"What are Tax Lien Certificates?" - A Basic Introduction to Real Estate Tax Liens.
Tax lien certificates have been around for over 200 years. In fact, investors and Wall Street insiders spend billions of dollars each year buying tax lien certificates. They've also done their very best to keep the tax lien business to themselves.
As a result, tax lien certificates are virtually unknown to all except a small percentage of the world's wealthiest investors.
Which is why tax lien certificates have attracted the attention of some of the biggest banks and hedge funds in the country including Bank of America, JPMorgan Chase, and Fortress Investment Group.
Here's how the tax lien certificate business works.
In the conventional mortgage market, lenders typically insist that an escrow account be set up to cover the costs of real estate property taxes and mortgage insurance. However, the vast majority of subprime mortgage loans that were made between 2001 and 2008 did not include an escrow account.
Some lenders and mortgage brokers used the lower monthly loan payment amount without escrow to lure consumers into believing that the loans were more affordable.
Many homeowners wrongly assumed the new loan would also have an escrow account and did not know that they would be responsible for making tax payments directly to the local municipality.
As a result of the subprime mortgage meltdown, thousands of counties all across the United States have millions of dollars in outstanding property taxes. Communities rely on the revenue generated from property taxes to fund daily services.
Unpaid real estate taxes creates a serious cash-flow problem for communities.
If local governments are unable to collect real estate property taxes, they are also unable to fund important government services like police protection, public schooling, and emergency medical services.
Recently, The National Tax Lien Association reported that annual property tax delinquencies are on the rise and total approximately $15 billion nationwide.
Politicians find themselves in a difficult situation, raising property taxes isn't popular and could mean losing an election. The failure to collect on these past-due debts weighs heavily on their already-overburdened budgets.
Across the United States cash-strapped communities turn to investors for help.
To solve this cash-flow problem, local governments allow investors to pay off a portion of these delinquent property taxes. In return, investors receive a tax lien certificate which is a claim for property taxes.
Currently, you can buy tax lien certificates in the following states:
When you buy tax lien certificates you are helping cities and communities. The money you pay to purchase these tax lien certificates generates the much needed revenue cities and communities need to pay for essential services.
Between $7 billion and $10 billion worth of tax lien certificates are sold each year.
Investors buy tax lien certificates at delinquent property tax sale auctions. A tax lien certificate transfers all the rights that come with being the owner of the real estate tax lien from the government to the investor.
Tax lien certificate investors effectively own a claim against the property until the property owner pays the county or municipality back.
A growing number of counties and municipalities conduct their delinquent property tax sale auctions online making it possible to purchase tax lien certificates from the comfort of home.
If purchasing tax lien certificate over the Internet isn't your thing you can buy tax lien certificates through the mail. You can even walk into the county offices and purchase them over-the-counter.
With a lot of investments it takes a great deal of money to get started but this is simply not the case with tax lien certificates.
County governments and municipalities sell tax lien certificates on all types of properties so you can find tax lien certificates that will fit most budgets. I've seen them range from as little as $6 at the low end to several million at the high end. You can even use your retirement account or 401(k) to purchase them.
Our communities will go bankrupt unless investors buy these tax lien certificates.
When you buy a tax lien certificate, you are paying someone else's delinquent property taxes. What's more, the government actually gives you the right to receive all of the tax money due - including fees, high interest, and penalties.
To encourage tax-delinquent property owners to pay their past-due property taxes, the county charges them interest and/or penalties (think of it like a late fee), which is passed directly to the tax lien purchaser....that's you!
Unlike Wall Street, state laws set the rates that counties can charge delinquent taxpayers and they can range anywhere from 12% to 36% per year.
Property owners who pay back what they owe, pay the county, which then repays the investor what they paid to satisfy the delinquent taxes, plus whatever interest rate was set at the time of the sale.
Unlike the stock market, these profit rates of 16% to 36% are fixed to stay high.
A lot of people have seen their retirement accounts evaporate with the ups and downs of the stock market. With tax lien certificates, you are mandated by law to receive profit rates of:
- 12% per year in Alabama (Sec. 40-10-122 ),
- 16% per year in Arizona (Sec. 42-18053 ),
- 18% per year in Florida (Sec. 197.172 ),
- 24% per year in Iowa (Sec. 447.1 ),
- 36% per year in Illinois (Sec. 21-355 ).
When you buy tax lien certificates you're solving several problems. Communities get their much needed tax dollars, allowing them to fund daily services, property owners get more time to pay their delinquent taxes (usually 6 months to 4 years, this period of time is called the redemption period) and you get profit rates of 16%, 18%, 24%, up to 36% mandated by United States law.
The redemption period can be rather short in some states. For example, a property owner in Arkansas has only 30 days to redeem after the sale, and in Delaware the redemption period for owners is only 60 days. The District of Columbia, Maryland and Massachusetts permit the redemption period to be foreclosed as soon as six (6) months after the tax sale.
When the county collects the past due taxes (usually within 2 years) they mail you a check covering what you paid to satisfy the back taxes PLUS profit rates of 16%, 18%, 24%, up to 36% which are mandated by United States law!
By law, real estate tax liens are senior to other liens including mortgages.
By law, real estate tax liens are almost always senior to other liens including mortgages, deeds of trust, judgment liens, and even IRS liens. Thus, because taxes are usually only a fraction of the value of the property, this makes the tax lien certificate a well-secured investment.
Since most property owners pay off their delinquent property taxes within a year and about 95% of the time back taxes are paid off within two (2) years you won't have to wait too long to recoup your profits.
If the property owner does not satisfy the delinquent taxes within the period of time specified by state law (known as the redemption period). Then, the county has the legal right to give you the property.
Let me explain.
All across the country state governments have passed laws which make the real estate tax lien superior and senior to all other liens and encumbrances, in some instances this would include the mortgage.
Most states grant this "super-priority" status to property tax liens as a matter of statute while other states have reached the same result as a matter of judicial decision.
In the state of Florida:
"All taxes imposed pursuant to the State Constitution and laws of this state shall be a first lien, superior to all other liens, on any property against which the taxes have been assessed..."
Just like Florida, all across the country individual states have enacted similar laws which mandate that tax liens are "superior and senior to all other liens."
State laws authorizes county governments with the right to give you the property.
What happens if the property owner does not redeem the tax lien and pay the county their delinquent property taxes?
If the county does not receive the property taxes plus interest and/or penalties within the period of time specified by state law, then according to state law the county has the legal right to give you the property.
In return, all you have to do is pay any remaining property taxes and costs related with them (i.e. title and recording fee's) at which point the county execute a deed to the property.
Keep in mind, about 95% of the time back taxes are paid off within two (2) years and about 5% of the time they're not at which point state law grants the county the legal right to give you the property.
Banks and Investors have been profiting with tax liens for years and now it's your turn.
No doubt the idea of capturing profit rates of 16%, 18%, 24%, up to 36% mandated by United States law and secured by real estate is exciting especially given the current conditions of the global economy.
Double digit profit rates secured by real estate are just two of the reasons why tax lien certificates has attracted some of the biggest banks and hedge funds in the country including Bank of America, JPMorgan Chase, and Fortress Investment Group.
The banks were dabbling in the tax lien business before the $787 Billion Stimulus Bill but they have ramped up their purchases since the crash of the housing market and bailout money became available.
Take a look at just one county in the state of Arizona. In the two years before the bailout, banks bought about $3.9 million in tax liens at the annual Pima County Arizona tax sale auction. Banks have bought $10.3 million at the last two auctions. Since the bailout, they've bought an additional $4.1 million in tax liens outside the auction (over-the counter).
Since the bailout, the banks have bought $16 million worth of tax liens in Pima County.
Bank of America, JP Morgan Chase, US Bank, and Wells Fargo collectively have bought $16 million worth of tax liens in Pima County Arizona since the 2008 bailout.
The interactive map below will allow you to see the tax lien certificates purchased and the foreclosures processed by each Bank. You can get started by clicking the boxes next to the various bank names.
If you click on the tax lien or foreclosure icon a bubble will pop up to show you the address, the lender, the amount of the tax lien and what year the tax lien or foreclosure occurred.
We've covered a lot, let's review the
tax lien certificate business.
In review, when you buy tax lien certificates you're helping our communities by paying a portion of these past due taxes so they can continue to fund important government services like police protection, public schooling, and emergency medical services.
You're also helping delinquent property owners by giving them more time to pay off their taxes (usually 6 months to 4 years), and when the county collects the past due taxes they mail you a check covering what you paid to satisfy the delinquent property taxes PLUS profit rates of 16%, 18%, 24%, up to 36% - mandated by United States law!
As the owner of a tax lien certificate you have a first lien position on the property. This means the property owner cannot sell, refinance, get a second mortgage or home equity loan until you receive what you paid to satisfy the delinquent property taxes PLUS interest and/or penalties.
If the property owner does not satisfy the delinquent taxes within the period of time specified by state law (known as the redemption period) then, the county has the legal right to give you the property!
Once you own the property you can do whatever you like; sell it for huge profit checks, rent it for monthly cash-flow, or if you like, even move in. The choice is yours, the property belongs to you.
Tax lien certificates are exciting but you have to know what you're doing.
In my opinion, tax lien certificates are the ideal investment but you need to know what you're doing so you can completely avoid these costly pitfalls including:
- Pitfall #1: Identify and Avoid Worthless Properties
- Pitfall #2: Identify and Avoid Federal Tax Liens
- Pitfall #3: Identify and Avoid Bad Neighborhoods
- Pitfall #4: Identify and Avoid Bankruptcy
- Pitfall #5: Identify and Avoid Costly Environmental Issues
- Pitfall #6: Identify and Navigate Competitive Markets
- Pitfall #7: Identify and Navigate Uninsurable Titles
Tax lien certificates can be a profitable investment and they have a lot going for them including double digit profit rates mandated by United States law and secured by real estate. On the flip-side, tax lien certificates can be a costly investment because there are some pitfalls which, if not avoided, could end up costing you far more than what you initially invested.
Hi, my name is Steven Waters and I'm the founder of Tax Lien University. Since 2001 I've been on a mission to arm investors with accurate and authoritative information so they can take advantage of the tremendous wealth-generating potential of tax lien certificates.
I've been in this business for over a decade. I can still remember my first tax sale auction and how excited I was to buy my first tax lien property. It's hard to believe that was nearly 15 years ago. A lot has changed between then and now but one thing has remained the same; my passion for this business.
Since 2001 I've been on a mission to
provide authoritative information.
In 2001 I founded Tax Lien University with the sole mission of providing accurate and authoritative information so beginning investors could learn how-to profit with tax lien certificates.
I've spent nearly 15 years of my life perfecting the steps and process for investing in tax lien certificates. Through my free newsletter and top-selling course Creating Wealth Without Risk™ I've helped nearly 100,000 people learn how to profit with tax lien certificates.
From the beginning, I wanted Tax Lien University to be a different kind of company. I wanted a company that not only valued it's customers and clients but was committed to helping them achieve their goals. At Tax Lien University, we measure our success by the success of our students.
"I purchased 3 tax lien certificates at an Internet auction for Miami-Dade County, Florida. All three were buildable vacant lots in moderate income neighborhoods. The prices were: (1)$1,018.86 (2) $1,224.90 (3) $1,654.82. I got 18% interest on all of them. I placed 39 bids in total."
- A. Hamad, Florida
Every day we go to work helping our students capture the tremendous wealth-generating power of tax lien certificates. We do this by channelling knowledge and value through our various educational products and services. It was true when we opened in 2001, and it’s just as true today.
With all the misinformation out there it's
hard to know what is fact or fiction.
Over the last few years I've seen the various late-night infomercials and high-pressure seminars where the "guru's" talk about how rich you can get with tax lien certificates.
They rarely take the time to point out the pitfalls because they are too busy exaggerating the benefits in order to sell a product or service.
Focusing entirely on the upside and neglecting the downside does more harm than good because it paints an inaccurate and distorted picture of this business. It not only confuses people but more importantly it completely misleads them.
Unfortunately, I've been on the receiving end witnessing first hand the damage resulting when a misinformed and mislead investor pulls the trigger and buys a tax lien on the wrong property. The excitement quickly fades once they realize they just became the new owner of a property ridden with problems.
Despite what the "guru's" have said it is possible to lose money with tax liens.
It's not your fault. If you're like most people I talk with, you first learned about tax lien certificates from either a late-night infomercial or a high-pressure weekend seminar. My experience is that more often than not the "experts" are more interested in selling a product than providing accurate information.
Here at Tax Lien University we are on a mission to arm investors with accurate and authoritative information so they can bypass the pitfalls and profit, like Wall Street does, with tax lien certificates.
Steven E. Waters
Tax Lien University, Inc.
I bought my first tax lien property nearly 15 years ago and I've been perfecting the system and process ever since.
Is there an aspect of tax lien certificates you would like to know more about but is not covered in the articles above? No problem, make your request in the user comment section at the bottom of the page.
Below you will find a collection of the latest user questions and comments relating to tax lien certificates.
comments powered by Disqus