Make Money with Tax Lien

American Tax Liens

Tax Liens are mainly known to investment professionals in the USA. The reason why this form of investment is largely unknown is mainly due to the fact that financial advisors and banks are not allowed to receive commissions for recommendations.

What exactly can I imagine by an investment in Tax Liens?

Tax Lien can be translated in German as Steuerpfandrecht. In the USA, property owners are required to pay a property tax within a certain period of time each year. If a property owner fails to pay this property tax amount for various reasons, the county is entitled to issue a tax lien on the property.
In live and online auctions, tax liens are auctioned off to investors as certificates known as “Tax Lien Certificates.” An investor who buys such a certificate pays the property tax debt of the owner. In the case of a tax lien, the debtor is given a period of time within which to pay the delinquent tax amount. After the land owner settles the tax debt, the investor (owner of the Tax Lien certificate) gets his investment back with interest.

Things to know about Tax Liens

Before investing in U.S. tax lien certificates, investors should be aware of the background knowledge. Tax Liens serve a specific purpose in the USA.
The individual counties of the US states finance their public facilities such as schools, fire departments, hospitals, police and many others with the help of property taxes (“Property Taxes”).
Defaulting property tax payments mean less money for counties to fund essential facilities. Strict tax delinquency laws have been enacted to protect government services. Property owners can lose their property in the worst case scenario if they fail to make the property tax payment due. Tax Liens have been in place for a very long time, this principle has existed in the USA for more than 200 years.

Property tax in comparison

In the United States, property taxes (for land and real estate) are due once a year, similar to Germany. However, the property tax in the USA is significantly higher than in Germany. On average, a property owner in Germany pays about 400 euros a year for a single-family home. In the U.S., owners have to reckon with much more; the property tax usually amounts to between one and two percent of the value of the real estate, which averages out to about 2,149 U.S. dollars a year.
However, there are also significant differences in terms of payment practices. In Germany, it is predominantly important for property owners to pay their taxes on time. In the U.S., on the other hand, people are used to making payments via credit cards, and they often use their credit limit to the full. Deadlines for property tax payments are therefore sometimes not met. This can lead to important county public services running into financial difficulties.
Missing property tax payments can become a major problem in the United States, because in the worst case, this can lead to the closure of essential facilities such as hospitals and fire departments, thereby severely limiting the quality of life in the affected community. This is where investors come in, which we will discuss in more detail later.

What distinguishes Tax Liens from other investments?

You now know some background information about Tax Liens as an investment. When investing in American tax liens, high returns are possible due to the government guaranteed interest rates.
But is this type of investment ethical at all?
YES! As a Tax Lien Investor, you can help both the debtor and the County while making a profit. This can also be called a win-win-win situation.

Win-win-win

In a Tax Lien Investment, the investor advances the amount of a landowner’s property tax debt. By purchasing the tax lien certificate, the investor is entitled to receive the penalty interest and any other fees that accrue on it as soon as the owner settles his debt. Depending on the government guaranteed interest rate and bidding process, this can turn out to be a very lucrative investment for the investor.

The County also benefits from the investor’s Tax Lien Certificate acquisition. It receives much needed funds from the property tax payments, which are essential for funding important facilities.

This type of investment also provides a great benefit to the debtor, the landowner. By “advancing” the property tax debt, the investor gives the owner additional time, thus a second chance to settle his debts and keep his property.

How does the investment work and how do I earn money with it?

Before an investment, certain prerequisites must be met, which thanks to digitalization can now also be created online from the comfort of your own home. The requirements include, for example, the establishment of an American company and the opening of an American bank account.

Once all the necessary conditions have been met, the preparations can begin.

State and County Selection
Tax Liens are not offered in every state. Therefore, you must first check in which states it is possible to invest in Tax Liens. If you want to invest from abroad, for example from Germany, Switzerland or Austria, without traveling to the USA, you can focus on the states in which online auctions are offered.
A state is divided into several municipalities, called counties. The next step is to select suitable counties which offer online auctions.

Check Tax Lien offers
Tax Lien certificates, as we have already learned, can also be purchased through online auctions in some states. The available Tax Liens can be viewed online by investors even before such an auction begins. The bids can be filtered by specific criteria and narrowed down to desired certificates with the help of a detailed online search.

Placing bids
The most common auction procedure in online auction is Bid Down The Interest Rate, which roughly translates to bid down the interest rate. Here, the investor who is willing to accept the lowest interest rate for the lowest bid wins.
Example: an investor bids on a Tax Lien Certificate in a county in the state of Arizona. The state guaranteed interest rate in Arizona is 16%. Generally, interest rates are reduced in 1/4 percent increments. The investor bids 8%. In our example, this makes him the lowest bidder (in terms of interest rate) and he wins the bid.

Payment of the investment
In online auctions, the respective auction conditions must be observed. As a rule, a deposit must also be paid. As soon as the auction is opened, the investor can place his bid. If the auction ran in favor of the investor and he won the bid, he receives a payment request and must pay the corresponding amount.

Redemption period
After successful Tax Lien certificate acquisition, the investor has to wait. The debtor receives a redemption period for Tax Liens, which varies depending on the state. This period can be between 6 months and 4 years. Within the specified period, the debtor must pay his tax debt plus interest, unless he wants to lose his property. As an investor, it is important to keep this period in mind.

Tax Lien will be paid
Tax Liens are paid out with a probability of about 95%. This means that the debtor usually pays his delinquent tax payments + interest within the redemption period. The investor then gets his investment amount back, along with interest for the relevant period.

What can you earn on a successful investment with Tax Liens?

Calculation example of a successful investment

State Florida
Property type Single-family house with garden
Property value US$202,350
Property tax 2021 owner does not pay
2022 May, Tax Lien 2.380 US$
Annual interest 18%
Repayment period 2 years
In Florida, it should be noted that it is a Tax Lien & Deed state.

Online auctions offering Tax Liens are only held at certain times of the year. Each state has determined this differently. Auctions can be monthly, or just once a year. In our example, the auction will take place in May 2022.
An investor purchases the Tax Lien certificate worth US$2,380.
The fixed annual interest rate in Florida is 18%.
In this simplified example, we assume that the investor will receive the certificate at the full interest rate and that the property owner will settle his debt after one year.

Investment duration 12 months
Investment 2.380 US$
Positive interest rate US$428.40 (US$2,380 x 18%)
Payout in May 2023 US$ 2,808.40
The investor receives a payout of US$2,808.40 (his investment amount + interest) after 12 months. The return on investment is US$428.40.

The amount of return depends not only on the interest rate, but also on the period in which the borrower pays. Depending on the state, interest rates are, for example, calculated down monthly or settled semi-annually. Furthermore, the different bidding procedures have an influence on the interest rates to be expected.
Generally, the later a debtor pays, the more return an investor receives.

Debtor does not pay

Tax Liens are paid out with a very high probability. Nevertheless, investors should take into account that the rare case may occur in which the debtor does not pay. In such a situation, the investor will not get back the amount invested, nor will he receive interest on it, but he will have the possibility to become the owner of the land through compulsory expropriation. You certainly do not want to become the owner of an inferior property. For this reason it is very important to invest only in good or very good properties. A detailed property research should always precede an investment.

In another example, let us assume that the owner of the property does not pay his tax debts. The investor initiates a compulsory expropriation. Let’s take the initial data from the example calculation above. The value of the property is $202,350, and the investor had $2,380 in expenses for the Tax Lien Certificate. If the investor is able to carry out a successful compulsory expropriation, he becomes the owner of the property. After deducting the costs for the Tax Lien Certificate, for a notary and other fees, this can mean a net profit of approx. 195,900 US$. The investor has to take some things into account. After a successful expropriation, the investor has to think about further issues: Should the property be resold or rented (for a passive cash flow), are there renovations to be done, or should the property be offered below market value to find a buyer quickly?
As we have learned, when calculating the return, it must be taken into account that there are other costs involved in a Tax Lien investment for the Tax Lien investor. Once investing in Tax Liens a tax advisor should also be consulted. Additional costs, such as for the establishment of a US company, must also be taken into account.

Can I invest in Tax Liens only through auctions?

There is another option, “Over The Counter”. This literally means “over the counter”. Tax Lien Certificates do not have to be purchased at auction through this process, but can be purchased directly from the County. This has the advantage that investors do not have to fear bidding competition. OTC can also have disadvantages, as there are many bad properties among the offered tax liens, which did not find favor in auctions. However, it should be taken into account that there are simply not enough investors or investor capital for the numerous tax lien certificates. For this reason, lucrative tax liens will also be offered via OTC, which can be determined via a detailed object search.