What Is A Tax Lien Certificate?
A tax lien certificate is a document that states that the property taxes surrounding a specific piece of property have not been paid out by the current owner. While in many instances this will likely result in the property being taken by the state, in over 27 states and 1,100 cities and counties, the tax lien certificate is instead sold to an investor. In these instances, the government can immediately recoup their lost tax revenue while the purchaser of the lien now essentially owns the property.
Tax lien certificates can have varying yields based on that particular state. Arizona, as an example, offers a top rate of 16%, whereas Michigan has rates that reach as high as 50% in the second year.
If the property owner is not able to pay off the back taxes on the property (plus the interest rate additions), the investor will officially be awarded the title and assume full possession of the property.
What States Offer Tax Lien Certificates?
As of the time of this article, currently, 27 states offer tax lien certificates. These include Alabama, Wyoming, Arizona, West Virginia, Colorado, Vermont, Florida, North Dakota, South Dakota, Georgia, South Carolina, Illinois, Rhode Island, Indiana, Oklahoma, Iowa, New York, New Jersey, Kentucky, New Hampshire, Louisiana, Nebraska, Maryland, Missouri, Massachusetts, Mississippi, and Michigan.
Is It Really Possible To Get Rich By Buying Tax Lien Properties?
If you are just learning about tax liens and tax lien property certificates, you may not understand all the ins and outs of a tax lien investment or how to take advantage of them for profit. In fact, depending on your situation, you may not even have known that they even exist prior to this article.
The reality is that tax lien investments are an incredibly simple and straightforward method of developing real wealth.
However, as with many things, you need to be able to parse out the exaggerated claims and the select examples to see exactly what this method of investment can really make you as far as returns go.
What Are Tax Lien Auctions?
Tax lien auctions are auctions that take place once a person fails to make their property tax payments. These auctions then go out for acquired property liens with the intent of being sold and recouping the state’s lost tax revenue.
Understanding Auction Rules
Depending on the state you are in and the overall nature of the auction, each place has its own specific rules. For example, while there are some states that will simply collect property and sell it to anyone that can pay the taxes owed, most will opt for auctioning it out.
While at these auctions, bidders will regularly bid just shy of the home’s market value. As an example, a home that costs $400 may sell at an auction for around $380 or $390.
This, understandably can result in fairly thin margins, especially if you plan to pay to remodel and flip the house later on.
Your best bet is to start small and invest only a couple of thousand dollars in certificates before steadily building up and eventually moving to auctions and larger homes.
Involving The IRS
While most tax liens will result in state or local sales acquisition if a property owner defaults on their property taxes, that isn’t always the case. In certain instances, if the owner has similarly not paid their income taxes, the IRS may also place a lien on the property. This opens up the auction nationwide and gives anyone a chance at buying the lien certificate.
Beware Of Fraudulent Sellers
One thing you’ll need to be on the lookout for is fraudulent sellers. These types of people will often show large and beautiful homes that could go on the market and easily sell for $200,000 or more. They’ll likely have a fully manicured hard as well as an expensive car sitting in the driveway.
These sellers will often have featured testimonials or interviews with regular people from everyday walks of life. These testimonials will often report these same people as now making tens of thousands of dollars in only a few weeks of engaging in these tax lien investment secrets and strategies.
As you can imagine, it may sound a bit too good to be true, and like a get-rich-quick scheme.
That’s because it is. While presented in a certain way to up the purchased rate, these homes are more than likely going to be fairly low value. They’re often owned for free by either the homeowner or one of their close friends or relatives. This means you could be saddled with paying a lot for the tax lien while owning a property that is otherwise worthless.
Dealing With Tax Lien Properties With A Mortgage
Generally speaking, the government will always have first rights at the property itself over investors, especially if it is worth something and there are a sufficient amount of back taxes required. This is the case even if the property is currently still under a mortgage loan.
And, while this may seem like a good deal on the outset, there are some drawbacks that you’ll want to keep in mind before trying to get at one of these homes.
If the property has an outstanding mortgage debt accrued, the lender is going to cover the back taxes first before sending the property to an auction. This means that your investment into the tax lien certificate may just be paid off entirely on the back taxes in order for the lender to keep the property out of the hands of the government.
This is why properties that are owned outright are a better option than those that have an unpaid mortgage tied to them.
While investing in property tax lien certificates is a great way to earn a legitimate income as well as a potential number of properties, it’s by no means a surefire method or a “get-rich-quick” scheme. By doing your homework, studying the rules in your particular state, and making smart and safe choices as you start, you can begin to create a very real fortune.