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Investing in US Property Tax Liens

By: Elite Legacy Education, May 30, 2017

One man’s loss is another man’s gain. When it comes to investing in property tax liens, this statement is both true and false. It’s true in the sense that tax liens are the result of someone’s inability or decision to not pay taxes. However, it’s also misleading because tax lien investing can actually create a win-win situation for you and the property owner. So don’t let this tarnish the image of tax lien investing just yet – stick with us.

 

What is a tax lien?

 

As briefly mentioned, tax liens are the result of someone not paying their taxes on time, usually for an extended period. With that said, a tax lien is imposed on a property to secure such tax payments. These can result from someone being late on property taxes or even their own personal income taxes. It’s essentially a claim against the property for the amount of outstanding taxes owed by the owner.

 

Why are tax liens relevant in the investment world?

 

Well, when a tax lien is issued against a property, that property cannot be refinanced or resold until it is paid for and removed. This means that the property essentially becomes dormant until someone can pay the lien. But if you understand the process of how tax liens are issued, then you may recognize an investment opportunity. What happens is this. The issuing of a tax lien means a certificate for the amount owed is created. Since the certificate represents a specific dollar value, it can be auctioned off to those willing to purchase it.

 

How do you profit from buying property tax liens?

 

So let’s assume that we’ve won an auction and have been awarded the rights to a tax lien certificate.

 

  1. Generally, you will be required to immediately pay back its value to the entity that issued it. The issuer is usually a municipal body.
  2. After you’ve made this payment, you now own the rights to the lien and must notify the property owner.
  3. Next, you must structure a deal where the property owner will work to repay you. This includes the principal of the loan plus interest on top. Interest rates will vary across states, so you should consult local regulations before doing this.
  4. At this point, you will be collecting loan payments from the property owner, unless for some reason they can’t make them.
  5. If the owner paid the loan successfully, then the deal is over. However, if they have not fully paid the loan by the end of the agreement, you as the investor have the option to foreclose the home. Now, it turns into a foreclosure investing deal (link to article).

 

To answer the question about how one profits from tax lien investing, consider this. In the first case, you will have collected the full principal amount of the loan plus a comfortable interest rate. In the latter case, you now have a foreclosed property, which presents an opportunity to earn a return on your initial investment. However, the latter scenario is thought to be rare so you should expect to earn your money through interest payments.

 

Some words of caution.

 

Tax lien investing is known to get very complicated and is not recommended for novice investors. There are so many variables at play here.

 

  1. Owner’s willingness and ability to repay a loan. There are many factors that affect this condition. You should consider things like the state of the property, the neighborhood, the income of the owner and anything else that could affect the repayment of the lien.
  2. Knowing the legal procedures. For example, you must immediately notify the property owner once you take control of the lien. It’s important that you follow any rules and regulations.
  3. Expiration dates. All tax liens come with expiration dates so you must take this into account when structuring your deal. It would be unfortunate if the lien expired right in the middle of your deal.

 

The bottom line is that you should always do your research to understand all of the opportunities out there. This includes understanding the inherent risks that come with each investing option. Tax liens present a unique real estate investment opportunity, but should not be taken lightly.

 

Explore an investing area that allows you to create "win-win" deals, making money for yourself while rescuing homeowners in distress. Our Rich Dad Education speakers will introduce you to methods to locate property tax liens, a variety of exit strategies, and ways to fund your tax lien investments.

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