Many investors who are affected by the stock market’s rising volatility and the near historical low interest rates are looking for an alternative that will generate a good return. One of these alternatives is investing in property tax liens, an investment which has the potential for providing great rates of return, but it also features a high risk, especially for those who are new to investing.
What are Property Tax Liens?
When a home owner doesn’t pay local or county taxes on his or her property anymore, then the city or county places a lien on the property. Having a lien on your property makes it impossible for you to sell or refinance your home until the taxes are paid. A popular practice is for the taxing authority to sell these property liens to the highest bidder at an auction. By selling property liens to third parties, the city or county in which the property is located has the chance to recover the money that should have been paid by the home owner as property taxes.
Investing in Property Tax Liens
When the taxing authority issues a lien on a property, they create a tax lien certificate which shows how much is owed and any penalties. These certificates are then sold at an auction or through an online auction to the highest bidder. Investors have a chance to buy the tax lien certificates sometimes for as little as a few hundred dollars, but most of the time they will cost much more.
After buying a tax lien certificate, the investor gains the right to all the tax-related debt on the property, as well as the interest. The investor will collect the interest, which is assigned by the taxing authority, until the debt is paid off. The repayment period usually lasts from 6 months to 3 years. If the repayment period has ended and the debt isn’t paid off, the investor has the right to foreclose on the property. This usually doesn’t happen, because most home owners manage to repay their debt on time. The investor can also become the owner of the property for a small percent of the market value of the home.
Risks Associated with Investing in Property Tax Liens
Investing in property tax liens comes with some great risks and is not recommended for beginner investors. What may seem like a good deal can quickly turn ugly and result in a waste of time and money. Here are the biggest risks associated with investing in property tax liens:
- The investor has to make sure that he or she knows the property value before investing into a property tax lien. Investing your money before having the property inspected is very risky, as the property owner may have neglected making repairs, so the home may be worth less than you were expecting, or even be worthless.
- The home owner may declare bankruptcy. If the owner of the property declares bankruptcy after you have invested in the property’s tax lien, then your home investment may be at risk, because the Internal Revenue Service can have other claims on the home, which will make your tax lien worthless.
- There may be other liens on the property. Having a title search on the property that you are about to invest in is very important, as it may have other outstanding liens, making it impossible for you to make a profit until the debt is paid off.
Property tax liens are a smart investment, but only if you are an experienced investor. Beginner investors can have success in this business, as well, but it is much easier for them to fall into a trap and end up losing money. Researching the property that you are about to invest in, and having a clear understanding of the property tax lien investment process will ensure that you make a good investment that will generate a profit, without having unpleasant and expensive surprises along the way.