Tax Liens: Investments Collateralized by Real Property

November 04, 2019 Blog No Comment

Tax Liens and Tax Deeds can be a lucrative investment vehicle to work into your portfolio. However, this type of investing is not for someone looking to just hop-in and enjoy the ride. On Tuesday, October 8th, Preferred Trust Company hosted a seminar about the ins-and-outs of investing in Tax Liens and Deeds. For those of you who were unable to attend, here are some of the key takeaways from the seminar.

What is a Tax Lien?

When a property owner is unable or refuses to make their property or local income tax payments, the local government has jurisdiction to place a lien on the property. When the lien is placed, a tax certificate is created to reflect the outstanding amount, including interest and penalties. If the property owner does not work with the city to pay-off the debt, the city has the right to sell the Tax Lien. In order to quickly recoup what is owed, municipalities opened the door for private investors to purchase Tax Liens as an investment opportunity. Once purchased, the property owner has a “redemption period” to pay the investor the balance with accrued interest and cure the lien. Your investment is collateralized by the property. If the owner fails to repay the balance, the investor can foreclose on the property to resell on the open market.

What is a Tax Deed?

The same scenario applies; taxes, interest and penalties are due by a property owner. Instead of giving the owner a redemption period to pay the balance back, the municipality seizes the property to sell to private investors in the form of a Tax Deed. The investor immediately becomes owner of the property once purchased at auction.

Key Takeaways from the Seminar:

Research, research, and then some more research:

There could not be enough of an emphasis on doing your research before investing in your first Tax Lien or Tax Deed. Each state has their own set of codes, regulations, and process for how Tax Liens and Deeds are handled. There are currently 21 states that sell Tax Liens and 31 that sell Tax Deeds. There is some overlap because some states sell both, and these numbers are constantly changing as states decide which process works best for them. States set the bar for the maximum amount of interest that can be charged on a Tax Lien. Florida offers a max rate of 18% per month, in Alabama it’s 12%, while in Iowa it is as low as 2% on the outstanding balance. With Tax Deeds, some states do allow for a redemption period.

Just when you thought you were done doing research on states, you then need to narrow down which county and/or municipality you are going to invest in, and then do more research on their auction process. Tax Lien and Deed auctions can be held in-person or online and are usually held on an annual basis around the same time each year. There are preregistration requirements, rules for how the sale will be conducted, certain accepted methods of payment and different cut-off periods for making that payment. Expiration of redemption periods and the time frame that you need to file for foreclosure also vary based on municipality. If you fail to file in time, the lien is forfeited and you lose out on your entire investment.

If a Lien or Deed is not purchased at auction they can be purchased “over-the-counter” or on the secondary market.

Perform due diligence on the property:

Once you have decided on which state and county or municipality you would like to invest in, you can then take a look at the list of delinquent Liens and Deeds that will be up for auction. Performing due diligence on property(s) you are interested in is a crucial step in the process. This applies even to Tax Lien investments, it is not often that the balance goes unpaid, but on the small chance that it does happen you do NOT want to take the property back unprepared. Municipalities are selling the Liens or Deeds as is. Below is a list of a few factors you should consider before making your first bid.

  • Make sure you know what is on the property. It can be anything from a dirt lot to a home, or even a commercial property.
  • Investigate the Title of the property to see if there are other liens on the property. Subordinate liens are extinguished by the Tax Lien or Deed. Lateral liens can create complications by either making you responsible for clearing that additional debt or making it impossible to obtain title when the property goes through foreclosure; which could mean you lose your investment.
  • Determine what the potential value of the property is.

Establish how much money you are willing to allocate to this investment:

For Tax Liens, investors can bid down the lien’s interest rate or bid up a premium they are willing to pay for it. The lowest rate or highest premium is awarded the lien. Auctions can be competitive, driving interest rates down or premiums up to where they could no longer be profitable investments. For tax deeds, the same thing applies for premiums bid to purchase the property. You are not allowed on the property prior to the purchase of the Tax Deed or foreclosure of the Tax Lien, so you need to determine if you will be able to handle any unforeseen repairs or environmental damage in order to rebuild the value of the property. You can also choose to work with a local attorney or third-party Lien or Deed specialist to make sure you do not miss any necessary steps in the process, and this would incur additional costs as well.

Invest with your Self-Directed IRA:

Did you know that all of your earnings on Tax Lien or Tax Deed investments can be tax deferred? That’s right! Tax Liens and Tax Deeds fall under the alternative real estate investment umbrella, and you can work with a Self-Directed IRA custodian to facilitate these types of investments. If you are not already investing self-directed, you can reach out to Preferred Trust Company at 702.990.7892 or info@ptcemail.com.

If you are interested in learning more about Tax Lien and/or Tax Deed investments, you can contact Preferred Trust Company at 702.990.7892 or info@ptcemail.com. Also, keep an eye on our event calendar so you don’t miss out on future events organized to help current and prospective account holders become better educated and explore all alternative investment opportunities.

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