Tax Liens and Deeds
Last month's article discussed the pitfalls of being a one-dimensional real estate investor. Being a one-strategy investor can be successful - many seasoned real estate veterans have specialized in a field they enjoy and found great success. However, these veterans are usually well versed in numerous strategies, and eventually settled with the one that best fits their strengths and fulfills their personal and financial goals. As a real estate investor, this is where you want to be - specializing on the strategy or strategies that best suit you.
To help get you to the point you want to be, the next several real estate articles in the Rich Dad E-zine will focus on often overlooked areas of real estate investing. To say that tax liens and deeds are often overlooked might be an understatement. Many real estate professionals have no, or only cursory, knowledge of this area of real estate investing. Few novices have even heard about this strategy, and thus never take the time to investigate to see if it might work for them. This is unfortunate as many investors have found that tax liens and deeds are the perfect fit for their investment needs.
Tax Liens and Deeds Overview
Property tax is one of the primary ways cities and counties generate revenue to fund the services they provide. When taxes aren't paid, these government entities still need a way to borrow the tax money that isn't paid, and often do this by selling tax liens and deeds to investors. Tax liens are effectively loans that can be turned into a deed if not repaid after a certain period of time, often called the redemption period. A tax deed is a deed to the property which may or may not have a redemption period.
Laws vary from state to state, but here are some of the basic advantages of tax lien investing.
Tax Liens and Deeds Advantages
Priority Lien. If a property tax is not paid and a lien is placed on the property, then the tax lien position moves in front of other mortgages and trust deeds. This gives a great deal of security—if you had to foreclose on the tax lien certificate, and become the owner by getting the deed, then you would own the property free and clear.
High Interest Rates. To encourage investors and penalize delinquent taxpayers, interest rates are often set high. Interest rates can range anywhere from 8 to 50% depending on the state you are investing in.
High Security. The lien may be as little as 5 to 50% of the value of a property. If the lien is converted into a deed, then most other liens are wiped out.
Tax Lien Example: Taxpayer Pays
Here is a hypothetical example of how the process works. The process starts when a property owner is late on their unpaid taxes. The city or county will set a date, after which unpaid taxes are late and liens or deeds will be sold. The taxpayer is sent a notice of when taxes are due and how much is due. Generally subsequent notices are also sent if taxes continue to go unpaid.
If taxes remain unpaid, the county or city advertises the property for sale in a newspaper of general circulation. The sale will be open to the general public, and investors will show up to the sale, and bid on the liens or deeds by different methods, according to the state statutes. The person with the winning bid pays cash or certified funds, including all processing costs, and is issued a certificate or a deed showing it is paid and the terms of repayment, if any.
In our example, let's assume we are in a state that issues liens with 18% interest in which we invested $3,000. Liens can always be redeemed up to the last day of the redemption period, and you can typically expect the taxpayer to go to the government office and pay it off, including all processing costs, interest, and penalties. The government does all of the processing during this transaction, and then issues a check to the investor, and the lien or deed is canceled. The amount of the check will be determined by the interest rate and any penalties that state law allows for.
Tax Lien Example: Taxpayer Does Not Redeem the Lien or Deed
Depending on state law, the redemption period can vary from six months to three years. As a lien holder, you have the option to wait longer than the mandatory waiting period. If the lien holder elects to not wait any longer, he/she will start legal action to get the court to deed the property to the lien holder. This legal action can take from three months to a year depending on the state statute and the difficulty of serving the parties involved.
During this court action, the owner of the property usually will be able to redeem the property by paying all back taxes, penalties, and legal fees up to the day the court hands down a final judgment. If this does not occur, then, after a final judgment, the lien holder is the new owner of the property.
Tax liens and deeds can offer excellent rates of return, and state laws designed to encourage investing provide the framework for investors looking for secure returns. Tax liens offer investors that may not have the time or desire to pursue other real estate strategies a way to capitalize on their real estate knowledge. This brief overview of how tax liens and deeds operate is only a small fraction of the knowledge necessary to fully capitalize on this lucrative real estate strategy. If you desire to know more, Rich Dad Education offers courses that focus exclusively on tax liens and deeds.
Have a wonderful and productive month.