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Last Updated: May 14th, 2012 - 22:24:01 |
How do tax lien certificates work? In hundreds of counties throughout the United States, local governments have millions of dollars in outstanding and overdue property taxes owed by property owners who will not or cannot pay their property taxes.
To fund daily services like police, fire, hospitals, welfare, and so son, local governments created and sell these tax lien certificates to investors like you and me.
You are not actually buying the real estate ¨C you are buying the government¡¯s lien on the real estate. In a sense, it's just like a mortgage! When you buy a tax lien, you are paying someone else's property taxes. Best of all, the government actually gives you the right to receive all of the tax money due ¨C including fees, high interest, and penalties. To encourage taxpayers to pay their property taxes, the government charges ¡°punitive,¡± sky-high interest rates, which are passed directly to the tax lien purchaser ¨C that¡¯s you.
That¡¯s right. State and county governments turn to you and me and say something like this:
We have thousands of homeowners who are late in paying their property taxes. But we need the money now. So, if you¡¯ll pay these back taxes and give us the money, then we¡¯ll charge the homeowner a penalty fee. When the homeowner eventually pays the taxes, we'll collect the taxes plus a late fee and give it o you, the investor. That's right. We'll send you a government check to return your investment plus the penalty. And if the property owner doesn't pay the taxes, we'll let you foreclose on the property to recover your invested dollars. This way, we get our tax money now. And you just wait for a period of time to see which way you win. If the taxes don't get paid, you get the property. And if the taxes do get paid, then you get your money back plus a substantial interest penalty.
A substantial penalty. Those are the kinds of phrases that banks like to scare us with. But in this case, you are the bank. And you get to collect the substantial interest penalty for late payment!
For example, in some counties in Florida the interest rate penalty is 18 percent. In Texas, it¡¯s 25 percent, even if the homeowner is only one week late! In Michigan it¡¯s only 15 percent in the first year, but a whopping 50 percent in the second year. Well, it sounds exciting, but, as with everything, there are a few catches.
First catch: Not every state does it this way. At present, about 30 states use tax lien certificates. The rest don¡¯t, so that narrows the field a bit.
Next catch: In the states that do offer tax lien certificates, each individual county handles its own tax lien auction¡With about 1,500 different counties holding separate auctions at different times and with slightly different rules, it can take a lot of homework to track down all of the information. But this extra effort keeps most people away¡which is actually an advantage to you.
Third catch: You just show up at the tax lien auction and bid with other people for the right to pay other people¡¯s taxes for them. Sometimes very few people show up and the certificates to begging. At a recent auction in Chicago, thousands of tax lien certificates went unsold! At other auctions, hundreds of people are there to do the bidding. (You can be sure that some of your bankers will be in the audience.)
You bid for the certificates that you¡¯re interested in, buy them, and wait. The government collects the money for you from the delinquent taxpayer and sends you the check. And you earn 10, 20, 30 percent or more.
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