This investment opportunity comes in two forms, either Tax Lien Certificates or Tax Deeds. The certificates serve as privately held notes secured by a common tax lien on real property. The virtues of this kind of investment are that they provide good security along with competitive rates of return. Of the 50 U.S. states, 32 utilize tax lien certificates at this time. The remaining states sell tax deeds on the property itself. The following explains how these differ.
How Does It work?
When a property owner is late on paying real property taxes, the taxing entity (county or municipality, in Louisiana, the parish, in Alaska, the borough) issues a tax lien on that property, while assessing an interest accrual penalty. The government could wait for the lien to be paid by the property owner, but in order to meet budget needs, would rather get the money now. In 32 states, a tax lien becomes a first lien on the property, and a certificate representing this can be sold at auction. Investors can then buy the lien (cash only) and receives the following in order:
1. Guaranteed yield from the lien, which the delinquent property owner must pay in order to release the lien.
2. Title to the property after a redemption period, the length of which is set by the local jurisdiction, if the property owner fails to pay.
In other states, a tax deed is sold at public auction. At this point, the investor owns the property outright and is entitled to collect rents on it. However, Georgia and Texas allow a redemption period, in which time the previous owner can pay the taxes plus a large penalty (usually 25%) to the investor to get the property back. In Texas, the redemption period is 6 months on most properties, 2 years on homesteaded or agricultural use properties.
Tax liens are a very attractive investment for people who know how to find them and how to buy them right. The offer guaranteed income mandated by a government agency, and may lead to the title to real property at a substantial discount. You get rates of return on your investment like 16%, 18% or even 24%. With tax deeds, you acquire great properties for pennies on the dollar. Put tenants in that property that you now own free and clear, and your passive residual income continues for as long as you want it. Just remember to pay the property taxes, of course.
Wise investors research the laws in various states to determine where rates of returns are best. We provide you comparative charts later in this publication to help you with this. But to give you a quick illustration of the great returns available, let’s consider the State of Texas:
As mentioned before, Texas sells tax deeds at public auction, generally on the first Tuesday of each month. In those cases where the property is not homesteaded or for agricultural use, the redemption period is six months (two years otherwise). In order to redeem the property and receive title back from the investor, the homeowner is required by law to pay a penalty of 25% of the amount of outstanding taxes.
Let’s take this a little further. A return on investment within six months of 25% would project out to an annualized return of 50%. Try and get that at your local bank! Remember this, too: in Texas these sales occur monthly. You could conceivably rotate money in and out of these deeds on a regular basis. That would mean that in the event a homeowner redeems a property within a month, the rate of return would increase twelve-fold to 300%! Possibly the investor might have been hoping the investor would not come through so that he or she could keep the house. A 300% annualized return on investment would go a long way toward mitigating the pain of missing out on ownership.
As long as investors do their homework, risk is nearly non-existent with tax liens. Remember that you either get the penalty from the property owner or you get the property. No if, ands or buts!
And as we have mentioned more than a few times, the returns are nice. Let’s say you purchase tax liens in a state where the rate of return is 16% per annum. Break that down monthly, and you get 1.33% per month. In two months, the tax lien pays you more than your local bank pays in a year on a regular savings account. What’s not to like there?