Tax Lien Investing

By Kellye Fox

Tax Lien Investing: PRO or CONS?

We’ve all watched that late night infomercial that promises us fast money and hefty returns if we only try tax lien investing with certificates. Well, let me save you the $99.95 and tell you the pros and cons of this type of investment. With the enormous amount of inventory from foreclosures and slow real estate sales, some consumers have decided to diversify their real estate portfolios and try investing in tax liens. Nowadays, people simply don’t have the 10-20% of certified funds needed for a foreclosure or a conventional loan, or cannot qualify for a mortgage. Purchasing a tax lien certificate can be a viable source of income, wealth and land, if researched thoroughly.

Now is the time to get your highlighter or pen and pad, because there are a few rules to this game that you might want to consider.

Tax Lien Investing DEFINITIONS

What is a tax lien certificate? A tax lien certificate is a charge against a property for delinquent taxes. A tax sale is the sale of those properties to satisfy the delinquent taxes. It’s one way for your local county to collect property taxes. The lien is offered to investors at a public auction. State laws have different determinations as to how a winner is chosen if more than one prospective investor wants the same lien. The methods include:

1.         Bidding down the interest – the investor accepting the lowest rate is the winner.

2.         Paying the highest premium – above the lien amount.

3.         Random selection.

4.         Rotational selection – first lien is offered to the investor with number one, who can refuse. If he refuses, then the number two investor is offered another lien until his number comes around again in the rotation.

5.         Bid down the ownership (only used in Iowa) – bidding on a lien for less than full right to the property or sale profits.

Liens not sold at a sale are returned to the county conducting the auction. While some states allow ‘over the counter’ or ‘leftover’ purchases of liens, most of the unsold liens are worthless properties.

Illinois hosts an annual tax sale, generally in the Fall, where the county collector lists all of the delinquent parcels into a record. The collector then makes a request to the Circuit Court for judgment and order of the sale for the taxes. If the judgment is entered, a lien will appear on the property for the unpaid taxes. The owners are mailed a notice of intended collection and a notice is published in a local newspaper before the court date. At that time, the owner or lien holder, may pay the taxes. The successful bidder receives a Certificate of Purchase after the completed transaction, which outlines the property lien sold, the sale date and the amount of taxes (and other costs paid). The tax purchaser, you, may then petition in Circuit Court for a tax deed if the owner (or some other person with an interest in the property) does not redeem in the time given. The owner, occupants and others with an interest, must receive advance notice of the tax deed proceedings.

Property owners who feel that their taxes were not delinquent or sold in error may seek a Sale-in-Error Declaration or order an Estimate of Redemption and pay the redemption bill through the Cook County Clerk’s Office.

What is a redemption period? This is the span of time in which the property owner (or someone else who has an interest in the property) has to repay the lien with interest. During this time, you, the investor, are not allowed to make contact with the property owner. Once this period is over, the lien holder may begin foreclosure proceedings. Keep in mind, the owner still has the right to pay the lien (with interest and the costs to foreclose) between the initiation of proceedings and actual foreclosure.

What is a tax lien certificate? A tax lien certificate is in the amount of one year’s worth of property taxes. It earns interest and the owner has a certain period of time to pay off the tax bill. When a property owner has not paid their taxes, the county makes that tax lien first (it will supersede other liens) and sells it at an auction as a tax lien certificate. Illinois is a tax certificate sales state. The bidder who is willing to accept the lowest penalty percentage is the winner. Penalty is NOT the interest. The penalty is applied to the minimum sale price if the property is redeemed from the sale date through six months.

What is a tax deed sale? Tax deed sales occur also when a property owner does not pay property taxes. Instead of a redemption period, the property is just sold and the sale is final. In Illinois, these are called Scavenger Sales. The investor gets the title to the property with no redemption period or interest rate.

What is a Scavenger Sale? When a lien cannot be sold at a tax sale, the county may offer them for sale in the future at a Scavenger Sale. This type of sale, held in odd-numbered years, involves taxes delinquent for two or more years.

PROS OF TAX LIEN INVESTING

The most obvious benefit to investing in tax liens is the return on investment and the potential to own a piece of property. The root of the issue is that the government wants to collect the money owed and keep the county operating. Simply put, if property taxes cannot be collected, that county could go broke. Property taxes are a major source of revenue for a local government. Every person and business is affected by property taxes. With over 5 million residents in Cook County, every penny is needed to fund all of the divisions. Thus, the process is controlled closely by the state government. Once you purchase a certificate, one of two things could happen – the delinquent property owner does pay their tax bill and you earn a high rate of return on your money. Or if the delinquent property owner does not pay their tax bill, you, the investor, get to keep the property for the taxes and penalties owed. Each state has its own rate of return and redemption period. It’s also important to verify what type of sale your state conducts. For instance, Illinois has tax lien auctions, tax lien certificate sales, and tax deed sales.  However, the latter is not that common and will only be held if enough properties are available.

According to the website, www.tax-lien-certificates.com, Illinois has a 36% interest rate for 12 months, 24% on farm land, with a 2-year redemption period. On the other hand, Wisconsin only conducts tax deed sales, not tax lien certificate sales. While South Carolina does not hold tax deed sales either, they do host tax lien certificate sales with an interest rate of 8-12% and a small redemption window of 12-18 months. So, it is worthwhile to take the time to research the particular state in which you plan to invest. You wouldn’t want to invest in a tax lien if there’s a chance other creditors have a legal rights to be paid first.

CONS OF TAX LIEN INVESTING

As with all real estate transactions, there is always a risk. Tax lien investing is nothing any different. The most common risk is losing your money. In this type of investment, payment is usually required within a very short amount of time (24-72 hours) and a lot of research must be conducted. If an investor cannot pay, all lien certificates will be cancelled and the investor may be banned from all future tax sales. Also, in reality, a lot of liens are redeemed before the foreclosure process ends and if the owner of the property files bankruptcy, the bankruptcy court may discharge the lien or lower the rate to be paid, leaving you, potentially, with nothing.

If you are lucky enough to purchase a tax lien certificate and the property owner does not redeem in the time allowed AND you’ve done your research (meaning no governmental liens, environmental hazards, structural damage, in a flood zone, etc.), not only have you secured a piece of the American pie at a deep discount, but you have successfully become a Tax Lien investor. Cheers to you! Please keep in mind, there are several costs involved in this process. You may be required to pay unpaid property taxes during the redemption period, costs to initiate foreclosure and problems with the home after attaining the deed.

SUMMARY OF TAX LIEN INVESTING

I realize that everyone is anxious to ‘strike it rich’ in real estate. While some investors profit better than others, there’s nothing wrong with a little diversity. The current inventory of real estate properties is overwhelming, so be confident that there will be at least one saved just for you.

The simplest way to get started is to contact your local county and request information on purchasing tax liens to start your tax lien investing journey. You can then pre-register for the sale, find out the method of payment, the timing of redemption by law and attend the sale. Like every great relationship, it takes time to know whether you’ve made the right choice. Investing in tax liens is a multi-billion dollar business. If you’ve learned nothing from this article, take this advice – take your time, do your research and seek legal counsel!

Kellye Fox is a Realtor® with Property Consultants Realty. She can be reached via e-mail at kfox@propertyconsultants.com or at

773-328-7661.

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