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Tax lien investing explained   Tax lien pic


Download an article written by tax lawyer on PDF document Tax Lien Investing: Everything You Wanted To Know About Tax Lien Purchases
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What is a tax lien?
In many USA States, if a property owner fails to pay annual property taxes, the county or municipality will issue a tax lien on that property. This lien obliges the property owner to pay the outstanding taxes plus penalty fees plus a punitive high rate of interest on the debt. The property owner must pay off this debt and interest to have the lien removed. In other States the local government will rather sell the property immediately with a tax deed sale. The investments we promote only invest in tax lien sales.

Investing in tax liens:
If the lien and interest continue being unpaid for a few months, the local government will publicly auction the lien to obtain the outstanding debt. In effect, the buyer of the lien is paying off the property owner's taxes and fees to the local government.
Superior Returns:
The owner of the lien, known as the lienee, accrues a high punitive rate of interest on the amount of the lien. If the property owner, known as the lienor, does not pay this interest and the outstanding lien, then the lienee is allowed to foreclose on the property after a redemption period, generally 6 - 24 months.

Potential for Windfall Profits:
There are only two outcomes for a lienee:
  1. Collect high interest until lien is paid off, or
  2. Foreclose on the property and receive clear title to that property. The property value is usually 5 - 100 x the value of the lien. In most cases the property owner or other creditor, such as mortgage provider, will pay the interest and outstanding lien.
Low risk:
Almost all tax liens and interest are fully redeemed by the property or mortgage provider. The ultimate incentive is the threat of foreclosure over a comparatively small debt. If the lien debt remains unpaid, the lien holder can foreclose on the property, allowing the lien holder to obtain title to the property at 80% to 99% below market value.

Investments are secured:
Real estate tax liens are placed against the title to real property by an entity of the government for unpaid taxes. The property owner cannot sell their property until the tax lien is removed by being paid in full. All other claims, including mortgage loans, are subordinate to the tax lien.

Tax lien purchases in a weak property environment:
In falling real-estate markets tax defaults skyrocket. This affords more tax liens, increasing the opportunities to invest in high-yielding tax lien certificates. Approximately 40% are borrowers escrowed by the mortgage company, who will invariably pay off the lien.

How is interest and outstanding lien debt collected from property owner?
The tax lien purchaser who bids the lowest wins the bid. After the tax sale the tax lien purchasers are presented with tax lien certificates by the county clerk. These certificates contain information like penalty rate, face amount, current assessee (owner), and property address. All redemptions by delinquent tax payers must be made to the county clerk. Once the county clerk receives the necessary amount to redeem, they will:
  1. Cancel the certificate lifting the tax lien against the property
  2. Forward all the proceeds from the lien to the lien holder (investor)
If the full debt remains unpaid then the County clerk will authorize the lien holder to proceed with foreclosure. What this means is the investor either receives full payment with interest or receives no payment but can foreclose on property. The lien holder will not receive any partial repayments.

What are the different types of tax lien bidding processes?

Rate: This is where the bidder prepared to accept the lowest rate, wins the right to buy the lien

Penalty: The successful bidder at a tax certificate sale is the person willing to accept the certificate with the lowest PENALTY percentage. For instance in Illinois, the maximum penalty on none farm land is 18%. This is a PENALTY - NOT INTEREST. The penalty applies each six month period or fraction thereof prior to redemption making the annualized yield on a bid of 18% a minimum of 36%. If homeowner does not pay ongoing tax during the redemption period, the lien holder is allowed to buy new liens on the outstanding debt at the FULL penalty rate.

Ownership: In some States, bidding is on a percentage of ownership basis in case of foreclosure. What this means is that the interest rate remains flat, but in the event of foreclosure, the investor and the property owner become co-owners of the property. The initial bid is with the investor starts at 100% and reduces until the lien is sold. This method is produces high lien interest rates. Iowa uses this method, which means that you are guaranteed a 24% rate. The disadvantage with this method is the potentially expensive legal hassle to take possession of the property if you co-own it with the delinquent owner.

Round Robin: Here the bidding is on a round robin basis. The auctioneer offers the lien around the room until someone buys it. They are always at the maximum rate allowed by statute. In round robin states, you get a nice guaranteed rate of return on your tax lien certificate, and don't have to mess with the co-ownership issue. However, in round robin states, it is much more difficult to actually get the liens that meet your needs. If you decline during your turn, then you have to wait for luck of the draw to see if you get the lien that you want. If you are a big money investor, then the risk is low since you can buy many more liens. As a smaller investor who can only afford a couple of the liens on the book, this restriction can be very limiting.
Why does the State of Georgia have tax deeds that have characteristics of a tax lien?

Lien investors act as debt holders and seek favorable interest rates, while deed investors make their money on the equity split between the deed price and the property value. Most states offer either liens or deeds, but a few states, such as Georgia, hold attractions for each type of investor.

Investors in Georgia tax deeds have the security of knowing they will either receive an annual return on investment of at least 20 percent or receive the entire property for what is likely significantly less than market value.

Georgia allows delinquent property owners a one-year right of redemption period during which they can redeem the property by paying off their outstanding debt. If this occurs, the tax deed operates much like a tax lien, with the exception that the deed holder must issue a quit claim deed to transfer title back to the property owner.

Georgia’s deed holders are entitled to repayment along with a 20 percent penalty regardless of when during the year redemption takes place. If redemption occurs in the first month, this offers the possibility of a 240 percent annual return.

If redemption does not occur, the deed holder can foreclose on the property and become the owner.




Benefits of Investing in Tax Liens: Comparison with other property investments:

Rentals Liens
Principle Volatile Constant
Income
  • Variable : market demand
  • Usually single digit rate
  • Not compoundable
  • Fixed : rate mandated by Government
  • Usually double digit rate
  • Compounded
Expenses Insurance, maintenance None
Risks Unoccupied
Lengthy eviction
Low rentals
None


Possible problems with tax lien investments




Video : An Introduction to Tax Lien Investing:





Video : Introduction to Tax Lien Investing: