Tax Liens and Deeds!!

Real Estate Sales Representative with Keller Williams Group One Sparks Inc

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Alexandra Cleary

Tax Liens and Deeds:
Should this investment strategy be part of your plan?

By Jordan Taylor

In most situations, tax liens are not good news for real estate investors; they can cloud titles and reduce profits. But tax liens are good when you want to buy tax lien certificates, because you are not investing in property but rather buying the rights of a taxing authority.

"Tax lien certificates are one of the most predictable, certain, and secure real estate-related investments available," says Thomas J. Senatore, a trainer with Wealth Intelligence Academy . "You buy them from the government, you get paid by the government, and the local tax collector does all the work." Senatore says you can earn anywhere from 12 to 24 percent interest the first year and as much as 24 to 50 percent in the second year, depending on individual state law, the bidding system, and the period of redemption. Those rates are part of state statutes. They are totally legal and can be changed only by the state legislature.

How do these opportunities get created? Cities and counties need a way to encourage people to pay their property taxes on time and penalize them when they don't. These local jurisdictions also need a way to borrow the funds that haven't been paid so they can continue to operate and pay their own expenses. They do this by selling tax liens or tax deeds. As an investor in tax liens and deeds, you are performing a valuable service by lending money to governments so they can pay employees and provide services.

What's the difference?

A tax lien is basically a loan that can be turned into a deed if not repaid after a certain period of time. A tax deed is a deed (which is ownership) to the property that may or may not have a redemption period.

Tax liens and tax deeds are created when a property owner doesn't pay his taxes. At a certain point dictated by law, after the taxes become delinquent, the particular governing taxing unit (usually the city or county) places a lien on the property. A certificate for that lien is sold to an investor for the amount of tax owed plus penalties and interest due at the time the certificate is sold.

Most of the time, the property owner will eventually pay the amount paid for the certificate plus additional interest to the county. The tax collector notifies the investor, who returns the certificate and collects those funds. If the taxes aren't paid within the time set by the taxing jurisdiction (typically one to three years, but sometimes longer), the owner of the certificate gets the property.

When you buy a tax lien certificate, you're essentially paying the delinquent taxes on a property and buying the rights to collect those taxes plus additional interest from the property owner. You aren't foreclosing or forcing anyone out of their home. In fact, it's unusual for property owners to forfeit their real estate for the taxes. If a property owner wants to sell, most buyers are going to insist that the tax lien be taken care of before they'll do the deal, so you'll get your money then. In the unlikely event that the buyer overlooks the tax lien, you're protected because it stays attached to the property until paid.

How the process works

Tax lien certificates are usually sold at a public auction and the details of the bidding process vary by state. Most tax collectors provide complete information on how the process works in their jurisdiction. As with any type of auction, it's a good idea to attend a few tax certificate auctions when you have no intention of bidding just for the experience. For most people, the biggest challenge of investing in tax lien certificates is understanding the bidding systems, which aren't like those of a general merchandise auction where you bid a dollar amount on a particular item. In a certificate auction, some states require that you bid the amount that is owed the government plus a surplus to acquire the certificate. In other states, your bid reduces the interest rate, and the bidder who is willing to accept the least return gets the certificate. In still other states, the highest bidder gets the certificate. It all boils down to simple arithmetic-you just need to understand how to do the calculations necessary to make a profitable bid in each state, and state laws will tell you that.

Don't ask other bidders for advice and information-they may know less than you do but don't want to admit it, or what they think they know may be wrong. Get facts from reliable sources, such as the state statutes, the printed material furnished by the taxing agency, and individuals recognized as experts who provide certified training programs.

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