Tax lien investing is something that every serious investor in real estate should consider. But the last thing you must do is leap into it without considering all that's involved.
What are tax liens?
Most states of the USA have a system for collecting unpaid property taxes and enabling reliable payers to be deposited back on the tax roll. These states use either a "tax deed" system or a "tax lien" system, depending on what rights are sold to the purchaser of the property. Under a tax deed system, county Governments will sell full ownership and possession rights to the investor. In tax lien states, it is only the right to the tax lien or tax claim on the property that is sold.
The tax lien is an encumbrance or enforcement right. It provides the investor with the right to receive interest penalty charges if the lien is paid off by the delinquent owner, or the right to foreclose and take title to the property if the lien is not paid.
So tax liens are a highly attractive investment opportunity. These are just some of the many benefits:
· The tax lien is a high priority lien which takes precedence over judgment liens, mortgage liens, trust deeds etc.
· There is the right to collect interest or foreclose. If the lien is redeemed by the delinquent property owner, you can collect a double-digit return. If not, you can foreclose and obtain full ownership rights.
· It is the responsibility of the county to chase up payment – it is not your problem.
· The tax lien is usually for a small fraction of the property's market value, so the investment is highly secured.
· The investor is not subject to land owner liability. This is clearly an advantage, as there are an increasing number of laws against property owners.
· Interest rates are usually 16-24 percent, according to state law.
· The investment is low risk and low maintenance.
So the temptation is to leap blindly into this seemingly very attractive type of investing. But those who do not take care can get their fingers burned. These are aspects you should attend to:
· Assessing the property. Since you are purchasing the lien, not the property itself, it is tempting to go ahead without bothering to view the property. However, the security and value of the lien are based on the actual property. So you do need to see what sort of property it is.
· Market value of the property. There are all sorts of factors that may affect the value of the property and hence the value of the lien. These include zoning regulations, location, city restrictions, flood plain paths etc. Researching these factors is essential.
· Although property tax liens have a high priority, in some states federal and state tax liens share equal priority. Sometimes people who have failed to research survival liens and encumbrances have received a nasty shock when they find their lien is not number one. This shock can easily be avoided with some simple research.
· One risk factor can be created by the delinquent taxpayer becoming bankrupt after the purchase of a lien. The tax lien holder is usually given high priority in this situation. However there could have been a problem in the case of a Chapter 7 bankruptcy where payment of the tax lien has to wait until the expenses of administration are paid.
· If a lien is administrated by the FDIC (Federal Deposit Insurance Corporation) there could be serious delays in the foreclosure process. It is essential to check whether this is so before completing the purchase.
The good news is that most of these risks can be avoided by doing reasonable research before investing. This makes tax liens one of the safest and most profitable forms of investment. And if you as the investor do fall into any of these traps after reading this, you only have yourself to blame!