The latest trend in real estate is having many investors ask the question, “what is a tax lien, and how does it work?” One thing is certain, tax lien investing does require a decent amount of research. Having helpful information and a good data provider is a recipe for real estate success.
So, what is a tax lien? It is a type of lien placed against a title or property when the owner neglects to pay either state or federal taxes.
How then is it possible to profit from a tax lien? Many times we look for a quick buck, a way to add some extra cash flow to help ease the burden of everyday expenses. An investment that is sure to only earn you money, with a solid rate. More and more people are turning to purchase Tax Liens. It is a win, win situation.
Different states have different procedures when it comes to buying a tax lien and it is important to learn all the details before setting out for a buy. Make sure to learn about the state laws involved with a tax lien. You need to know when the sale is. Each state usually holds a sale for liens only one or two predetermined months during the year, and differs from state to state. Also, know the interest rate, return per year and the property redemption period. These are all important factors in the purchase and calculation of potential earnings. Terms of sale also differ greatly from county to county so research is essential, not only by state but by city or county.
One important element of buying a tax lien is to know about the property. Know all of the details. It is very important to know and see the property before you buy the lien. Don’t buy a property sight unseen because you won’t know if it is just useless acreage or an actual house which could possibly be in shambles. It is a risk you run if you are out of the area and don’t spend the time investigating. There have been horror stories of buying into land that floods two months a year, or a house that would cost more to repair than you have gained from the investment. Also, you are not buying an actual tangible piece of property at the initial stage. It is a purchase of a debt to be collected before a set period of time. The winning bidder has not bought the deed but their investment pays the delinquent taxes on behalf of the property owner who has fallen behind, in exchange the buyer is given first lien position on the title, liens for unpaid property taxes have priority over all other liens.
One important fact to remember about the purchase of tax liens is that, many times you need cash or a down payment to be able to participate in the auction. Not everyone in real estate has the liquid assets available to buy into tax liens. Learn what you will need to be able to participate in the sale and gain profit.
For the most part tax liens are a low risk and high return investment making it a virtually sure win situation for investors. When you invest in a tax lien certificate it is certain that you will at least get a return on your investment. The amount of the return differs depending on the amount of interest bid or the amount regulated by the state. If the original owner fails to repay his debt to release the lien, the financier will have the chance to win the title to the property, usually for a portion of its value. No matter what the outcome the tax lien certificate investor will certainly profit in the end.
Tax liens and tax deeds can be profitable for some and a hardship for others. The benefits for both parties are substantial. The buyer of the tax lien is going to make a profit off of the interest rate, the homeowner then gets the chance to pay back their debt during the redemption period. A tax certificate investor is basically loaning money to the property owner to pay their taxes and in return the investor will earn a return from the interest. The entire process can be considered a symbiotic relationship where investors can make an extra dollar and debtors can potentially clear their record.