Tax Lien Investing: 101 Guide
Undoubtedly, the stock market has always been able to attract the interests of investors from all around the world. However, factors like increasing volatility and low-interest rates offered by some stocks, are urging investors to seek different avenues to avail a promising rate of return. One such avenue is investing in property tax liens. Though tax lien investing is not very common, it is a decent investment option. If done prudently, it can provide an excellent rate of returns. On the flip side, there are some risks associated with property liens; hence newbies must comprehend the principles and potential risks associated with each asset before making any decision. In this post, we’ll walk you through various aspects of tax lien investing.
A Complete Guide on Tax Lien Investing
Every homeowner/property owner is liable to pay certain taxes to the government of the state where he resides. However, when an owner is not able to pay the taxes, then the authorities of the country where the property is located can place a lien on it.
A lien is basically a claim placed on the property for the outstanding amount that could not be paid by the owner. The homes which have liens placed on them can neither be refinanced nor sold till the time the taxes are fully paid. When a lien is attached to a property, the municipality creates a tax lien certificate, which contains details related to unpaid amounts along with outstanding interest or penalty. Once the certificate is created, it is auctioned at an auction center, and the bidding investor that produces the highest bid buys it.
Costing a few dollars to even huge sums of money, tax liens are different for different properties. For small estates, the tax liens can cost very little money, while most of the claims for commercial properties can cost you exorbitantly. You can purchase the tax liens of property from a municipality, and the owner of the claim can collect the unpaid payment or the interests due on the property.
Facts related to Tax Lien Investing
Mentioned below are some of the key points that you should consider while investing in tax liens.
- Sometimes liens give rise to bidding wars mostly when they are sold during auctions.
- At times, when you desire to foreclose, you might not be able to take possession of the property because of the existing liens related to them
- Even after you have the property, you might have to pay for several miscellaneous expenses like evicting the current occupants or carrying out repairs work.
- It is also a good idea to invest your money in lien funds related to property.
How can you invest in tax liens?
Property tax liens are traded in a similar manner in which houses are bought and sold during auctions. The venue of the sale can either be online or auction can take place in a physical setting. Investors have the option of bidding down on the rate of interest. They can also bid on the amount that has been lien marked. On the other hand, they can indulge themselves in bidding up a premium that they wish to pay.
The claim is given to the investor who accepts the lowest rates of interest or agrees to pay the highest rates of premium. Sometimes, the buyers are found to engage themselves in bidding wars on a particular property thereby allowing the rate of return to reduce, which is enjoyed by the winning investor.
For properties marked with tax liens, the foreclosure rate is only 4%. However, the buyers must build an understanding of repair costs or miscellaneous costs, if any. The buyers should be aware of these expenses because they might have to pay for it, once they own the property. Sometimes, buyers have to get themselves involved in tasks like evicting the existing occupants for which they might have to get in touch with the attorney or property manager.
Things to keep in mind for lien investing
If you are keen on investing or buying a tax lien, you have to first decide the type of house/property on which you would like to have a claim. Properties can be of various kinds, starting from commercial or residential properties; houses with scope for improvement, or which are still in poor condition.
Once you’ve chosen the type of property, you need to get in touch with the city treasurer to understand the time and the venue of the next auction. While communicating with the treasurer, it is essential to follow the process of auctioning. The treasurer will then inform you on how to find the list of houses that would be auctioned. He will also explain the rules of the sale during the auction. These rules will enable you to decipher if you should make any preregistration and it will also supply details related to the type of payment associated with it.
Once you’ve gathered the information, you should carry out detailed research on the chosen properties because there might be cases where the lien amount is more than the value of the property. Moreover, you should be proactive because the property might have other liens which can prevent you from exercising ownership on it.
How to make a profit from a tax lien?
If you are investing in purchasing tax lien property, then you will have to pay the lien amount in full to the municipality of the city immediately. The property owner must repay the investor, and he has to refund the entire lien money as well as the interest amount, which hovers around 5 to 26%. However, this percentage differs from one state to the other. Usually, it ranges from 10 to 12%.
The repayment schedule ranges from six months to three years. Mostly, the owner can pay back the entire money of lien. However, if the property owner fails to pay the lien amount within the deadline, the investor can exercise foreclosing rights on the property, which is precisely similar to the municipal authority.
What are some of the benefits of investing in a tax lien?
People who invest in tax lien can make good money from the lien interest, and this can be a very lucrative amount as the rates of returns are very high. Sometimes they can reach up to 18% and in some states, the rates can also go up to 36%.
Generally, a redemption period is given to the owner of the property. And within this given period, the owner has to pay the tax amount as well as the interest. Based on which state you reside, the redemption period varies between 1 to 3 years.
The Responsibilities of an investor
A tax lien is not as easy as purchasing the certificate and just relaxing and gathering money. If you own a tax lien certificate, you might have to take care of some responsibilities that differ from one place to another. In addition to this, it is crucial to remember the expiry date of a tax lien. Again, the expiration date is not the same for all tax liens. It varies from one place to another, depending on where you are placed. If you believe in holding a tax lien for a long time and in making foreclosure if you don’t receive the money, then you are hugely mistaken.
What are some of the risks associated with tax lien investing?
Tax lien investing is not a very simple process. The prime reason behind this is that auctions are very competitive. Furthermore, there are fluctuations in interest rates. Sometimes, the interest rates become very lower, and tax lien might not be profitable. There are some cases of tax lien when the lien amount is more than the property value.
Additionally, it is always a good idea to build an understanding of the condition of the house that you’ve decided to buy. Also, you should look at factors like: whether foreclosures are high in the place where the property is located, or whether the property is affected by environmental issues. If you come across situations when you find the property owners have declared bankruptcy, then you should consider foreclosing.
Closing note
In conclusion, it can be said that investing in property tax liens is a fantastic option of investment. If you are an investor and you are familiar with the concept of property tax lien investment, then it is a good idea to go ahead and invest. Tax lien investment might not be a suitable option for you if you are not ready to pay for the miscellaneous expenses.
It is always a good practice to research the properties before you decide to purchase liens. It is ideal for investors who have an excellent educational background and due diligence. So, if you are looking for some alternative investment options, then go ahead and invest in tax liens today!
If you wish to invest in tax lien and need consultation by experts, then you can seek a fiduciary investment advisor who can advise you on ways to avail the benefits from a tax return. At WeathFace, we serve as your advisor and help you in investing in tax lien such that you can leverage the utmost benefits.
