Being the recipient of a tax lien is not a happy experience. It means you have outstanding state and/or federal tax debt. Say the IRS tax lien removal experts, liens can make it hard for you to borrow against your property and for you to secure a bank backed credit loan.
You will also have trouble getting an auto loan. So long as your lien appears on the public record, it can make it near impossible to sell your property and/or refinance it. As for your credit report, it can be damaged beyond repair for a long, long time.
But is there a good side to tax liens?
Maybe you assumed that investing in real estate was way beyond your financial means. But according to a new report, countless ways exist to invest in real estate, and tax liens just happens to be one of them. In fact, it is said to be one of the most accessible options available to those would-be investors without a lot of on-hand cash.
Defining Tax Lien Investing
A tax lien is defined as a legal claim against an asset which is set forth when a property owner becomes delinquent on tax debt payments that are directly associated with said property. In real estate terms, tax liens are placed on businesses and individuals who do not pay their property taxes for one reason or another.
The homeowner or landowner can remove a property tax lien prior to its expiration date if they make an effort to repay the debt, plus any interest and penalties that have accrued. Delinquent property owners usually hire an IRS lien removal professional to help them with this sometimes complicated process.
Initially, tax liens are placed on delinquent taxpayers by local government entities like a county, city, or town. Property tax liens mean that the government retains the right to collect the tax debt on their own. Therefore, a demand has grown for tax lien certificates.
You can purchase a tax lien certificate at a public auction. You then automatically take full responsibility paying off the taxes owed to the municipality. It is then also your responsibility to be reimbursed for that tax debt payment from the property’s original owner.
When a tax lien certificate is sold off to a third-party investor, the municipality automatically receives a guarantee that the late taxes will be paid and that the investor is willingly able to accept all the risks since he or she “will be rewarded with interest payments” as delinquent property owners have no choice but to repay the tax debt over a certain amount of time.
The Process of Purchasing a Tax Debt
Say the experts, municipalities will publish lien certificates that are for sale, prior to holding a public auction. This will afford interested real estate parties to research and review the tax debt before the official auction begins.
Some lien certificates represent only a small amount of property taxes that have gone unpaid, such as a few hundred dollars or maybe one or two thousand dollars. Others however, represent a much larger percentage of the property’s underlying value and can run into the tens or thousands of dollars or more.
Some certificates are said to represent such large values that failure to repay the tax debt will result on a foreclosure of the home and/or property.
Two Primary Methods Exist to Auction Off Tax Lien Certificates
According to financial experts, two primary methods can used for auctioning off tax lien certificates.
Accepting a Premium
Municipalities will typically set a specific price for the tax lien certificates which is usually the full balance of the delinquent, unpaid debt. Potential real estate investors have the option of bidding any amount they want that’s above the starting bid. The return on investment they are inevitably seeking out will be the amount they then collect in interest from the delinquent property owner that exceeds their successful auction bid.
Accepting the Lowest Interest Rate
If a real estate investor follows what’s referred to as a “bid-down” method, they will be competing to bid for the lowest stated interest rate on the existing tax lien. The winning bid will automatically establish an interest rate that the potential investor receives from the delinquent property owner as they, in theory, repay their tax debt.
Keep in mind, tax lien investments can be risky since the delinquent taxpayer might have no intention of paying you back. That said, you are still responsible for the tax debt.