Tax Lien Investing
The easiest way to understand what a tax lien is is to first understand how the county government works with property taxes. Tax lien investing is tightly connected to this process, no matter how it varies from county to county, or from government to government. All you need basically to become a tax lien investor is to have access to a county that offers tax lien investment opportunities.
What is a Tax Lien?
As said, first you need to know how property taxes work within a county government. Everyone that lives within the county boundaries needs to pay property taxes. Those taxes go towards paying for public services that most of us rely upon in daily life.
Those services are for instance, the police, the fire dept, education, road construction, and other various services. For the large part, all those services are pay for from the budget that is collected from the property taxes people in that specific county pay.
What happens when someone doesn’t pay his property taxes is that it creates a deficit in the budget for the services that the county has already agreed to provide. Logically, the county needs a way to enforce the property tax system a way to assure that property tax will be paid so that they have the funds for those services they provide.
This is done by issuing a tax lien against the property itself of which the owner has missed to pay the property tax. This enables the county to recoup the owed amount. This lien prevents the owner from selling that property until the debt is paid and it could lead to an eventual loss of that property.
The reason the county can gain profits here is because tax liens enable a set rate of return, which ranges from 10 to up to a 25 %, depending on a certain county or state.
The Redemption Period
This is the time frame in which the owner of the property in question can pay up the owed amount and regain his full ownership of the property, before that tax lien is used to foreclose on it.
How is Tax Lien used in investments?
What the county does is that they hold annual sales, where they invite investors from the public to purchase these tax liens. These tax liens are purchased for the delinquent amount owed, plus any penalties or fees as well. The investor is also guaranteed an 18% annual return on this investment and it comes with a 2 year redemption period.
What happens here is that, from the moment an investor purchases a certain tax lien on a certain property in question, the original owner has 2 years from the day of the sale, before the investor can initiate the foreclosure process. So, basically the county offers the investor the security for this investment.
To remove this lien, the original owner must pay back his tax debt, plus the 18% rate of return that goes to the investor. So, the investor is guaranteed an 18% return of investment, in that 2 year period, or in best case scenario can foreclose on that property, and own it for a presumably much cheaper price than it would be worth in the free market.