How the property lien may
make you money?
How the property lien can be your real estate investing vehicle? This is facilitated by tax property lien issued by local state governments to get tax money when owners do not pay taxes on time. The property lien can be a tax lien or a tax deed.
What makes this property lien investing universe more complicated is that the rules, redemption time and percentages are different for every state.
What is the difference between tax lien and tax deed investing?
Counties and municipalities depend on money from property taxes to meet their budget. When property owners don’t pay their taxes, the county or municipality will sell the taxes to an investor. The investor is not buying the property but paying the taxes on the property and putting a lien on the property. Why would an investor want to do this? Two reasons; first they are getting a good interest rate on their money and secondly a tax lien comes before most other liens, so the investor is likely to get paid.
In some states, when a property owner does not pay their taxes, instead of selling a lien on the property, the county or municipality will sell the property at a tax deed sale. In states that sell tax deeds you are actually buying the property. In some states the property is sold for back taxes and penalties, in other states the property is sold for a certain percentage of assessed value and in other states the property is sold at market value. A tax deed can be a good investment, especially in states that sell the property for the back taxes because the investor has a chance to buy real estate at under market value.
Some states sell redeemable tax deeds, in which the county does sell the deed to the property at the tax sale. But there is a redemption period in which the delinquent taxpayer can come back and redeem the property. (In Michigan the redemption period is three years.)
In order to redeem the property the delinquent taxpayer must pay the investor either a penalty or interest on their investment. Some redeemable deed states have a penalty and some have an interest rate. In some states the penalty or interest can be quite high, making it very attractive to the investor.
The truth about tax lien investing
Because people have been told that tax liens are a great investment and that they can make such good interest rates, they assume that interest is paid out by the county or municipality on a regular basis. The truth about tax lien investing is that you do not get paid a cent until the delinquent property owner decides to redeem the lien. If they do not pay during the redemption period (which is different for every state) then you can foreclose on the property in order to get paid on your lien.
Another misunderstanding about tax lien investing is that after the redemption period is over, the lien holder will automatically get the deed to the property. The truth about foreclosing on a tax lien is that in most states you need a lawyer in order to foreclose and get the deed to the property, and in other states (Florida for example) the property will be sold in a tax deed sale, and will be auctioned to the highest bidder, so your chances of coming away with the property for what you have invested in it are not good.
Some people have the misunderstanding that tax lien investing is a good way to buy properties for pennies on the dollar. This does not happen very often. Especially in states where the value of real estate is very high, the tax lien will almost always redeem sometime during the foreclosure process.
Tax lien investing
is a way to get a high return on your money. If you are interested in buying property for under market value, you are better of with tax deeds or redeemable tax deeds. See
Due diligence for Property Tax Lien Sale
Page created with help from Joanne Musa a Tax Lien Investing Coach and Consultant. She is the president of Tax Lien Consulting LLC, a consulting firm for tax lien investors.
She is the author of the e-books: Tax Lien Investing Secrets and Tax Lien Lady's State Guide to Tax Lien and Tax Deed Investing, available at http://www.taxlienconsulting.com
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