Tax Liens - Tax Lien Certificates

While no one likes paying taxes, for some, the word "tax" is synonymous with "opportunity."

Taxes can sometimes be profitable. Just ask those who own tax credits or participate in tax lien auctions.

In fact, a whole new industry has boomed from people that scour local auctions for real estate sales, caused by delinquent taxes. These forced sales, or tax lien sales, are becoming more and more mainstream and popular with the general public.

What is a Tax Lien?

In most jurisdictions, when a property owner is late on paying real property taxes, the county or municipality will issue a a tax lien on that person's property. Certain states allow the tax lien to become a first lien on the property, which is then turned around and sold at auction as a tax lien certificate.

After placing a successful bid, buyers of a government-issued tax lien certificate will then get one of two things:

1) A state-mandated yield from the lien, which the delinquent taxpayer must pay in order to release the lien, OR

2) Title to the property (after a certain amount of time, set by the jurisdiction) if the delinquent taxpayer fails to pay up.

Individuals have been snapping up tax liens more and more because of these two benefits. A fixed percentage rate, mandated by a government agency, or the title to property at a substantial discount are incredible benefits rarely seen with other real estate transactions.

Risks In Going It Alone

The rewards of tax liens seem promising. Who would balk at the chance to pay a fraction of the cost for a new home, either to collect a fixed penalty from the homeowner or (in case of default) the property itself?

However, what many tax lien buyers find out is that, if they did not do proper title and bankruptcy research, their tax liens can become worthless.

For instance, creditors and the IRS can take priority over tax lien holders in cases where the original owner of the property declares bankruptcy.

In addition, many people purchase properties sight unseen, going just on the description posted prior to auction. Without actual inspections and geographical surveys, sometimes these deeds are worth little more than the paper they're printed on.

Imagine the surprise of a property owner in Texas who, at auction, thought he got a deal on 2 acres of property for $11,000... only to realize the property is completely flooded twice a year.

Yet institutions, like banks and credit unions, have always been able to overcome many of these conditions. Why? Because they had the resources to build relationships with local real estate agents, do the proper title searches and property inspections.

These firms realized the potential in tax liens, provided they could "cover their bases" and ensure each tax lien purchase was a sound one.

Individual tax lien purchasers are often burned without doing full inspections of each property they purchase. At auction, tax liens are usually issued based on lot number. Purchasers have no idea whether they're buying a four-bedroom house or a plot of dirt without inspecting the property. Physical inspections take time, energy and money, and often limits tax lien purchasers to properties within a small area.

Participating in Auctions

So who can participate in these tax lien sales? Anyone who can legally own property in the U.S. can participate in these sales.

Tax lien sales are not for everyone, since purchases must be made in cold, hard cash. As is often the case, the County conducting the tax lien auction will require payment in full in cash within a pre-determied amount of time. Sometimes payment can be made in 48 hours, while others require payment in full on the spot.

Thanks to the popularity of such auction sites as eBay, the realm of tax lien sales has also entered the internet age. Many County officials recognize the greater reach and appeal that these properties can have when published online. Several online auction sites specialize in distressed property sales, eliminating the need to show up on the day of the auction.

Learn More About Tax Liens

When purchasing a tax-distressed property online, be sure to still do your due diligence and homework prior to logging in and placing a bid. Review regional foreclosure listsregularly to find out the types of property currently available. You'd also want to verify the reputation of the authority conducting the auction on behalf of the County.

Open publication - Free publishing - More tax liens

by SaveWealth.com

Tax Liens - Tax Lien Certificates

Tax-lien auction may be lucrative

Unstable market often spells high interest rate
J. Craig Anderson The Arizona Republic Jan. 24, 2010 12:00 AM

This year's Maricopa County property-tax-lien auction is shaping up to be the biggest ever and potentially more lucrative for investors than others in recent years.
It's a prime example of how misery so often rubs elbows with opportunity in the Phoenix-area real-estate market.
Rampant home foreclosure and plummeting property values caused a dramatic spike in unpaid property taxes during the 2008 tax year. On Feb. 8, those unpaid taxes will be sold to investors hoping to earn interest on them until the property owners pay up.
Although rare, the investor can end up owning the property outright if no one else pays the overdue tax within three years.
"Given the big chill in the real-estate market, whether from residential foreclosures or an inactive commercial sector, many property owners have not paid their 2008 year property taxes," said Mark Manoil, a Phoenix lawyer who specializes in property-tax issues and has written a book about tax-lien investing.
Maricopa County is gearing up for its largest sale of delinquent property-tax liens on record, an estimated $70 million worth of unpaid taxes on about 42,000 homes and other properties.
That's a significant jump from 2009's record-breaking sale involving 33,500 available parcels valued at $47.5 million.
Bidding on property-tax liens occupies a relatively obscure niche in real-estate investing, but experts said the returns are more reliable than with other property-related investments and can be as high as 16 percent annually.
Manoil said that with so many tax liens up for bid and the real-estate market still unstable, relatively low demand for tax-lien certificates is liable to keep the average final bid as high as 10 percent.
In the bidding process, the interest rate to be earned decreases with each subsequent bid, he said.
The average winning bid in 2009 was 8.7 percent, according to the Maricopa County Treasurer's Office.
County Treasurer Charles Hoskins said the number and value of unpaid property-tax liens tend to increase during a market downturn.
Hoskins said that although the coming lien sale will be the largest ever in volume and value, it still pales in comparison with record-holder 1992 in terms of the percentage of overall property taxes represented.
The liens headed for auction represent 1.6 percent of the county's total 2008 property-tax levy, he said.
In 1992, after the savings-and-loan industry collapsed from too many risky investments in commercial real estate, a full 4 percent of the county's 1990 tax levy ended up on the auction block.
"This is by no means our worst year," Hoskins said.
This year's auction is entirely online, and early bidding already is under way, he said. An investor's guide is available at bidmaricopa.com.
Lien investors perform a vital function in the community, Hoskins said, by paying off other property owners' past-due taxes in the hope of making the money back with interest when the property is sold or the taxpayer ultimately pays it off with interest and penalties.
Manoil said the prevalence of home foreclosures actually bodes well for lien buyers because lenders tend to pay the past-due taxes after they foreclose.
An investor's goal is to receive a decent rate of return for a few years and then recoup the purchase money - an average of $1,784 per lien in 2009 - when the lien is paid off.
As with any investment, there are risks, Manoil said.
In some cases, a property doesn't sell for enough money to pay off all county tax liens, which can exist for multiple years and be held by multiple investors.
Investors who don't do their research could find themselves holding a lien on property that has been deemed an environmental hazard, and the investor could be liable for financing the cleanup.
A lien investor can initiate a foreclosure action against the property owner in court but not until three years after the lien is purchased, provided that it still has not been repaid.
Chandler resident Anne Galvi, 60, said that despite those risks, she is taking classes on tax-lien auctions and plans to participate for the first time this year.
Galvi said she wants to diversify her investment portfolio while helping the county pay for public services.
She also likes that Maricopa County is a long way from Wall Street.
"I could help pay for another egregious corporate bonus, or I could help some poor Joe who has fallen on hard times," she said.