the owner cannot pay the lien by the deadline, then the investor has the
authority to foreclose on the property just as the municipality would
have (although this is a fairly rare occurrence.)
Disadvantages of Investing in Property Tax Liens
Although property tax liens can yield substantial rates of interest,
investors need to do their homework before wading into this arena. Tax
liens are generally inappropriate for novice investors or those with
little experience with or knowledge of real estate.
Investors
also need to be familiar with the actual property upon which the lien
has been placed to ensure that they can collect the money from the
owner. A dilapidated property that is located in the heart of a slum
neighborhood is probably not a good buy, regardless of the interest rate
that is promised, because the property owner may be completely unable
or unwilling to pay the tax that is owed. Properties that have suffered
any kind of environmental damage, such as from chemicals or hazardous
materials that were deposited there, are also generally undesirable.
Lien owners also need to know what their responsibilities are after they
receive their certificates. They must usually notify the property owner
in writing of their purchase within a stated amount of time and then
send a second letter of notification to them near the end of the
redemption period if payment has not been made in full by that time.
Tax liens are also not everlasting instruments; many of them have an
expiration date after a certain period of time has elapsed after the end
of the redemption period. Once the lien expires, the lienholder becomes
unable to collect any unpaid balance that was previously owed. And
if the property goes into foreclosure, then the lienholder may discover that there are other liens on the property, which can make it impossible to obtain the title.
Many commercial institutions such as banks and
hedge funds
are also getting into the act and have been able to outbid the
competition and drive down yields. This has made it harder for
individual investors to find profitable liens and some have given up as a
result.
The Bottom Line
Property tax liens can be a viable
investment alternative for experienced investors
that are familiar with the real estate market. Those who know what they
are doing and take the time to research the properties upon which they
buy liens can generate substantial profits over time, but the potential
risks that are involved render this arena inappropriate for
unsophisticated investors. For more information on property tax liens,
consult your real estate agent or financial advisor.
To find out more about Tax Liens go to:
http://bit.ly/14x4th9
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