Many people are intrigued by the money-saving power of tax lien properties. If you’ve ever looked into this investment strategy, you know it can be a little complicated, so here are some tips to help you get started.
Understand What You’re Getting Into First
Tax lien investing is basically an investment where you buy into someone else’s tax debt, attempt to collect on that debt and, if you can, you earn a profit based on the amount of time it takes to collect the past-due taxes.
When property owners fail to pay their property taxes, they can have their homes taken away from them by the government. To do this, the local government initiates the lien and levy process.
First, it starts with a tax lien. The lien is a legal claim against the property owner’s property for the payment of property tax. The next step is to levy the property – to seize it. But, before this happens, the property owner has a chance to pay back taxes and clear the lien.
This is where the tax lien investor comes in. Municipalities don’t want to be in the business of selling property. They just want the tax money. So, they auction off the property to private investors so that they can make a quick sale and let investors attempt to collect the tax debt. Governments either sell the lien itself or they auction off rights to the deed.
The lien is satisfied by you, but the homeowner still has a legal obligation to pay. And, if they don’t, they can lose the home. You would become the owner of the property if that happens.
Before you go to an auction or attempt to buy a property, you should familiarize yourself with the process by getting good tax deed investor advice.
Getting Into Auctions
Auctions are held all the time, but you must know where they are. You can either visit your state’s website, or websites like netronline.com, to find properties. However, many of the online auctions are dominated by banks and large financial firms that want an easy way to make money from tax liens and deeds.
Most of the best sales are still made in-person at auctions that are not advertised online.
Profiting From The Lien
When you bid on a lien, there are two things that can happen: Investors can bid up the premium on the lien or they can bid down the interest rate on the lien.
Either way results in a loss of potential profit, and this is what makes the auction profitable for the municipality while encouraging competition among investors.
Large institutional buyers don’t mind bidding down the interest rate, or bidding up the premium, because they’ll make money on volume sales. For the individual/retail investor, this makes most auctions tough because you can’t compete with their buying power.
The smaller auctions are generally a safe bet, but you still need to know what you’re doing. Never place a bid on a property you don’t understand.
Like any real estate transaction, you must know the location, value of the property, and the potential for the buyer to repay the debt. Because these property owners are already behind on their tax payments, assume that there will be some losses on your investments. Not everyone repays.
But, at the same time, some people do want their properties back and are willing to repay you. The repayment schedule usually lasts between 6 months and 3 years, so this is the time frame you should expect for your investment to pay off.
Disadvantages To be Aware Of
Like any investment, there are risks. While tax liens and deed investments can yield incredible returns in excess of 20 percent annually, they can also leave you holding properties that are worthless (or near worthless).
As an investor, you must be familiar with the property that you’re investing in. Some properties, like those in the heart of a slum neighborhood, may be bad investments. You also need to understand your responsibilities, or you could lose your investment.
For example, when you by a lien, you must notify the property owner within 30 days that you have purchased their tax debt and that they now owe you the money. You must send a second letter of notification near the end of the redemption period if the payment has not been made in full by that time.
Ted Thomas is a Florida based educator, publisher and author of more than 30 books. He is now an in demand international speaker having spoken with Tony Robbins in engagements on investing throughout the world in Singapore, England, Australia and more.