Every homeowner knows the joys of paying property taxes. And unfortunately, the Great Recession has made it tough for many people to pay the bill.
When a homeowner fails to pay their property taxes, a lien is placed on their home and the tax lien certificate is later auctioned off to investors.
Anybody can participate in a tax lien auction and they are quite popular with small-investors because of their low risks and high interest rates. Tax liens can also be purchased for as low as a $100, making it an accessible investment for even those with little capital.
How to Buy a Tax Lien Certificate
County governments don’t like to wait for outstanding tax bills so they auction the liens off to local investors to generate quick cash. The auctions are often held at the county courthouse, but some counties even have online auctions.
To find out about tax lien auctions in your area, “Google” your county tax collector’s website for a calendar of upcoming events. You can also check in your local newspaper as auctions are required to be announced in the legal section of the classifieds.
Attending a tax lien auction can be a lot of fun and there are usually several auctions held in a row. The amount of the lien doesn’t change in the auction, rather investors bid on the interest rate. Bids on the interest rate will start high, and investors bid down until someone wins the auction and the tax lien certificate.
As long as you hold a lien against your neighbors’ house, you will continue to accrue interest on your investment. The interest rates can range anywhere from 5% to a whopping 50%! In most states, the annual interest penalty is applied the day after the lien is acquired, so often times your best rate of return can be when a property owner pays their taxes within a few days of the auction.
Every time a homeowner send a tax payment to the county, you will receive a check in the mail for your portion. If you own several tax liens, it can be a great way of earning passive income.
What if They Don’t Ever Pay Their Taxes?
Well, truth be told, many tax lien investors pray that their homeowner never pays the bill…
If the taxes are not paid the investor receives first right of refusal for the next year’s delinquent taxes. In most counties, if a tax payer is delinquent for three years in a row, the investors has the right to begin foreclosure proceedings and claim the deed to the house. Obviously, this can create a huge return for tax lien certificate holders who can acquire properties for pennies on the dollar and resell them for a huge profit.
Foreclosing on someone can come with a lot of stipulations depending on your state. If their are other lien holders or claims against the deed, they will need to be paid before you can take ownership of the home.
There is also some risk in this strategy. First, it’s estimated that less than 1% of homeowners let their property tax debt default to the point of foreclosure, meaning that your chances of acquiring a home on the cheap are slim. You also run the risk of inheriting a home with major structural damage which is why it’s important to do your research before investing in a lien. If the home is worth less than the lien you hold, you’re out of luck.
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