What is a tax lien? First off, a lien is a charge or a claim that, once recorded encumbers someone's property to legally enforce the payment of debts or obligations. A lien must be cleared before a warranty deed can be issued. Similar to a lien in which the lender places against a property to ensure they get paid, a tax lien deals with the government's way of protecting themselves when the property taxes are not paid. As in both cases, liens give them the right to encumber the property until certain agreed upon terms are met or paid.
It is major focal point for local governments and municipalities to see to it that property taxes are paid. Unpaid property taxes, mean less cash flow to cover the needs and responsibilities of local governments. Without the collection of property taxes, counties are not able to perform important services most of us take for granted. Things like public schooling, police and fire departments just to name a few. Counties would literally go bankrupt without the revenue generated from local property taxes. Tax liens are a way to ensure these local government necessities could continue to function without interruption.
Some might ask if there is a difference between a tax levy and a tax lien. The answer is yes. A tax levy allows the government to seize property immediately to pay off back taxes, whereas a tax lien only gives the government the right to seize property after certain requirements are met. In the end, the government always gets paid.
In many cases, property taxes are escrowed in the homeowner's monthly mortgage payments. Today there are a tremendous amount of foreclosures happening all throughout the country. If people are not making their mortgage payments, chances are they are also not paying their property taxes. There are several reasons why homeowners fail to pay their property taxes, which then puts them at risk for the government to issue a tax lien. Some of these reason might be loss of job, death, they simply forget, or they decide it would be better not to pay.
When homeowners, for whatever reason, do not pay property taxes, they essentially give the right to the local county’s state or federal government to seize the property. Under the U.S. tax laws each country in the U.S., there are over 3000 of them, has their own rules and penalty’s so to speak. Because each county is different, and laws are different, some governments have the right to issue a tax lien on the property until the taxes are paid, or there is a certain mandated time frame before they can auction off the property for the back taxes so that the homeowner has a chance to earn enough money to pay these taxes plus the penalty or interest rate attached to it. If by chance the sale of the property for the back taxes doesn’t satisfy the tax lien against the property, the government has the right to go after other properties or assets of the homeowner to pay off the unpaid taxes.
A Tax Lien is exactly what is sounds like... it's a lien on a piece of property to ensure taxes are paid each year on the property. If you own real estate, you know that you have to pay taxes on the property you own each year, regardless if there is a house on it or not. Much like a mortgage company will place a lien against your property when you borrow money to purchase a home, the government will put tax liens on properties as a way to ensure they get paid. Failure to pay your property taxes could result in the issuance of a tax lien certificate.
Most homeowners don't realize that if they fail to pay their property taxes, investors can actually bid at county tax lien auctions for the right to pay the property taxes in behalf of the homeowner. The highest bidder receives a tax lien certificate. In return for paying the delinquent property taxes, the property owner agrees, by it's states mandated laws, to pay a specific penalty. This penalty ranges anywhere from 16% to 24%. In one state, the penalty gets as high as 50%, which is a huge return for paying someone elses property taxes.
Tax Certificates are extremely safe! Property taxes help pay for most of the government and local county operations like fire and police depts. You and I both know when it comes to the government, they don't mess around when it comes to money. If they don't receive money to fund their services, they find ways to get paid. Unpaid property taxes cut to the front of the line when we speak of lien priority, ensuring that they ALWAYS get paid first. Yes, even before the mortgages no matter when those liens were recorded. Bottom line... you will get paid!Are there any risks by Investing in Tax Lien Certificates?
There are always risks when investing. Investing in Tax Lien Certificates is no different either. There are two main risks one that very seldom occurs however it's always good to know as much as you can when you start investing in tax lien certificates. The main risk (which very seldom occurs) would be that the home is located in the middle of some hazardous waste material that requires more money to clean up than what the property is worth and so there was a good reason the homeowner decided to leave the property and not pay the taxes. So you might end up with a property you don't want. The other risk is that your money is tied up longer than expected. If the homeowner declares bankruptcy or the property goes into foreclosure, the tax lien stays with the property, but you may not get paid until after the foreclosure auction.
Can I own a Property Free and Clear through Tax Lien Investing?
YES! However, very rarely does this ever happen and I'll explain why. All the late night infomercials and gurus will tell this is what makes tax lien investing so exciting because you could end up with a property free and clear for only the back taxes. I would venture to say 1 in every 100,000 tax liens does this ever happen and here's why. Chances are if a property owner is not paying his property taxes, he's also not paying his mortgage. Mortgage companies know that tax liens are senior to even their position. So in the event a property is going to auction and property taxes have not been paying, the mortgage companies will forward money to pay the taxes and secure their position. They will NEVER let a property go for just the back taxes. So the only chance you have is when a homeowner owns his home free and clear... no mortgages.
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