Tax Lien Foreclosures are a little known method to acquire properties for as little as 5-10% of the true market value of a property.
In the US, every year hundreds of thousands of property owners do not pay their Real Estate property taxes on time. As a result in 18 states there are laws allowing the Counties to do so called “tax Lien Auctions” and auction off the Delinquent Tax obligations to investors in exchange for them receiving several rights.
Right #1: the right to collect a (usually high) Interest rate:
In many states these interest rates are 16% and higher and (in Illinois they are 18% per half a year for a total of 36% per annum). Usually the rates are between 12% and 36% with some exceptions where instead of a rate which is prorated if the owner “redeems (= pays off the taxes), the state allows for a Penalty, meaning the property owner has to pay a fixed percentage no matter if they redeem the property in 1 day or 11 months and 30 days.
Right 2: The Right to Foreclose on the property:
Once the investor pays the outstanding property taxes to the county, a lien is being placed against this property to make sure the Investor get’s paid back his investment plus interest when the property is sold.
However if the property is not sold or the owner does not redeem the Tax lien Prior to a Tax Lien Redemption period, the Lien Holder has the right to foreclose on this property.
Redemptions periods very from state to state but usually range between 3 and 5 years.
Depending on which state it is, the foreclosure can be fast (in some cases the State does the foreclosure for the investor) or take up to a few months. But in most states, the Tax lien supersedes most other liens including Bank Mortgages and Mechanics liens. The only exceptions are Federal and State IRS Liens and very few other, rare liens. As a result a Tax Lien Foreclosure usually leads to a free and clear title to the property.
Right 3: To buy the subsequent year’s Tax liens in advance without competition.
Most Tax Lien States have a provision in their statutes allowing Holders of Tax liens to purchase the next year’s delinquent property taxes as soon as they become delinquent, without competition and therefore months in advance of the next tax lien auction.
As a result Tax Liens are a very safe investment which in the worst case results in the investor making an EXCELLENT return on his/her investment and in the best case results in the investor making getting the actual real Property worth up to 20 times the amount the investor paid in property taxes.
Example (assuming the property owner does not redeem the tax lien and the Redemption period is 3 years):
Property value: $100,000
Annual Property Taxes (including some fees and Penalties): $1,500
In this example:
The Investor Pays to the county:
- In year 1: $1,500.00 in exchange for a TLC for that amount.
- In year 2: $1,500.00 in exchange for a TLC for that amount.
- In year 3: $1,500.00 in exchange for a TLC for that amount.
After year three is over, the investor forecloses on the property which costs him another $1,000.
Total investment made:
$5,500 and the value of the property is $100,000.00
The investor now hit the “jack-pot” and can decide what to do with his property. Sell it, move in, build on it (if it is a vacant land parcel) or just hold on to it for future appreciation.
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