Land Tax Lien Foreclosures are a little known method to acquire properties for as little as 5-10% of the true market value of a property. In the US, every year hundreds of thousands of property owners do not pay their Real Estate property taxes on time. As a result in 18 states there are laws allowing the Counties to do so called tax Lien auctions and auction off the Delinquent Tax obligations to investors in exchange for them receiving several rights.
Normally, the rates for lien redemption are between 12 and 36%, with 16% being the average. Illinois has a rate of 18% per half a year for a total of 36% per year. There are exceptions to the rate paid. In many states a rate may be prorated if the owner redeems (pays off the taxes) the back taxes and any penalties prior to a year in default. In others, full payment of the tax and lean percentage regardless of the time frame the property is redeemed is required. The right to collect a (usually high) interest rate is the investor’s first right.
Investor right #2 is the right to foreclose on the property. The investor pays the outstanding property taxes to the county, and a lien is being placed against this property to make sure the investor gets paid back his investment plus interest when the property is sold. Redemption periods very from state to state but usually range between 3 and 5 years. The lien holder has the right to foreclose on the property at the end of the redemption period unless the owner has paid the tax, penalties, and lien amounts due.
Foreclosure periods can vary by state. In some cases the State does the foreclosure for the investor. In others, the investor must initiate foreclosure proceedings at the end of the redemption period. In most states, the Tax lien supersedes most other liens including Bank Mortgages and Mechanics liens. The only exceptions are Federal and State IRS liens. There are few other precedent liens, thus a Tax Lien Foreclosure usually leads to a free and clear title to the property.
You, as the investor, may be able to procure the subsequent year’s lien on property you already hold a lien upon. This third right allows for the non-competitive procurement of the lien for future delinquencies. You may also be allows to procure the year’s lien many months before the normal tax lien auctions are held.
Tax lien investments have no effective downside, they should be considered very safe investments. If the owner pay the redemption cost, you earn an excellent profit in interest charges. If the owner does not redeem the lien, the land becomes your through foreclosure proceedings.
As an example, you could earn a $100,000 property for $5,500 investment! Here is how. You pay $1,500 per year on the taxes in default on the property. The redemption period before foreclosure is 3 years. You have the right as the previous year’s lien holder to purchase, without competition, the current year’s delinquency. Assuming that the foreclosure costs are $1,000, your investment of $1,500 for 3 years totals $5,500, and the land becomes yours free and clear.
The investor now hit the jack-pot and can decide what to do with his property. Sell it, move in, build on it (if it is a vacant land parcel) or just hold on to it for future appreciation.