What investment will pay you 18 percent or more per year on your money? It is called a tax lien (or tax deed), and it is growing in popularity as more traditional investments have fallen flat in recent years. The concept is actually not that complicated. If you own real estate , you realize that each year the value of your property is assessed and then you are sent a property tax bill. The process varies widely, but most states provide a window of time during which you can pay your taxes. In Florida, if we pay real estate taxes in November we receive a small discount, and the discount reduces to zero by the following April (which is the final point in time that the taxes can be paid without being officially late). If the taxes are not paid within a short grace period after that, a lien is filed against the property. The county has a secured interest in your real property but still does not have its money. The solution; allow an investor to step in a pay the taxes and earn a substantial interest rate on their money. There was a time when writing an article on tax lien investing, that I would have felt the need to include a list of which states. Now, virtually every state in the country solicits investors to front the money to cover unpaid real estate taxes. They are even selling tax liens in Canada!
How To Invest In Tax Liens
Tax lien sales are conducted by local county governments. The rules and procedures will vary widely from one jurisdiction to the next. Many states (such as Florida) conduct an auction to sell the tax liens. It is sort of a reverse auction as the winner is the person that bids the lowest. In Florida, the auction begins at 18 percent interest and then goes down as bidders offer to accept a lower rates of interest. For example, you may bid 17 percent and then someone bids 16 percent and the final bidder ‘wins’ at 12 percent. This is the rate of return that they have agreed to accept to advance the money to pay the unpaid real estate taxes. The interest on the tax lien will ultimately be paid as a penalty by the delinquent property owner. The state is only concerned about collecting the tax money from anywhere they can get it, the amount of interest assessed as the penalty makes little difference to them.
In Illinois, tax liens can have an interest rate as high as 36 percent! In Illinois, they are called Scavenger Sales and are offered through an auction system much like in Florida.
A Sampling of Rates Of Return On Tax Liens Nationwide (source taxsales.com)
ARIZONA - 16% 12%- Redemption period 3 years TLC
CALIFORNIA 18% - 2 year redemption when held Tax deed state
CONNECTICUT - 18% 2 year redemption period TLC & Tax deeds sold
DELAWARE - 15% Penalty - One year redemption.
FLORIDA - 18% per annum 2 year redemption period TLC & Tax deeds sold
GEORGIA - 20% Penalty - One Year Redemption tax deed
ILLINOIS - 36% for full year and 24% on farmland with a 2 year redemption period TLC
Risks Of Investing In tax Liens
Most tax lien investors are paid off without much drama, as the underlying property owner does not want to lose their property. This is not always the case, however. From state to state the procedures vary and so do your rights and responsibilities as a tax lien investor. What may make things even more complicated is the property owner filing for bankruptcy, or the IRS placing liens against the property. This is why I suggest that you invest in a large number of smaller sized tax liens rather than betting the farm on one or two large ones. Additionally, I would recommend that you do some reading on the topic. Listed below are some books available on the subject.
If you have invested in tax liens, please use the comment section below to share your experience (good or bad). Keep in mind that you can purchase tax liens from counties nationwide. You don’t have to limit yourself to just your own home county. Most states now provide a method for out of area investors to participate in the process using the Internet. There is even a way to purchase tax liens from within your IRA account with select IRA custodians.
Helping you make the most of God’s money!