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A step by step breakdown for investing in Tax Liens & Tax Deeds, including a state by state directory. A very simplified approach to an often-confusing strategy.
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Alabama (12%) Arizona (16%) Colorado (9% plus federal discount rate) Florida (18%) Illinois (18% for 6 months) Indiana (10%) Kentucky (12%) Louisiana (17%) Maryland (10 to 24%) Mississippi (18%) Missouri (10%) Montana (10%) Nebraska (14%) Nevada (12% New Jersey (18%) New York (10 to 14%) Ohio (18%) South Carolina (12%) South Dakota (12%) Vermont (12%) Washington D.C. (18%) West Virginia (12%) Wyoming (18%) In a tax lien state, counties do not sell property; rather they sell their lien for unpaid property taxes. This lien is an encumbrance or enforcement right held by the county. While the lien does not grant full ownership rights to the property, it does provide the investor with two commanding rights: 1) The right to receive interest penalty charges if the lien is paid off by the delinquent property owner, and 2) The right to foreclose the tax lien and take title to the property if the lien is not paid. Even better the property tax lien is a high priority lien superior to judgment liens, mortgage liens, trust deeds, and other private liens. The Process: 1. The winning bidder at a tax lien auction is issued what is known as a tax lien certificate for the property. 2. The original owner will often have a period of time to redeem the property, which is known as a redemption period. 3. During this time, interest is accruing on the property that must also be paid to redeem the property. 4. If the property is redeemed, the investor (holder of the lien certificate) profits by collecting the interest. 5. If the property is not redeemed, the investor has the right to obtain the deed to the property. • Price of lien bid up based on competition • Price paid for lien may be bid higher, but interest rate is fixed • Ex States: Alabama, Georgia, Indiana, Montana, & Kentucky • Interest rate earned on certificate is bid down • Winning bidder is person who accepts the lowest interest rate payable on the lien • Ex States: Arizona, Florida, Maryland, New Jersey, & Missouri 1. Premium. Under this method, the investor willing to pay the highest "premium" (or excess above the lien amount) will be the winner. The premium may or may not earn interest, and may or may not be paid back to the investor upon redemption of the lien. (Colorado uses this method) 2. Random Selection. Under this method, a bidder will be randomly selected from those offering a bid. Usually a computer is used to make the selection, but in smaller jurisdictions more rudimentary methods may be used (Larry Loftis, an attorney and professional tax lien investor from Orland, FL and an author on the subject, mentions in his book of an Iowa county whose random selection method consisted of drawing numbered ping-pong balls from a small bucket). Nevada uses Random selection since it is supposed to be the first buyer but it is hard to determine who was the first person to the sale. 3. Rotational Selection. Under this method, the first lien offered for sale will be offered to the investor holding bidder number one, who has the right of first refusal. If bidder number one refuses the lien, bidder number two may then bid. However, bidder number one will not be offered another lien until his number comes up again in the rotation. The next lien will go to the next number in line. Under this method, the investor has virtually no control over which liens s/he will obtain in the bidding, except to take or refuse what is offered. 4. Bid Down the Ownership. Used in Iowa and few other states, the investor willing to purchase the lien for the lowest percent of encumbrance on the property will be awarded the lien. For example, a bidder may agree to take a lien on only 95% of the property. If the lien is not redeemed, the investor would only receive 95% ownership of the property with the remaining 5% owned by the original owner. In practice, few investors will bid on liens for less than full right to the property or sale proceeds. Therefore, with multiple owners bidding on 100% encumbrance, the process then generally reverts to the random selection. OTC certificates – is one that did not sell at the live auction. In many states, when the certificate does not sell, it is "struck off" to the county. The county has a list in their office that you can typically access online or call & request it. You can purchase these either online or via mail, eliminating any need for travel. No restrictions exist on who can participate in these sales Cautionary Note: they are often not sold for a reason. Make sure you do a good amount of due diligence on the property. For example, at the 2003 Maricopa County , Arizona tax sale 21,200 liens were available for sale but only 14,156 liens were sold. A total of 7,044 or approximately 33% of liens were made available for purchase after the tax sale. In 2004, that percentage totaled 27% and was still within the historical range of fluctuation. Although Arizona ‟s Maricopa County is a very popular destination for tax lien investors, literally thousands of liens are still available for purchase after each sale. Such liens would still carry a full 16% interest rate for the investor. While such a large inventory can create confusion for the investor, a systematic process for eliminating liens can transform this into a simple yet profitable exercise. Track down county‟s website Enter parcel number Pull up tax records Compare to amount delinquent (for all previous years) Check Google Earth Call local agent about potentially relisting property Preliminary title report 1. The Right to Collect Interest or Foreclose: The prudent investor will earn profit on the lien certificate no matter the outcome. If the lien is paid off by the delinquent property owner through redemption, then the investor can generally expect to receive a double digit return on the original investment. On the other hand, if redemption does not occur then the investor can foreclose on the certificate. After foreclosure, the investor will obtain full ownership rights to the parcel. Moreover, since property taxes are a small percentage of market value, the investor stands to earn substantial profit on the transaction. 2. A High Priority Lien Holder Position: At the tax sale the investor purchases a tax lien once held by the county. The priority position of the property tax lien is not subordinated (or diminished) because a private party now holds the lien. The investor holds the same rights once held by the county. Because the lien occupies a first position on the land title, foreclosure of the tax lien clears almost all other liens from the title. Foreclosure not only places full property ownership in the hands of the investor, but it purges the land title of other subordinate liens and debts. The end result is a property interest that is generally „free and clear‟ of other obligations on the title. NOTE: Exceptions will be discussed in Section VI. 3. No Landowner Liability or Maintenance Responsibility: An often forgotten benefit of tax lien investing is the passive nature of the investment. Only one state grants the purchaser of a tax lien possession of the property. In all other states, the investor does not obtain possession by purchasing the tax lien. The investor is simply a super priority lien holder, but not a property owner. Because the tax lien investor is not a possessor of property, there is no landowner liability. This is clearly an advantage as lawsuits against property owners/operators continue to rise. According to The Wall Street Journal (Feb 2003), 4. Enforcement Rights Without Enforcement Duties: Another advantage is that the tax lien investor need not demand payment or start collection efforts to compel payment from the delinquent property owner. Although the lien is now owned by a private investor the county will still handle enforcement of the lien until foreclosure. Some states will actually handle the foreclosure process for you. Irregardless, there is no contact with the delinquent taxpayer. Moreover, in the redemption scenario most state tax offices handle the collection of redemption money plus interest. The investor will receive notice that payment has been made to the county. Most states will require the investor to mail back the actual tax certificate in return for the funds invested plus interest. 5. The Right to Purchase Later Year Tax Liens: Liens sold at auction are only for one year‟s delinquent taxes. If the property owner defaults on next year‟s taxes then the investor has the right to privately acquire these taxes with no competition. This can maximize investment performance depending on the tax lien jurisdiction. It also reduces research time since the investor will already be familiar with a particular parcel. In a tax deed state the county will sell all of its rights to the property at a public foreclosure auction or through a later assignment process. The sale will generally occur 3 to 5 years after the first tax payment becomes delinquent. Property is sold for
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