Property taxes help pay government expenses. When property owners fail to pay their property taxes in a timely fashion, the government still needs money to operate. Waiting for the property owners to pay up, especially in a troubled economy where homeowners are failing to pay not just their property tax, but also their mortgage payments, isn't practical for the state. Property tax liens brings in funds for the government and provides an opportunity for investors to make high interest, and possibly purchase real estate for pennies on the dollar.
Deed States vs. Lien States
When dealing with delinquent property taxes, some states are deed states, while others are lien states. In a deed state, after a set amount of time, the state auctions off properties having delinquent property taxes. It works differently in a lien state, where the state auctions off the tax lien to investors, as opposed to the property.
Lien States
While each lien state may have its own set of procedures, the process is similar throughout the different states. After listing properties with unpaid property taxes, investors agree to pay off the taxes of individual properties, in exchange for a high rate of interest. Under most circumstances, it is a highly secure loan, for if the property owner fails to repay the loan, with interest and fees, the investor has the option (after a set period) to foreclose on the property.
Tax Liens Trump Mortgages
Property taxes trump mortgages and most other liens, which means, if an investor forecloses on a tax lien property, they are not responsible for many other liens, even a mortgage with a bank. One exception would be other tax liens, such as IRS liens. However, if the property has a mortgage, the bank will typically pay off the tax lien, to avoid losing their investment. Occasionally a lender will overlook an unpaid tax lien, and the property will slip away to the investor for a fraction of the property’s value.
Negotiate Interest Rates
Each state has its own interest rates on tax liens, such as 16% in some states. Yet, this doesn’t necessarily mean this is what the investor will earn. If more than one investor wants to pay the taxes on a specific piece of property, they make a bid on the property, agreeing to take a lower interest rate. The investor agreeing to receive the lowest interest pays the taxes, and the state gets to keep the difference between the initial rate, and the final interest rate. For example, if the state’s rate for property tax liens is 16%, and an investor has agreed to take 12%, then the state gets to keep the difference, 4%.
Investing Novice
One way to locate information on tax liens is to visit the different state or county websites which contain information on local property taxes. Begin investing in property tax liens with properties close to home, and avoid vacant land and commercial properties. Commercial properties are more apt to have IRS liens, and some vacant lands might be worth less than the taxes owed, such as the infamous swampland.
Exception, Not Rule
While there are stories about investors in property tax liens walking away owning valuable real estate, after investing only a few thousand dollars or less, the reality is most investors will simply earn a high rate of interest. Ending up with the property may happen, yet is the exception rather than the rule.
Bobbi Holmes - A graduate of California State University, with a Bachelor’s Degree in Communications, and an emphasis in photography, Bobbi Holmes ...
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