Anyone out there know a thing or two about Tax Lien Certificates that the would be willing to share with a newbie?
I don't know anything about tax lien certificates, but a search by "tax lien certificates" turned up these sites:http://www.taxlienuniversity.com/http://www.taxliens.org/http://www.taxsales.com/http://www.cash4notes.com/taxliens/
You could also read the book "The 16 percent solution" by Joel Moskowitz. He talks about what they are, why they should be invested in, and also lists the states that have them and what rate they pay. He tells you how to do it yourself so you don't have to pay a big company to do it, if you want to.Fool on!!Matt
Anyone out there know a thing or two about Tax Lien Certificates that the would be willing to share with a newbie?FFJ:Tax Lien Certificates are a method that some States use to recoup unpaid property/school taxes. Some States auction the properties off (like my State of PA) and some sell certificates (like NJ I believe). The difference is that in a sale, you take ownership of the property either subject to existing liens and encumbrances (like our Upset Sale here) or free and clear (like our Judicial Sales where they sell everything that didn't sell at Upset). The other States sell tax certificates. Generally they provide the buyer with a lien of certain priority on the property (usually first except for IRS liens). It is then the certificate buyers' job to foreclose (I use the word foreclosure even though it is usually used in terms of a mortgage. Here I mean any action to recover a debt against a property) and obtain the property or satisfaction of the debt. I personally prefer PA's system where the property is purchased at an auction. The prices are higher, but it's more rewarding. It is also much easier to take possession of the property.With certificates, suppose you purchase $10k worth on a property. Clearly the owner will fight your foreclosure. The owner will try to deal with you, maybe flip-flop in and out of bankruptcy, etc. to delay your repayment. Buyer certificates are a lot like buyer bad mortgages at a discount (very rewarding as well). It takes a committed buyer to get the debt paid.Splotto
Splotto--I think you are partially right with yoru description of a Tax Lien Certificate. When you buy one of these certificates you are buying the right to foreclose on the property, if the owner doesn't pay the back taxes, but what you are getting in the meantime is an interest bearing certificate. Here is an example:In Missouri they pay 10% on tax certificates. So if someone owes the city $1000 on a property you go to the auction and buy the tax lien certificate for $1000. The certificate lasts for 3 years and carries with it interest penalties equal to 10% per year. So for three years you have an interest bearing instrument. If after three years the owner doesn't pay the back taxes you can foreclose on the property and take it over. Obviously you would need to work out the other existing liens with those lienholders, but if the property is owned free and clear and there are no other lienholders you get the property for your $1000 investment.If the person pays off the backtaxes they are liable for the $1000 and the interest that comes with it. So you had a ST interest bearing instrument with a booster potential where you might be able to get the property. These things are extremely secure since they are backed by real estate, and since it's back taxes you are the first lien holder (in most cases) so you're first up at a foreclosure.Hope that helps.Fool on!!Matt
KC: I agree. However, the foreclosure business isn't for everyone and there are costs associated with it. For example, in my county, there is a $2000 deposit with the sheriff to cover costs of the sale. I love the entire tax sale business. I think that anyone looking for a method of investing in RE, and who are liquid, should look into it.Splotto
Folks:Much thanks for your help. My first move will be to do some reading. It sounds like the best place to start is "The 16 Percent Solution". However, I want want to throw another question to the crowd... "These things are extremely secure since they are backed by real estate, and since it's back taxes you are the first lien holder (in most cases) so you're first up at a foreclosure."I have no interest in being a skeptic, but it seems that the whole idea recieves a fair amount of skepticism. Anyone have any thoughts about why and what the real risks are (lack of education aside)?Mahalo,FFJ
Anyone have any thoughts about why and what the real risks are (lack of education aside)?I've heard that the real risk is that the property owner will redeem the property, which happens most of the time, so you receive those high rates of return for a very short time.
FFJ: One real risk is that the real estate which backs your investment will become worthless (or worse, a liability). The home on the property could burn down. The current possessor could destroy it. There could be environmental contamination of some sort. There could be an IRS lien on the property. It could be siezed as part of criminal activity on the property. Etc. Clearly as a lien holder you have an insurable interest, so you could take out fire insurance on the home as well as other insurance. Another risk that cuts into your RoR is the cost of foreclosing and evicting the holdover in possession. You might also face an initial fight in bankruptcy court. However, you would prevail there. It's always good to be a secured creditor in bankruptcy (provided the security exceeds your debt).Splotto
Anyone have any thoughts about why and what the real risks are (lack of education aside)?I think one of the biggest risks is estimating the value of the underlying property. Valuing real property (either raw land or improved) can be much more an art than a science and you have to be sure that the broker you use (if you use a broker, and if you don't, that YOU know the market) really knows their stuff and their market. I have seen where a property was mis-valued and you end up underwater compared to the redemptive value. That really sucks, because you can't foreclose due to lack of value and when it won't redeem, which it probably won't, then it won't take long for you to be inferior to other liens. At that point you just hope someone to whom you can assign the lien comes along with an actual plan for the property and you can realize some pennies on the dollar.If you are able to foreclose on a property and become the title holder then that opens up a whole new basket of risks. Sometimes your mortgagor stays put and you have to take action against them to move them out. You won't truly unlock value until you can get it empty and do some repair work. Also, if you planned on turning the property over quickly and it doesn't then you have to put more money in to stay current with the taxes. If you don't then you might have a lien holder superior to the one on which you foreclosed. You have insurance costs, maintenance costs, broker costs, all costs that can work towards putting you underwater. These are just a few thoughts off the top of my head. The main theme, know your market very well, or have trusted professionals help you know it.Roger
I would say that all three answers you have already received cover most of the risks pretty aptly. The biggest risk is the one that Catherine notes. 99% of all Tax Liens are redeemed, so the likihoood of you actually getting a property is pretty small. And a lot of times once someone realizes that Uncle Sam isn't going to support them anymore they wise up and take care of their problem. So your biggest problem will be keeping yourself fully invested in these instruments.Here are some internet sites for additional information. Depending on your current work situation it might be easier for you to hire this out and just accept a little smaller return for them to run the investment for you.http://www.tax-foreclosure.com/http://www.ucap.com/http://www.investing-tools.com/links/tax-lieninvesting.htmlhttp://www.foreclosures-auctions.com/tax_lien_certificates.htmAnd I asked Jeeves and got all this stuff back.http://www.ask.com/main/askjeeves.asp?ask=tax+lien+certificatesFool on!!Matt
Here's some information about tax liens that I just ran across:http://www.foreclosures.com/forecast/ff_Aug02/default.asp?topic=front
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