A lien is a claim against something of value, for our purposes – real estate. A lien affects the owner’s ability to sell or transfer ownership of the real estate until the lien is satisfied. A common real estate lien is a mortgage. Real estate property taxes when unpaid become a lien on the property.
Note* property taxes are also called ad valorem taxes, which are county assessed taxes on real property.
All real estate is subject to property taxes. This includes improved or unimproved raw land. The tax rate charged by the county is based on a combination of property value and the county’s estimated budget for the year. That’s why the assessed value of the home is almost always different than the fair market value.
The county uses property taxes to fund government functions like the fire department, police department, road repair,, schools, teachers, etc. That’s the reason this investment exists, because property taxes are the primary source of income for the county government. If there were no collection of property taxes, the county government would cease to function.
Tax Lien Scenario
A property owner fails to pay their property taxes when due. Many property owners just pay their property taxes along with their mortgage; but sometimes the property owner doesn’t have a mortgage or maybe the owner passed away, so the property owner fails to pay those property taxes before the due date. Instead of raising taxes for those that actually pay taxes, the county places a tax lien on the property. The tax lien affects the ability of the owner to sell and transfer ownership to another party. After the tax lien is issued it gives the county the ability to collect the debt by selling tax lien certificates to the general public.
The county issues the tax lien certificate and then announces the sale of the certificate. Most counties no longer send out paper tax certificates. Rather the purchaser or investor in a tax lien certificate will receive an email confirmation of their purchase.
You can easily purchase tax liens by showing up at live sales or online. But most investors aren’t interested in the piece of paper, they are interested in what the certificate represents. Guaranteed interest on their investment!
Since the collection of property taxes is done by municipalities and is governed by the state, each state is free to set their own rules as to how they will sell and reward the buyer of each tax lien certificate, with a few federal laws that bind the states. But over all the states can do what they want. That’s why the reference material on the website is so important. Each state is different and requires specific understanding.
To the credit of the states, they are very similar in what they reward and how they function. The strategy is pretty consistent from state to state with only small differences. For example, different states will give higher percentage rates to the investor or longer redemption periods for the property owner. However, the actual process is different is every state. States are either deed, lien, redeemable deed or a combination of liens and deeds also know as hybrid states.
The county holds the tax sale and investors show up to buy the tax lien certificate. They want the interest that is promised by the government for that certificate. The auctioneer presents the certificate to the investors and those investors that are interested in the certificate bid on the certificate, and the winner walks home with the certificate.
When an investor purchases a tax lien certificate, it is similar to making a loan to the homeowner to pay their property tax bill. They don’t actually pay the taxes for the property owner, the investors simply purchased a certificate in the same amount that the property owner owes to the county. The investor doesn’t own the property; he or she only owns the certificate. However, the investor may have the right to take ownership after the redemption period ends if the property owner doesn’t pay his or her taxes.
Let’s also assume that this investment was made in Florida where the interest rate is 18 percent and redemption period is 2 years. When the investor buys the certificate the interest immediately begins to accrue. The investor starts making money on the investment right away. Unlike stocks or any other investment you don’t have to sit and watch and worry about whether values are rising or dropping and whether you’re making or losing money every day. With tax liens you know that every day you’re making money and you can calculate the money you’re making every day. It’s like clockwork.
So back to our example. To remove the tax lien from the property, the property owner has to pay his or her property taxes to the county. Not to the investor. In fact, the property owner doesn’t even know the investor exists. The property owner goes about his or her normal business and pays the property taxes owed, but is also required to pay a penalty for being late.
Then the county writes a check to the investor for the amount of the taxes plus the interest that was paid as a penalty by the property owner. The property owner had to pay that same 18 percent that the investor just earned and the county passes that money straight through to the investor.
But what if the property owner never pays the property tax amount?
Maybe the property owner dies, moves or just remains in the property. Just understand they cannot sell the property without payoff the liens and the interest. For whatever reason the property owner doesn’t pay during the two-year redemption period. At that point the tax lien certificate that the investor bought gives the investor the right to take ownership of the property through a process similar to a foreclosure. When that legal process is completed the property could be the investors.
Notice I say “could be” because this process is different in almost every state. In Florida the foreclosure process could take almost a year, ending in a public auction where the investor could lose to the highest bidder. However, the investor will receive the amount they paid for the lien(s) plus the fees and interest. So as long as the investor bought a lien on a property that has some market value, they cannot lose! This is the beauty of tax lien investing.
So with tax liens you either get back your investment plus a high interest rate or you get the property.
It’s a Win/Win/Win. The county gets the money they need to operate. The property owner gets a redemption period to pay their taxes, and the investor gets a great return.
Hope this brief background on tax lien investing helps!
If you are looking to buy or sell tax deed properties without bidding at auctions go to The Deed XChange™
As always, here’s to your success!
Creator of The Deed XChange™