Tax Lien Investing:
Everything You Wanted To Know About Tax Lien Purchases
Continued...
By: Darius M. Barazandeh, Attorney at Law/M.B.A.
V. Tax Lien Holder Rights and Advantages
The purchaser at tax sale will receive a certificate of purchase
or (‘certificate’). Thus it is said that the purchaser holds a
‘tax lien certificate’. The certificate is a document that
illustrates the investor’s ownership in the tax lien. A properly
researched tax lien will award the investor with numerous
benefits and in most cases very few headaches. In general, the
tax lien investor has the following rights and advantages:
1) The Right to Collect Interest or Foreclose: The prudent
investor will earn profit on the lien certificate no matter the
outcome. If the lien is paid off by the delinquent property
owner through redemption, then the investor can generally expect
to receive a double digit return on the original investment. On
the other hand, if redemption does not occur then the investor
can foreclose on the certificate. After foreclosure, the
investor will obtain full ownership rights to the parcel.
Moreover, since property taxes are a small percentage of market
value, the investor stands to earn substantial profit on the
transaction.
2) A High Priority Lien Holder Position: At the tax sale the
investor purchases a tax lien once held by the county. The
priority position of the property tax lien is not subordinated
(or diminished) because a private party now holds the lien. The
investor holds the same rights once held by the county. Because
the lien occupies a first position on the land title,
foreclosure of the tax lien clears almost all other liens from
the title. Foreclosure not only places full property ownership
in the hands of the investor, but it purges the land title of
other subordinate liens and debts. The end result is a property
interest that is generally ‘free and clear’ of other obligations
on the title. NOTE: Exceptions will be discussed in Section VI.
3) No Landowner Liability or Maintenance Responsibility: An
often forgotten benefit of tax lien investing is the passive
nature of the investment. Only one state grants the purchaser of
a tax lien possession of the property. In all other states, the
investor does not obtain possession by purchasing the tax lien.
The investor is simply a super priority lien holder, but not a
property owner. Because the tax lien investor is not a possessor
of property, there is no landowner liability. This is clearly an
advantage as lawsuits against property owners/operators continue
to rise. According to The Wall Street Journal (Feb 2003),
"Something as simple as paying a college kid to clean your
gutters or giving youngsters a few bucks to shovel the driveway
could lead to a serious lawsuit."
The lack of control over the property creates an asset
protection feature for the tax lien investor. NOTE: After
foreclosure the tax lien investor will have possession of the
property.
4) Enforcement Rights Without Enforcement Duties: Another
advantage is that the tax lien investor need not demand payment
or start collection efforts to compel payment from the
delinquent property owner. Although the lien is now owned by a
private investor the county will still handle enforcement of the
lien until foreclosure. Some states will actually handle the
foreclosure process for you. Irregardless, there is no contact
with the delinquent taxpayer. Moreover, in the redemption
scenario most state tax offices handle the collection of
redemption money plus interest. The investor will receive notice
that payment has been made to the county. Most states will
require the investor to mail back the actual tax certificate in
return for the funds invested plus interest.
5) The Right to Purchase Later Year Tax Liens: Liens sold at
auction are only for one year’s delinquent taxes. If the
property owner defaults on next year’s taxes then the investor
has the right to privately acquire these taxes with no
competition. This can maximize investment performance depending
on the tax lien jurisdiction. It also reduces research time
since the investor will already be familiar with a particular
parcel.
Clearly tax lien investing presents some very favorable
advantages to the astute investor. The numerous purchase
opportunities and the high security/low risk nature of tax liens
make this an extremely attractive option to many active forms of
real estate, stock and bond market investment.
Tax Lien Sales and Post Sale Opportunities: The tax lien
purchaser is also favored by the surplus of tax lien instruments
that are available for purchase. For example, at the 2003
Maricopa County , Arizona tax sale 21,200 liens were available
for sale but only 14,156 liens were sold. A total of 7,044 or
approximately 33% of liens were made available for purchase
after the tax sale. In 2004, that percentage totaled 27% and was
still within the historical range of fluctuation. Although
Arizona ’s Maricopa County is a very popular destination for tax
lien investors, literally thousands of liens are still available
for purchase after each sale. Such liens would still carry a
full 16% interest rate for the investor. While such a large
inventory can create confusion for the investor, a systematic
process for eliminating liens can transform this into a simple
yet profitable exercise.
VI. Tax Lien Investor Risks
Tax lien investing does have numerous advantages, there are also
risks and traps for the unwary. As with any type of investment
(real estate or otherwise) technique and a proper understanding
of the processes involved are critical. In the following pages I
will review the general risk areas which can plague investors. A
full discussion of these risks is beyond the scope of this short
review, nevertheless realize that virtually all of these risks
can be easily avoided using a logical research and selection
strategy.
Failure to Research Property:
Viewing the Property:
Property research is important before purchasing any type of
real estate. Tax lien investment is no different. Since the real
property gives the lien its security and value, viewing the
property is recommended. You may decide to view a parcel
yourself or use a 3rd party. Many investors, including myself,
travel to high interest states just to view property and
purchase tax liens. Numerous states have aerial photographs of
real property located in the county. Clark County in Nevada has
aerial photographs of property, as do many counties in Florida
and other states. In addition, realtors and other real estate
professionals have been used for years by the out-of-state
investor when a property sight evaluation is required. In fact,
I have developed detailed selection criteria for investors who
plan on viewing the property and those who do not. Applying
these steps in their precise order is fundamental for success in
this process. NOTE: Someone should view the property.
Researching Value:
The failure to accurately determine market value of property
backing a tax lien certificate is an unnecessary risk. County
appraisal data is available online for almost 70% of counties in
the United States . Even more exciting is the fact that this
number will only continue to rise. Counties without online data
are just a phone call away. Of course, there are other
components to market value such as location, future uses,
zoning, flood plain paths, city restrictions, etc. The vast
majority of these questions can be answered by viewing the
property, speaking to county employees, and/or contacting real
estate professionals in the area. The appropriate zoning
department in that county can also provide you with a great deal
of information on any zoning regulations that may impact the use
of the property.
Environmental Risk:
The tax lien purchaser is not an owner of property for
environmental liability purposes. This is good news. ‘What about
investors who foreclose on their tax lien?’, you may ask. Well,
Federal law has exempted lien holders who foreclose on
contaminated property allowing them to maintain lien holder
status and avoid liability. These rules are always subject to
change so perform a few basic steps before buying. First, a
phone call to the state environmental agency is a worthwhile
step for the beginner. The investor is also better served by
focusing on subdivision lots and/or houses. The likelihood of
environmental liability with such ‘subdivision’ properties is
greatly diminished and the property has quicker re-sale
potential. When working a new county an understanding of the
geographic area is worthwhile. In summary, environmental risk
exposure when investing is tax lien certificates is less than
that found in other forms of real estate investment. Remember
that no possession generally means no landowner liability in
most states.
Failure to Research Title:
Surviving Liens and Encumbrances:
Property tax liens are superior to judgment liens, mortgage
liens, trust deeds, and other private liens. Nevertheless, some
liens share equal priority with the tax lien. For example, state
tax liens share equal priority with property tax liens in most
states. Federal tax liens for unpaid Federal income taxes will
also share priority, thus survive the foreclosure of the tax
lien. The investor is unlikely to be responsible for payment
since the Federal government has its own ‘right to redeem’ which
last 120 days after the foreclosure of the tax lien. The
investor is entitled to receive attorney’s fees, interest, and
costs incurred in the upkeep of the property.
Keep in mind however, that no investor should have to contend
with state or federal tax liens since simple research can
quickly detect such liens. Where do you find this information? I
teach my students the often ‘hidden’ traps associated with
researching title. It is imperative that you get good
instruction when proceeding forward. Your goal should be
investment certainty through a streamlined research process, not
confusion from erratic methods. I have found that almost every
‘guru’ in this field tends to gloss over the ‘equal priority’
lien issue. Never invest in tax liens without fully
understanding this area. If you have questions then please email
me.
Bankruptcy of the Delinquent Taxpayer
Tax lien jurisdictions work diligently to exclude liens from the
sale that have pending litigation such as bankruptcy. Bankruptcy
after the purchase of a lien however can create some risk for
the investor. If a bankruptcy occurs after the tax lien
purchase, don’t despair since all is not lost. The tax lien
holder is customarily given high priority when the debts of the
bankrupt estate are paid. Very seldom is the tax lien not paid
off during a bankruptcy proceeding. The end result is a
favorable rate of return for the investor.
The only troubling scenario may occur in a Chapter 7 bankruptcy.
Bankruptcy laws may allow the trustee to pay the expenses of
administering the bankrupt estate before paying the tax lien.
This is an uncommon practice and would require sufficient
grounds, namely that the tax lien debt is so high that payment
would make it nearly impossible to administer the bankruptcy.
This is a difficult position for the bankruptcy trustee to win.
Also if the investor follows certain cost guidelines when
selecting a lien this risk can be virtually eliminated. In the
end, even bankruptcy can have little effect on a tax lien
investment if proper techniques are applied.
FDIC Held Liens
When a bank fails due to insolvency (i.e., not enough money) any
loans owed to the bank are administered by the Federal Deposit
Insurance Corporation (FDIC). If a loan administered by the FDIC
is attached to a property on your list, then move on. FDIC liens
can create issues during foreclosure, namely delays. The good
news is that it is very easy to check for FDIC administered
loans during a review of title. In fact, a list of FDIC
institutions is available online. Feel free to email me for
listings of FDIC controlled loans. Once you obtain the list you
should check the FDIC list against mortgage holders (if any) on
the property. Moreover since most tax lien certificates are
redeemed, the risk of a delayed foreclosure due to a FDIC
administered lien is quite remote and easily avoidable.
Foreclosure Title Issues
Title Certification vs. Suit to Quiet Title:
At one time obtaining ‘clear’ title through tax foreclosure sale
required a title clearing suit before the land could be sold
with bank financing. Those days are quickly coming to an end
with the advent of title certification processes. A title
certification is a relatively simple and inexpensive process
that confirms title to lenders. This creates numerous
opportunities to sell the property with bank financing.
Irregardless, some investors will choose to sell the property to
another investor using non-traditional means, such as a below
market value price (i.e., wholesaling). Depending on preference
investors may also wish to rent out or owner finance properties.
Appreciation and interest on owner carried financing can parlay
a small tax lien investment into a cash flow vehicle
demonstrating astronomical returns.
Variations in State Procedure
Understanding Differing State Procedures:
A firm analysis and understanding of the laws in your investment
state is critical. There are many slight variations to the
general rules discussed in this paper. The good news is that
proper information and training can bridge the experience gap
very quickly. I am committed to sharing my knowledge with you
and providing current, realistic information to new and
experienced investors alike.
VI. Tax Lien Investor Preferences
While some risks do exist with tax lien investing, these risks
can be avoided by conducting simple research. Proper and
systematic research techniques will award the tax lien investor
with numerous benefits and in most cases very few headaches.
Recall that tax liens can provide the investor with a safe and
secure rate of return that outperforms many other passive
investment vehicles, such as stock and bond market investments.
The low maintenance aspect of tax lien investing makes this a
viable option to many active forms of real estate investment.
Investors who do not wish become full-time property managers or
who desire a passive, high yield, part-time investment will
delight in tax lien opportunities. Investors with substantial
capital can also utilize the tax lien sale process to quickly
increase cash reserves. Full-time investors who desire property
ownership can also take advantage of liens which have expired
redemption periods. These liens are available in every tax lien
state.
Tax lien investing will also allow some control over the end
results. Rules can be manipulated depending on whether the
desired end result is property ownership or a stated rate of
return, for example:
Property Ownership Strategies:
Recall that the prudent investor will earn profit on the lien
certificate no matter the outcome. An investor can greatly
increase the likelihood of obtaining the property by targeting
out-of-town owners and vacant lands. Houses and subdivision lots
which do not have mortgages attached to the property are also
redeemed less frequently.
Redemption Strategies:
Conversely, an investor interested in redemption would target
owner occupied properties with attached mortgages. The more an
investor utilizes these processes the more the predictable the
outcomes.
VII. Conclusion
Careful investing in tax lien certificates will allow for safe
and quick wealth accumulation. Recall that this investment
technique combines tremendous upside potential with very
manageable risk. A recap of these advantages include:
The Right to Collect Interest or Take Title to Property
A High Priority Lien Holder Position
No Landowner Liability or Maintenance Responsibility
Enforcement Rights Without Enforcement Duties
The Right to Purchase Later Year Tax Liens
In summary, perhaps the most exciting component of this
investment technique is the fact that it can be repeated time
and time again with consistent results. This is because the same
legal processes create consistent opportunities year after year
resulting in a steady inventory of tax liens. You can feel good
about your efforts since your investment will help local
governments fund important civil services.
Keep in mind however that the rules forming the process are
subject to slight variation as time passes so keeping up with
changes in the law is important. Tax lien investing is a
significant opportunity which also requires some specialized
knowledge. If you can ‘learn the ropes’ so to speak, then it’s
very easy to multiply your money hundreds of times over. Here is
my suggestion: 1) learn the process, and then 2) repeat the
process until you are satisfied with you wealth!
Tax Lien Article
Part 1 Tax
Lien Course
Texas Tax Deed Course
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