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IWP!, flagship product is Chicago's premiere real estate Investment
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Mid-West. The publication seeks to grow it's market share by providing
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Since it's release in January of 2006, the magazine has been well received and
continues to gain momentum and support. The education, information, and
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INVESTING IN TAX LIENS: PRO or CONS?
By Kellye Fox
We've all watched that late night
infomercial that promises us fast money and hefty returns if we only try
investing in tax lien 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.
DEFINITIONS
What is a tax lien? A tax lien 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
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
As with all real estate
transactions, there is always a risk. 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
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. 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 RealtorŪ with
Property Consultants Realty. She can be reached via e-mail at kfox@propertyconsultants.com
or at
773-328-7661. |
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