6 THINGS TO KNOW ABOUT TAX LIEN INVESTING

Currently, stock markets manifest historically low interest rates and increasing volatility which causes investors to look for alternative ways able to provide a decent return rate. With this in mind they explore many investment niches, yet property tax liens seem to remain overlooked as often as not. Experiencing a surge in popularity tax lien investing promises a unique opportunity of tremendous returns. However, it can also incur substantial risks since it requires up-front capital and a prolonged period of getting a return on investment. Before you consider embarking on tax lien investing you ought to evaluate risk vs. reward and realize potential pitfalls this type of asset is likely to face. This is what you need to know to navigate in this often profitable though confusing investment field.

 What is a tax lien? Sometimes landowners fail to pay taxes on their property, so the local authorities place a lien on it, that is a legal claim against the said property for the amount owed. As a result, this property can’t be sold or refinanced unless the taxes are paid. In addition, as Tax Crisis Institute claims, it is a serious implication on the landowner’s credit report since it can show up on their credit history for almost 7 years even after (s)he has paid the due debt.

 How do you invest into tax liens? You can buy the delinquent lien on the property which gives you the right to foreclosure on the property unless the owner tries to avoid Tax Liens by entering in some installment agreements or pays off the entire tax amount within the redemption period (normally 120 days). If the property taxes aren’t paid by the end of redemption period the lien holder can take ownership of the property after all foreclosure proceedings have been completed. However, such an outcome is rare. Generally, landowners take pains to pay all they owe.

 Where do you buy liens? The municipality creates a tax lien certificate which specifies the amount owed and interest or penalties due. These certificates are auctioned off and the highest bidding investor gets one. The auctions may be held online or in a physical setting. But whatever the form, the investor is to pay not only the amount of taxes owned, but an interest as well. Interest rates differ depending on the state or jurisdiction.

 How do you make a lien profitable? Liens are first in line for payment rating above even first mortgages. So the investor is entitled to be repaid the entire amount of the lien plus interest which can range from 5% to 36% with 10-12% on the average. It is these interest rates that make tax liens an attractive investment. And the investor may add to the sum the premium (if (s)he has paid it).

 How to go about tax lien investment? First you should make up your mind what to hold a tax lien on – residential or commercial property, undeveloped land or property with improvements. Then you must contact city or county officials (usually the treasurer) to learn about the time and place of the next auction and about the property scheduled to be auctioned. The official will also outline rules of the sale, registration requirements and methods of payment.

 What are disadvantages of investment in tax liens? Despite being a promising field, tax liens are to a large extend inappropriate for novice investors with little experience in real estate. They must realize that a decrepit house located in a slum neighborhood or the one that has suffered some environmental damage is not a good option in spite of the promised interest rate. Lien holders also need to know their responsibilities after they receive the certificate and realize that the latter has an expiration date after which the lien holder is unable to collect any outstanding balance.

Generally, tax lien certificates are a superb investment to add to your portfolio. It will allow you to see 12-18% return on your investment, though not without a degree of risk. Sophisticated investors who know what they are doing and make sure to research the properties they are about to invest in can make decent returns. However, potential risks and heavy competition render this field incongruous for novices who can easily get burned.