Two Ways To Benefit From Investing In Tax Liens:
Scenario 1: Passive Returns
The investor buys the tax liens and waits until the owner pays them back. The good news for the investor is that they also earn interest on their money. It could be anywhere from 5% to 36% per year, but rates are generally in the 10-12% range.
But wait, there is more! The investor is also paid any penalties that the homeowner has accrued.
All the county cares about is getting its taxes paid, which the investor does when they buy the lien. So, you buy the tax lien, and Jack still owns his condo. You wait, and hopefully, he will pay. Although you never know when that might happen, it may be a couple of days, or it could be years.
But if your patient, it is a guarantee on your money and then some.
Scenario 2: The Road to a Larger Real Estate Portfolio
Lets get back to Jack.
You buy the tax lien, and he never pays off his back taxes. You have the authority to start tax foreclosure proceedings. During the foreclosure, you can buy the property like anyone else who is interested. At the very least, youll be paid back your initial investment. Plus, you have the choice to buy the property at a discounted rate.
However, there is never a guarantee there will be equity in the property.
To learn more about tax liens, head over to the National Tax Lien Association site. There is a wealth of information to be found there.
Tax Liens Come With An Expiration Date
If the property owner fails to pony up the property taxes by the end of the redemption period, the lienholder can initiate foreclosure proceedings to take ownership of the property. But that rarely happens: The taxes are generally paid before the redemption date. Liens also are first in line for repayment, even before mortgages.
Even so, tax liens have an expiration date, and a lienholders right to foreclose on the property or to collect their investment expires at the same time as the lien.
After youve bought a lien, you may also want to pay taxes on the property in the years that follow, so no one else can purchase a lien and thus have a claim on the property.
Sometimes its six months after the redemption period, Musa says. Dont think you can just buy and forget about it.
What Happens If There Is No Profit For The Seller
But what if you run into a situation where the seller will still owe money? Does that mean youll need to make up the difference?
Going back to our previous example, lets say that the seller still has two years of past-due property taxes amounting to $6,000. But this time, instead of owing the bank $50,000, they owe $100,000. When the property is sold, the bank will get their $100k, but what happens to that outstanding $6,000?
There are a few things that can happen:
- The seller brings that $6,000 to the table. The property is then sold to you.
- You increase your offer by $6,000 to cover the taxes. The property is then sold to you.
- The bank agrees to a short sale to get rid of the property.
- The tax office discounts the amount of tax owed, and the seller brings that amount to the closing .
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Dealing With Back Property Taxes: What You Can Do To Save Your House
If you owe back property taxes and you can’t afford to pay them all at once, you may still have options for protecting your property from a tax sale. Your taxing authority may offer an abatement program through which you can enter into a payment plan to pay the taxes back over time, or you may be able to pay them back over time through a Chapter 13 bankruptcy case.
How Tax Liens Affect The Homebuying Process
A tax lien really only begins to affect your homebuying endeavor when youre in the final stages of the process. Most people learn about liens on the property when they apply for a mortgage. The lending institution conducts a title search, and in that process uncovers any unpaid debts. Many homebuyers wont purchase a home with a lien on it, so sellers can agree to use the proceeds of the sale to pay off any unpaid debts and get rid of the lien.
However, if the lien is significant, you are more likely to run into complications in the financing process. For example, if the combined total of the tax lien on the house and what the current owner owes on their mortgage is greater than your offer, they wont have enough proceeds from the sale to cover their debts.
Another factor to consider is financing. Sometimes, liens take priority over a mortgage, meaning the IRS expects a lien to be paid off first. However, the bank or lending institution prefers for the mortgage to have priority. So, the bank may stop the approval process for a mortgage on a house when they discover a lien.
A tax lien on the property often means you wont be able to secure title insurance. Title insurance ensures there are no liens on the property, tax, or otherwise. Without title insurance, youre responsible for any liens on the house, not just tax liens. These liens can include other unpaid debts, like unpaid roofers or other work.
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How To Buy Properties For Delinquent Taxes
When looking to diversify their portfolios, many investors choose to invest in tax-delinquent properties. After considering the current real estate market and interest rates, many look toward tax liens for the source of their next investment. Albeit risky, buying tax liens and property with delinquent taxes is potentially profitable if done wisely.
Paying Your Taxes Through The Mortgage Company
Many people opt to use a mortgage escrow to pay property taxes, along with homeowners’ insurance. Your mortgage company estimates how much your taxes will be for the year and then divides that number by 12 to determine how much you’ll need to pay each month to pay the taxes. Your monthly mortgage payment will increase by that amount. Your mortgage company will create an escrow account, where it will deposit that excess payment and then pay the taxes from it when the time comes. If the estimate was too low and you don’t have enough, the mortgage company will make up the difference and then increase your payment going forward to pay back the shortfall if the estimate was too high, you’ll get a refund.
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How Tax Sales Work In West Virginia
At the tax sale, the sheriff sells the tax lien to the highest bidder. The purchaser gets a certificate of sale and can eventually apply for a tax deed to your home. If no one bids on the tax lien at the auction , the state auditor gets the certificate and can later sell the property.
Look Out for Legal Changes
In this article, you’ll find details on tax sale laws in West Virginia, with citations to statutes so you can learn more. Statutes change, so checking them is always a good idea. How courts and agencies interpret and apply the law can also change. And some rules can even vary within a state. These are just some of the reasons to consider consulting an attorney if you’re facing a tax sale.
What Is A Tax Lien
A tax lien is a legal claim against the property of an individual or business that fails to pay taxes owed to the government. For example, when a landowner or homeowner fails to pay the taxes on their property, the city or county in which the property is located has the authority to place a lien on the property. The lien acts as a legal claim against the property for the unpaid amount that’s owed. Property with a lien attached to it cannot be sold or refinanced until the taxes are paid and the lien is removed.
When a lien is issued, a tax lien certificate is created by the municipality that reflects the amount owed on the property, plus any interest or penalties due. These certificates are then auctioned off to the highest bidding investor. Investors can purchase tax liens for as little as a few hundred dollars if it is a very small property. However, the majority cost much more.
Investors can purchase property tax liens from a municipality, allowing them as the new lien owner to collect payments with interest from the property owner. In some cases, they may foreclose and attain title to the property.
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How Long You Get To Redeem Your Property After A West Virginia Tax Sale If Someone Buys The Lien
After a West Virginia tax lien sale, you can protect your ownership of the property by redeeming the home at any time before a tax deed is issued. . To get title to the home, the purchaser must request a deed. The earliest that the lien purchaser can get the tax deed from the county clerk is April 1st of the second year after the sheriff’s sale. . So, most homeowners get around 18 months to redeem the property. Though, your redemption period might be different.
Also, under West Virginia law, a lien evidenced by a tax certificate of sale can’t remain a lien on the real property for a period longer than 18 months after the original issuance of the tax certificate of sale. . If the purchaser doesn’t apply for a deed and the lien expires, the purchaser’s rights are forfeited, and the purchaser loses the chance to get title to the property.
Can You Buy A House With Tax Debt
You may be able to buy a house with tax debt, but through whats called a tax sale. If a seller lists the property before the tax lien certificate is created, you may be able to buy the house and pay the taxes in the price.
The key is to pay an undervalued price for the property so you have room to pay the taxes and still make money on your investment.
If the property already has a tax lien certificate, the only way to buy it is through a tax sale which is a different process than buying the traditional way.
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Tax Liens Can Be A Higher
From a mere profit standpoint, most investors make their money based on the tax liens interest rate. Interest rates vary and depend on the jurisdiction or the state. For example, the maximum statutory interest rate is 16 percent in Arizona and 18 percent in Florida, while in Alabama the rate is fixed at 12 percent, according to the National Tax Lien Association.
Profits, however, dont always amount to yields that high during the bidding process. In the end, most tax liens purchased at auction are sold at rates between 3 percent and 7 percent nationally, according to Brad Westover, executive director of the National Tax Lien Association.
Before retiring, Richard Rampell, formerly the chief executive of Rampell & Rampell, an accounting firm in Palm Beach, Florida, experienced this firsthand. Rampell was part of a small group that invested in local tax liens in the late 1990s and early 2000s. At first, the partners did well. But then big institutional investors, including banks, hedge funds and pension funds, chased those higher yields in auctions around the country. The bigger investors helped bid down interest rates, so Rampells group wasnt making significant money anymore on liens.
At the end, we werent doing much better than a CD, he says. For the amount of work, it wasnt worth it.
My Take On Tax Delinquent Properties
Let me start by saying that this is only my opinion. I dont fault anyone for trying to find tax delinquent properties. They can be a great way to find property for little money down.
That said, my investment strategy revolves around helping people, and buying past-due tax notes just doesnt fit my model. I couldnt sleep well at night knowing Id be taking someones house from them for a small past due balance.
Yes, business is business, but I just dont believe in the model when it comes to buying with the goal of eventually taking the home. However, it can be highly profitable when done right.
And again, not everyone shares my investment philosophy, which is fine. Alternatively, some investors are just seeking interest, and tax delinquent properties offer a great return.
If you dont actually intend to foreclose on the home, it can be a great way to help someone get back on track while also getting a little interest in the meantime. Its a win-win.
I have looked into this, but the time and effort required were not worth the return for me. Its a labor-intensive process, and most balances fall under $5,000, so even at a 14% interest rate, here in Nebraska youd only get 7% annually. This is simply is not enough return for me to invest my energy into a deal
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How Does The Lien Auction Work
There are two primary auction methods. One is known as a bid-down, where potential investors bid the lowest amount of interest they’re willing to accept on the certificate. The municipality has a maximum statutory rate which can be as high as 18 percent, and investors bid down from there. Most investors come away with a rate between 3 percent and 7 percent.
The second option involves bidding a premium on the certificate. When you buy a tax lien, you are basically paying the amount of the homeowner’s indebtedness that’s back taxes plus interest and penalties. The investor who pays the highest premium above this amount wins.
Getting The Delinquent Tax List
Can you think of a county that youd like to get this list from? In most cases, you can probably get it, but keep in mind that good information is worth money. Always expect the list to cost something.
Most county Treasurers are probably going to charge you something to generate this list and send it to you. Some counties will charge A LOT and other counties will charge you a nominal amount .
The least Ive ever seen a county charge for their list was 1 cent per parcel . This kind of price is awesome and a great value .
The most Ive ever seen a county charge for their list is $1.50 per parcel. This kind of price is ludicrous . NEVER cough up this much cash for a delinquent tax listit doesnt have to be this expensive.
The cost of the full list from most counties will fall somewhere in between $100 $500. The most common pricing I see is 25 cents per parcel and at this rate, some lists can get pricey, but in most cases, its still worth the price.
As a general rule of thumb, I try not to pay more than $500 for any single list. Not because it isnt worth the price but because this is the line Ive drawn for myself . That said, most of the lists Ive bought have been somewhere in the $100 $300 range.
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Should I Avoid Properties That Have Delinquent Taxes
I dont think investors should avoid homes with delinquent taxes. It can be a great way to find hidden deals that havent yet made it to the MLS. As long as you use a standard purchase contract that stipulates the seller is responsible and you have a title company backing you, the process is pretty straightforward.
So why do I keep mentioning a title company? Well, if you close with a title company, that title company is responsible for taxes being current, not you. Youre paying them to do the research necessary and making them put their money where their mouth is, which covers you should they miss something.
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Next Steps And Closing The Deal
On your list, youll be able to cherry-pick the properties that most interest you and fit your investment portfolio. Pick a property owner to reach out to and remember to be friendly, tactful, and confident in your approach.
You might contact the owner via phone, direct mail, email, or even in person. Most investors find it best to contact via phone first.