What you should know about Tax Liens?
Real estate is currently one of the most popular and profitable investment opportunities. Maybe you have already played with the idea to invest in foreign or especially in US real estate. A relatively unknown, but very lucrative investment can be American Tax Liens. These are indirectly comparable with the investment in real estate. Here you will learn what you should know about the 200 year old investment form of Tax Liens before you invest.
What are Tax Liens?
In the United States, property owners must pay a property tax each year. If a property owner fails to pay his or her property taxes, the appropriate county can impose a tax lien on the land (with real estate). The tax liens are then sold as Tax Lien certificates at auctions to investors. In the event of a successful Tax Lien investment, the holder of a Tax Lien Certificate will receive back his investment amount with interest and any additional fees. This investment is very interesting for investors, because high returns can be expected. Government guaranteed interest rates of up to 36% are possible. The interest rate depends on the state.
How does this investment work?
First, we should understand why there are tax liens in the USA.
Property taxes are used to fund important public services such as hospitals, fire departments, schools, and police departments. Counties rely on the money from tax payments to continue to maintain these facilities. Therefore, the County is very concerned that property tax payments be made on a regular basis. If a property owner fails to pay his or her property taxes, it means less money and therefore savings on essential facilities, which could have a negative impact on the quality of life.
The local municipal government issues a Tax Lien Certificate.
For delinquent property taxes, the appropriate county may issue a tax lien (Tax Lien) on the debtor’s property. So-called Tax Lien Certificates (Tax Lien Certificates) are then offered to investors at auctions. The purpose of this is for investors to assume the property tax debt for the time being by purchasing a Tax Lien Certificate, the price of which is equal to the outstanding property tax payments and any additional fees and penalties. This allows the County to receive much needed funds for public facilities.
Tax Liens are sold at auctions
Tax liens are offered to investors in a variety of auctions. The certificates can be purchased in live and online auctions.
Those who reside in foreign countries in the US have to rely on the online-based auctions.
There are various options for this. For example, as an investor, you can access auctions in specific states and their counties on the following sites:
Auction platforms like Realauction https://www.realauction.com/
Naco https://ce.naco.org/ and then through the county’s website.
You can also contact the local tax office at the appropriate county and inquire about Tax Liens. It should be noted that not all states offer Tax Liens. For example, there are also Tax Deed only states.
Tax Lien certificates are offered in auctions at very different prices. These start from US$25, but can also go into the 5-digit range. On average, a Tax Lien certificate costs between US$2,000 and US$3,000.
Investors bid in auctions
Auction procedures and bidding rules vary by state and county.
Investors should obtain detailed information on required conditions.
The most common auction procedure is bid down interest. The investor willing to accept the lowest interest rate for the lowest bid wins. Typically, interest rates are lowered in 1/4 percent increments.
In premium bidding, on the other hand, the bidder willing to pay the highest premium (which often does not accrue interest) wins.
There are other auction types, each of which can have a different impact on tax lien profits. Investors should plan for this and set a minimum or maximum bid in advance. It should be taken into account that the investment still offers an acceptable return. As an investor, be strategic and don’t get caught up in a bidding war that could wipe out a potential return.
Purchasing a Tax Lien Certificate
Winners in Tax Lien auctions become owners of a Tax Lien Certificate. This means that once the landowner’s tax liability is paid off, they will get their investment back with interest.
Compared to real estate investment, a Tax Lien investor invests only indirectly in real estate. Actually, with Tax Liens, only the tax liability of a real estate owner (land owner) is advanced and no real estate is acquired. However, with Tax Liens there is a trump card, a security. If the debtor does not pay within a certain repayment period, there is a possibility that the investor will become the owner of the property in case of foreclosure.
Repayment period expires – 2 possibilities
- In the case of a tax lien, the property owner is given a certain period of time in which he can pay his property tax debt. If he fails to do so, he is threatened with compulsory expropriation.
- After purchasing a Tax Lien certificate, the investor has to wait for this redemption period. If the debtor pays, the investor receives his investment sum back with interest. Tax Liens are paid out up to 99%.
If a property owner fails to pay his tax debt, the property behind the certificate serves as collateral for the investor. The holder of the Tax Lien certificate has the possibility to initiate compulsory expropriation and thus become the owner of the property.
Good management is of great importance for this purpose. If the debtor does not pay, deadlines must also be met for the compulsory expropriation.
Important advantages and disadvantages you should know about
- With Tax Liens, an annual return of up to 36% is possible. How high the interest rate ends up being depends on the state and the auction process. In Florida, a Tax Lien and Deed state, annual interest rates of 18% are possible. In Iowa, the possible annual interest rate is as high as 24%. Upon settlement of the property tax debt, you as an investor will receive your investment amount back with interest.
- The likelihood of getting your investment back with interest is very high. Tax Liens, as we have already experienced, are paid out up to 99% within the redemption period. This is also due to the fact that property tax debtors face compulsory expropriation and thus the loss of their property in case of non-payment. In most cases, the owners will do everything in their power to settle their debts.
- The property, for example a family house with a garden, serves as collateral when you purchase a Tax Lien Certificate. If the debtor does not pay, you still have the possibility to initiate a compulsory expropriation and thus become the legal owner of the property.
- Tax Liens are also ethically correct. Investors advance property tax debt, allowing counties to fund important public facilities. In addition, property owners get a chance to pay off their debts within a certain period of time after all, and thus keep their property.
- As with any investment, there are risks associated with tax liens. However, with a good knowledge base and careful consideration, the risks can be kept to a minimum.
Therefore, investing in Tax Liens requires some education. Without acquiring the basic knowledge on the subject, investing is simply not possible. Interested Tax Lien investors should allow time for the learning phase at the beginning.
- Investors should beware of objects that do not offer any added value. For example, behind a Tax Lien certificate could be a plot of land that is not buildable, or on which there is an abandoned house in need of major renovation. In case of compulsory expropriation, the investor could be left sitting on the property or would have to invest a lot of money for a sale, which would have a negative impact on the profit. The risks of this can be reduced with detailed property research.
- If important deadlines are missed, this can have negative consequences for your investment. A good management of the acquired Tax Liens is therefore inevitable.
- The investment form Tax Lien exists only in the USA. The auctions, forms and websites are therefore in English. Nowadays it is no problem with translation programs to translate texts into an understandable native language. However, you should have a basic knowledge of English in order to invest successfully in Tax Liens.
How can I start with Tax Liens?
If you would like to invest in Tax Liens, you must first acquire the basic knowledge of this form of investment and meet some requirements.
The following is required to participate in the auctions:
- A US company
- A tax identification number (EIN)
- A US bank account
Once you meet these requirements, you can start thinking about the type of real estate you want to invest in. Single-family homes and condominiums have a particularly high likelihood of payoff, and therefore a successful investment.
As an investor from outside the US, you will have to rely on online-based auctions. Check which states are eligible. Dates for online auctions can be determined in several ways. For example, you can check directly with the county and contact the appropriate tax office.
When it comes to the tax liens offered, extensive research is among the most important things for a successful investment. Only invest in good properties, such as a nice single family home in a great neighborhood with a good infrastructure. Also make sure that there are no old debts on the property, such as further tax debts, for which you would otherwise have to pay in case of a compulsory expropriation.