Tax liens, or more technically, a tax deeds certificates are issued by a taxing authority to a third party in exchange of settling the tax due on a particular real estate property. A tax deed certificate is a debt claim against a real estate property with previously unpaid lien. The holder of a tax deed has the right to demand payment equivalent to the price of lien plus any premium paid during the bidding and any interest accrued over the term of the tax deed.
If you are looking to invest in tax lien-delinquent properties, you need to arm yourself with timely and accurate information not just about your state’s standard procedure on tax lien auctions but also when it comes to the general overview of the real estate industry.
Why tax liens certificates are good investments?
Tax lien certificates are among the most popular investment vehicles of today and there are a couple reasons why. First and foremost is that tax liens offer a good return on investment, depending on the state where the property is located. Interest rates on tax deed certificate range from 3 to 36 percent per year – on the second year most states lash out a bigger penalty starting at around 24 percent, thereby increasing again the returns for the investor.
A tax lien certificate is also backed by a real estate property, making it almost as secured as a mortgage. In the event that the property owner cannot pay the tax lien, the investor has the option to foreclose the property and demand payment upon liquidation. In some very rare instances, the investor can also walk away with the property for only the taxes owed.
How does tax lien investing work?
Not so many people know and understand the concept of tax lien investing – and that’s another good reason why you should get your feet wet and start your tax lien investments. For those who have little idea or no idea at all on how investing in tax liens work, a good point of comparison is your average home foreclosure auction.
Tax lien investing is done through an auction but instead of actual real estate properties, an investor in a tax lien auction is bidding for the right to settle the lien on a particular property.
The tax lien investor will enter as a third party who will settle the tax due on behalf of the property owner. After paying the lien, the investor will be issued a tax deed certificate which entitles him to demand payment from the owner of the property. The investor is basically a de facto creditor of the property’s owner.
Before taking the plunge in the crazy world of tax lien investing, you need to do your homework. Research about the current status of your state’s housing market and make sure that you are up-to-date when it comes to recent local real estate market events – you just don’t know where the next diamond in the rough will surface.