Tax liens are an investment that is often overlooked by investors. With the increasing volatility of the stock market, combined with historically low-interest rates, investors may seek this type of alternative investment to provide a decent rate of return. Many knowledgeable investors can receive excellent rates of return using tax lien sales.
Property liens do carry substantial amounts of risk, which means that novice or inexperienced buyers need to understand the rules and regulations that accompany this type of asset.
What is a Tax Lien Sale?
A tax lien sale may be conducted by a local municipality or state government for the purposes of collecting outstanding property taxes on a piece of property. This typically applies to residential homes that have unpaid property taxes on them. If the property owner is unable to make up for the taxes, the government will then place a lien on the property. The lien acts as a legal claim against the property for the unpaid amount that’s still owed.
This lien may then be sold to the public through an auction. When a lien is issued, a tax lien certificate is created by the local municipality or state government, which reflects the amount due on the property, in addition to any interest accumulated or penalties due. These certificates can be auctioned off to the highest bidding investor. Investors can purchase some tax liens for as little as a few hundred dollars.
In some cases, the lien may allow an investor to collect unpaid taxes or penalties associated with the property. In other cases, the tax lien may allow the investor to foreclose on the home and obtain title to the property. This may happen either through a direct acquisition by the investor (using a quitclaim deed) or through a tax deed sale by the government, with the tax lien holder having rights to first bids.
Who Can Participate in a Tax Lien Sale?
Tax lien sales are usually conducted by the government and are open to the public through auctions. Investors are free to place their bid to purchase a tax lien. The term “investors” generally refers to persons or institutions interested in purchasing the foreclosed property to be resold for a profit. These may include banks, real estate companies, and sometimes mortgage companies. Individuals can also participate in tax lien sales.
How Do I Invest in Tax Liens?
Investors can purchase property tax liens in the same way that properties can be bought or sold at an auction. Auctions are held physically, although some auctions are now held online. As an investor, you can bid on the interest rate on the lien or bid on a premium.
If you plan to buy a property with a tax lien, be aware of the cost of repairs and other hidden costs you may need to pay if you take ownership of a property. If you have to deal with difficult tasks, such as evicting a current occupant, consider contacting the property manager or hiring an attorney.
What are the Risks of Investing in Property Tax Liens?
Property tax liens can yield substantial interest rates, but investors need to do their homework before entering into an investment. Tax liens may be risky for novice investors or those without experience in real estate.
The following are common risks associated with tax lien sales:
- Tax liens can expire: Tax liens do not last forever. Many tax liens have an expiration date at the end of a redemption period. Once the lien expires, the holder of the lien is unable to collect any unpaid balance. If the property goes into foreclosure, the lienholder may receive other liens on the property, which can make it difficult to obtain the title.
- Tax liens are not typically passive investments: It is important for lien owners to know their responsibilities after receiving their certificates. Usually, lien owners must notify the property owner in writing after their purchase of the lien within a certain amount of time. Lien owners are also typically required to send a second letter notification to property owners near the end of the redemption period if full payment has not been made by that time.
- Properties with liens on them are often neglected: The actual property upon which a lien has been placed may be dilapidated. Properties with any kind of environmental damage, such as damage from chemicals or hazardous materials, may not be a desirable investment, regardless of promised interest rates.
- Competition: Commercial institutions like banks and hedge funds have become increasingly invested in property liens. These institutions are typically able to outbid the competition. Individual investors may have a harder time finding profitable liens.
Where Can I Find Tax Liens for Sale?
Your county tax collector’s office may advertise tax liens on their website. However, you can call your county’s tax collector directly to find out their process for buying tax liens and be provided with instructions on how to register as a bidder.
On the county website, information about the properties up for auction, when the properties are available for auction, and what the minimum bids are. This information can help you to identify if there are any properties that you are interested in based on location, minimum bid, property type, and property size.
Are There Any Alternatives to Foreclosure?
As mentioned, a tax lien and a tax lien sale can often result in a foreclosure on the home in question. For the property owner, a tax lien foreclosure may be difficult to avoid or prevent. This is because, unlike a foreclosure by a mortgage company or bank, the tax lien foreclosure is typically overseen through the efforts of the state or through a local court system. As such, judicial decisions are rendered during the tax lien proceedings, which may be difficult to overturn.
However, there may be various foreclosure alternatives available to the property owner. For instance, in most tax lien sales, there is a “redemption period” allotted to the homeowner. This is a set time period in which the homeowner can pay back the taxes owed if possible. During the redemption period, any interested investors can’t foreclose on the property. Other alternatives may be available, depending on the real estate and tax laws in the area.
Do I Need a Lawyer for Help Assisting With a Tax Lien Sale?
Tax lien sales can often be very complicated and can involve many different overlapping legal concepts. You may need to hire a real estate lawyer if you need any type of assistance with a tax lien sale. Your attorney will be able to represent your interests during court hearings and can inform you of your legal rights. Also, in the event of a legal conflict or dispute, your lawyer can assist you with a lawsuit if necessary.
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