What is a Tax Lien?
When a property owner fails to pay local taxes, the state in which the property is situated has the authority to place a lien on the property. The legal claim against the property for the unpaid amount that is owed to the county or state is called a lien. Many state issue tax lien certificate investment documents once a lien is placed on a property. A third party can buy the tax lien certificate at auction. This earns the taxing authorities the money they need to fulfill their budget commitments. A tax lien property cannot be refinanced or sold until the taxes are paid, and the lien is removed.Before investing in a tax lien property, it is important to understand a few things.
The interest rates of tax lien property vary across different states depending on the statutes that govern the individual state. Determine what interest rate you will be paid on the tax lien property you invest in. different counties use a different sales process, which has a major effect on the amount of interest you receive.
The Redemption Period
Different states have different redemption periods. The redemption period greatly affects the liquidity of your tax lien property investment. For example, if a state has a redemption period of six months, it means you can receive your investment plus interest after six months, or you can foreclose on the property and take ownership if the property owner fails to pay you by the sixth month. In some states, the redemption period can take up to four years. A shorter redemption period presents higher benefits compared to longer redemption periods.
The Live Auction
It is important to determine when the live auction will take place. Investing in tax lien properties is all about knowing when and where the auction is taking place. This gives you time to make attendance plans. It also gives you the opportunity to reasonably determine a date range to begin seeking assignment purchases if the state offers them.
Determine the auction procedures of the state that you have chosen to invest in because the procedure used can affect your interest rate. State that uses a bid down the interest procedure greatly affects the rate interest you receive. On the other hand, if the state you chose uses a premium bidding method, it will affect the price you pay on the tax lien.
Determine whether the state you want to invest in allows assignment purchasing. If they do, determine how the assignment purchases can be made, either online, offline or even both.
Acquiring Lists and Information
Determine where and how you can acquire the list of a tax lien to be sold at the auction. Some online tools offer the sales lists from all of the counties. You can also check with the county treasurer or tax collector’s office to see if they have available lists. You can also find a list in legal notices of your local newspaper a few weeks prior to the sale.
The State to Invest In
States that have the highest interest rates or penalties are the most suitable investment place. A state's interest rate and the penalty are greatly affected by their sale method, redemption period, reimbursable fees and their foreclosure process. find the best available opportunities including the state of your residence.
While investing in a tax lien property, make sure you take the current condition of the state you invest in into consideration. Investing in tax lien properties requires an exit strategy in order to monetize your investment. In areas where the market condition is strong, you may have to pay a bit more for the property compared to areas that have a soft market. Properties located in strong markets are easier to sell or rent.
Reaping the Profit From the Tax Lien Property Investment
A tax lien property investment requires you to pay the amount of the lien immediately in full to the issuing tax authorities. You must then notify the property owner that you are now the lien holder. The property owner will get a set time to repay you the entire amount of the lien plus interest.
If the property owner fails to pay you the full amount of the lien by the set deadline, you have the authority to foreclose on the property the same way tax authorities would have.
Lisa Patterson is a personal finance consultant. Practicing what she preaches, her personal portfolio covers over 30 properties. Her articles mainly focus on long-term investment strategies & risks.