Property tax liens are touted as a lucrative investment which can enable the average person to create wealth. Skeptical consumers are leery of those promises to get something for nothing. On television there are info-commercials telling people you can make a fortune by purchasing tax liens, where the investor can literally pick up an improved real estate for a few hundred dollars. Making money with tax liens isn’t a con, but it isn’t as rosy as some promoters claim. Yet, it can be as lucrative.
The first question: what is a tax lien? State and local governments need tax money to operate. Much of this money comes in the way of property tax. But, when property owners fail or delay in paying their taxes, there are still bills to pay. Tax liens are a way to keep the government running.
If a property owner fails to pay the tax bill on time, the government offers a tax lien on the property to investors. An investor pays the past due taxes. The government promises to repay the taxes, plus interest. Interest rates vary from state to state, yet they are often considered higher than rates on other investments, and can exceed 16%. It isn’t the government who pays back the loan and the interest. It is the property owner, when the bill is finally repaid.
Should two or more investors want to purchase the same tax lien, they can bid against each other, offering to accept less than the interest rate. If an investor agrees to take 14% instead of 16% interest, the government then gets to keep the additional 2%.
Info commercials focus on the investor gaining ownership of the property. Generally that is not the case. Property owners will normally pay the tax, and if the property is mortgaged, the lender will usually pay the tax. But, investors are happy earning high interest on their money. If the investor is savvy with the tax liens purchased, it is a fairly safe investment with high returns.
If the property tax is not paid off within the time frame specified by the state, then there is a process investors go through to obtain ownership of the property. And, for some investors, this can be a lucrative windfall.
But, what are the pitfalls? There are circumstances when the property is not worth owning. While most debts on the real estate will not stay with the property, this is not the case if there is an IRS lien. If the property has environmental issues, the new owner will have a new burden.
I remember one story we were told in real estate school. One tax lien investor decided to check out the property he’d obtained through a tax lien. When he arrived at the site, it was a vacant piece of property. But, his tax lien was not on the land. There was supposed to be a condo complex on the property, and he discovered his tax lien was for one of the units, that hadn’t yet been built. He, in essence, owned air space.
When first wading into the tax lien market it is advisable to stick with developed property, as opposed to vacant land. If you purchase a tax lien for useless swampland, it is a good bet the owner is letting the property go, and it isn’t land you want.
Commercial property is also something the novice investor may want to avoid, until gaining more experience. With commercial property comes the increased potential for environmental and IRS issues.
Procedures for tax liens, and interest rates paid, vary from state to state. County websites often post information about their tax lien programs, along with available liens. If you are a beginner, start close to home so you can easily check out the properties.
Real estate schools and colleges sometime offer courses on tax liens. Seminars, which encourage investors to purchase their program, are frequently held around the country. Before attending a seminar, and purchasing their program, do your due diligence, and investigate the company and feedback on the program they are offering.
Tax liens can be lucrative, and I know people who have made their fortunes this way. Yet, it requires a well informed investor, who does his or her homework.