Owning an ex-military missile silo has been all the rage for years, but it’s not often you find a bomb-hardened homesite built with other purposes. Available on eBay at the moment is . It has all the creature comforts of living someplace where you’re protected from the USSR flinging atomic warheads at Indiana, and on the other hand it doesn’t have the pesky problems of having to decontaminate the place from all the toxic rocket fuel that it might still have lying around an ICBM silo. So, with the end of the Mayan calendar closing in, heading underground might be the safest place to be — if you’ve got over half a million dollars to invest into a living place. If anything, the missile silo housing market is still strong and can ask for high prices after the non-bombproof housing bubble burst.
So, what do you need to know to make a good tax lien certificate investment?
- Learn how to research property. County recorders are public records, so you can go down to your courthouse and look up real estate records yourself. If you want to pay for the service, abstract companies can do it for you, but for a price. Your objective is to look up the property that the lien is on, in order to determine if there are any other liens or anything else to cause a clouded title.
- Enlist the help of a real estate lawyer. If you have to foreclose, you’ll need their assistance. The paperwork can be done manually by the lien owner, but a wrong turn can result in significant loss. This, too, comes as the expense of investing.
- Find a conservative estimate of the property’s value. This can be done through past tax records, the auditor’s office, and sites like Zillow. Keep in mind things other than just a number on paper: is it in a good neighborhood? Does it flood every spring? Is there any way to actually access the property from a road? Remember that, if the owner is going to let the property go at a tax foreclosure, there’s a good chance that something’s wrong with it.
- Do the math: add the cost of buying the tax lien certificate to the amount spent in filing and researching the property. This is the total investment. Now, calculate the amount that will be recouped if the property owner actually repays the taxes at the halfway mark before foreclosure and the amount at the end of foreclosure. These are the potential returns. Next, estimate the resale value of the property after foreclosure minus the cost of foreclosing. This should give you a nice upward curve. You want the possibility that, as the investment matures, the value keeps going up.
A few other notes:
- There are investors that sell their tax lien certificates on eBay. The question you should ask yourself is: “If this is such a great investment, why is it for sale on eBay, of all places?”
- Advocates of tax lien sales often upsell the benefit of foreclosure at the end. Remember, the previous owner couldn’t pay the taxes and couldn’t sell the property; will you be able to?
- Buying tax liens from some county other than your own means figuring out how to research property, attend and bid at the lien sale, and possibly manage a foreclosure from wherever you currently live. This is a significant investment in time and money, which must be factored in to your return calculations.
- The laws regarding tax liens are varied and complicated; make sure you understand what you’re buying, and the loopholes of the local jurisdiction. Can additional liens be sold for future years? What existing liens can be discharged at foreclosure? What happens if a lienholder forecloses on the property before you collect any taxes?
There are certainly many ways to go about investing in tax liens, enough ways to fill hours upon hours of infomercial time with “systems” and “guaranteed investment” promises. As with any investing, the only way to truly manage risk is to fully understand what you are buying as an investment. Tax lien certificates are not risk-free, but they do have significant opportunities if those risks can be avoided and managed. Do your research, and you might beat the odds.
Since a tax lien certificate entitles the holder to recieve repaid taxes or foreclose on a piece of tax-default property, it seems like the investor always walks away with something in their pocket. So, how can this not be a slam dunk?
Well, even an investor in the stock market still owns something when their stock tanks, it just might be worth as much as they paid for it. The risks are much higher investing in stocks, but there is still the possibility of ending up with less money than you started with after the tax lien has been satisfied.
- First, tax liens aren’t free. There are fees involved in recording the documentation. In my previous example, if an investor buys a tax lien on Monday and the lien is paid on Tuesday, the investor is still out the money spent on filing fees. It might not be much, but it can still leave an investor in the red.
- A tax lien might not pay anything for years, which is why the county passes the expense on to an investor. The best investment in a tax lien is when the back-taxes get paid off, but just not too soon, so that interest can build. If there are $1,000 in back taxes at 10% interest, that’s $100 a year…but only after the taxes and interest are paid by the tax defaulter. On paper, things will grow, but the return isn’t realized until the taxes are paid. Sitting on a large sum of money out, waiting for interest to be paid, is not always a sound investment when there are more steady returns in bonds or mutual funds.
- Who doesn’t pay their back-taxes on a nice house? The properties that end up in tax default are properties that the owner feels are of no value to them. Then, the properties are often vacant or otherwise ignored while the foreclosure clock keeps ticking.
- There is a pecking order for repayment after a foreclosure. A tax lien is often the first, but not always; bankruptcy, back federal taxes, judgements, and other problematic things might mean that the tax lien holder doesn’t just get to own the property outright, and these are the sort of problems that cause back taxes to go unpaid anyway.
So, in summary, making money off owning a tax lien certificate is a Goldilocks condition. You want the taxes to get paid off not too soon, and not too late; you want the property to be lien-free but also valuable enough to recoup investment; you want the price paid for the lien to be low enough that the chance of making more than your cost and fees is optimal.
Coming soon – Part 4: How Do I Improve My Tax Lien Chances?
There are two ways to buy a tax lien certificate: from the government, or from an investor. Buying tax lien certificates from a county is a matter of finding out when the sale is, researching the properties, and placing your bids. If an investor is liquidating his tax lien portfolio for some reason, it can be transferred to a new owner in a private sale, while filing the appropriate transfer documents with the county.
Once you own the tax lien certificate, you learn a bunch of information: what the owed tax is, what the interest rate is, and when the lien expires and a foreclosure may be done. Each of those describes how an investor earns their return on their investment.
If a tax lien certificate is sold on Monday and the property owner pays off their taxes on Tuesday, the investor gets a check for the amount of the tax lien, the lien is removed from the property, and the investment has run its course. If time passes before the taxes are paid by the property owner, interest grows on the unpaid taxes, and those are paid to the investor.
If a few years pass and the property is sold, the tax lien and any interest due is paid off the top, the lien is removed, and the investor recieved a sizeable return, usually about 10% annually.
If the tax lien reaches its time limit, then the holder of the tax lien certificate has a right to foreclose on the property, take ownership, and release the lien themselves. Now the lienholder owns the taxed property – and since taxes due is usually a fraction of the appraised price of a piece of real estate they should own property more valuable than the lien was worth.
As an investment, this system seems to have no downside, as those late-night infomercials would have you believe. Either you get the taxes, or you get the property. What could go wrong?
Continue to Part 3: How A Tax Lien Investment Can Go Wrong
When I got up this morning, the TV was on and an infomercial for guaranteed tax-lien returns was on the History Channel. As you’d expect from an infomercial, it followed the same method of sales as the Carlton Sheets ads did – show people who got rich using the system, have the charismatic originator of the system talk about how awesome it is, and throw around hyperbole about getting rich and guaranteed results. The thing is, tax lien certificates aren’t a secret, nor do they take a super-complex system to work. They aren’t, however, guaranteed nor a safe bet.
So, what is a tax lien? Well, when you owe taxes to your city, county, state, or nation, and you don’t pay them back fast enough, the government places a lien on your property. If the lien is on a home you own, the paperwork is filed with the county recorder’s office, like a mortgage or a contractor’s lien. Now, the owed taxes are top of the list to be paid back when the property is sold, or foreclosed on, and it generally eats up your equity if you thought you’d get another loan on your property. If you continue to not pay your taxes, interest and fees build, and the lien gets bigger.
From a business standpoint, unpaid taxes are the accounts receivable of a county’s budget. If you ran a business where people who owed you money never paid, and your outstanding AR balance sheet kept getting bigger, you’d have to take action. Businesses turn things over to collection agencies who call you during dinner and leave terse messages on your work voicemail. Governments can’t really do that, not with as much leeway for collecting. They can get a lien against personal property, they can sieze accounts and tax returns, but beyond that, foreclosure is a pretty big step for a county to get into.
A lot of counties do go the foreclosure route, and have an annual tax sale. If you ask your county auditor’s office around October what properties are up for sale, they’ll probably have a list for you. Properties usually have a starting price above the owed taxes, and are sold in an open auction, so the actual sale price might be quite high.
The downside of a county holding on to tax-default property is that they still don’t have their money. If the property doesn’t even sell for the owed taxes, the county is stuck. These end up as ‘counter sales’, unwanted properties that anyone can step up and buy for a low price. Getting to that point means the county has to wait on getting the tax revenues for years and years, affecting budgets and services.
A few states have moved to the tax lien certificate sale in order to improve tax revenue cash flow. When taxes go unpaid for a few years, the lien is placed and put up for sale. Interested parties who’d like the chance to collect the state’s fees and interest, or the opportunity to foreclose on the property themselves, can pay the county the back taxes and some filing fees, and become the holder of interest for the past-due taxes. This way, the county doesn’t have to wait for tax funds until they foreclose and sell the property themselves.
In a sense, the past-due taxes are “borrowed” from a private investor, and the investor is either paid back when the taxes are caught up or the investor gets to foreclose and own the property themselves. The county or state passes on what little risk they had to investors, who can potentially profit on the deal. The county keeps money flowing, investors get a chance to profit, and everyone’s happy, right?
Next - Part 2: “How Does A Tax Lien Work?”
Small print: tax lien and tax sale laws work differently in different states and counties. General information here is not intended to encompass all possibilities. Consult local laws before investing in tax liens or tax certificates.
Well, not the fair, exactly, but The State Fair of Virginia, Inc., the non-public corporation in charge of the Fair, has reached that point in their Chapter 11 adventures where the Meadow Event Park goes on the auction block. This is the new location of the Virginia Fair, after moving to this new location in 2009, but only a couple years later the money has run out and things are up for sale. Poor money management is the main culprit: if you add up the salaries of the highest-paid officers, you get pretty darn close to their million-and-a-half annual loss that has been conisistent for the past couple years. I don’t think the average investor has the money to buy the birthplace of Secretariat, but the $10 million assessment doesn’t seem too put of line. The articles I’ve read make it unclear whether the sale is just the property, or other assets owned by the fair corporation; it’d be a pretty bad deal if you get the property, but the fair moves someplace else. Maybe somebody will walk away with the property for a song, because there’s not a lot of use for this property aside from massively-scaled events.