In this overview about Investing in Tax Liens, we will begin with the definition of Tax Liens, the processes,  the potential returns and steps when it comes in investing in tax liens. It is important for investor to be aware that tax liens investing has its strategy and is part of financial investment.

Investing in tax liens

Tax liens deal with the payment of delinquent (unpaid) property taxes. Every year owners of properties in the US have a tax lien – ie, a financial obligation to pay taxes – placed on their properties if they have been delinquent in paying their property taxes. The lien is for the amount of property tax payable, and is almost always placed by the government of the county where the property is located.

If a property owner pays his property tax on time the tax lien is removed. If an owner fails to pay his tax on time, the county government of that property is authorised to collect the tax due by selling, at a public auction, a Tax Lien Certificate for that property.

The winning bidder of the property receives the tax lien certificate as proof of the purchase. The owner of this tax lien certificate can expect one of two possible outcomes:

1)    An annualised return of up to 18% on the amount paid for the tax lien certificate;

2)    Through foreclosure, ownership of the property. This ownership is free and clear of all junior liens (aka Mortgages and Mechanics’ liens).

This entire process – bidding for the property, receiving the tax lien certificate and holding it to maturity, having your principal and interest returned to you – is termed Tax Liens Investing.

Typical returns are 10-18% per annum, with minimal effort required of the investor once the process has been set up. This investment vehicle is available to both companies and private individuals.

In purchasing a tax lien from a county, the investor pays the outstanding property tax due on behalf of the property owner. In return, the county will pay a guaranteed rate of interest on the lien that has been purchased. The investor also receives the right of first lien on the property, meaning that her lien takes priority over all other encumbrances on that property. (‘Encumbrances’ is legal terminology for anything – mortgages, leases, easements, liens, or restrictions – that affects or limits the title of a property.)

If the owner of the property wishes to settle her tax obligation, he will have to pay the outstanding amount (ie, the amount the tax lien investor paid for the lien) plus interest. At this point, the country government will ask the tax lien investor to return the tax lien certificate, and will write her a cheque for the amount paid for the lien plus interest.

Every tax lien purchased is backed up by equity – the house or building on which the lien has been placed. The value of this equity is typically many, many times the purchase price of the liens. It is next to impossible to lose the principal investment amount. If the tax liens are not redeemed, the investor owns the property outright, free and clear of all encumbrances. The bank which owns the mortgage on the property will pay up for the liens otherwise they will lose the loan taken out on the property.

Tax Lien investing is tightly regulated and very secure. There is no middleman – investors deal directly with the US government (or State County). Investment returns are fixed and are not subject to the ups and downs of the stock or property markets. Investment amounts start from a few hundred dollars and are scalable.

You will probably be surprised to learn that this method of property tax payment recovery goes back 300 years, which means that it has been in use before the US constitution was written.

Click here to join tax liens course in Singapore.

Safe investing.

Dr John Heng

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