Tax liens can be confusing for new investors, since the investor is actually buying a lien, not a property. The rules governing tax liens vary from state to state and the procedure is slightly different among counties, but the idea behind tax liens is universal. Municipalities run off of property taxes, using the money to pay for schools, roads, or other public works. It is imperative, therefore, that the counties collect this tax. If homeowners default on their property tax, then the county places a lien against the property. Liens are positions of priority, indicating the order of entities to be paid if the property is in default. Typically, mortgages are in the first lien position, but tax liens imposed by the state take first priority, including over IRS income tax liens. The county can then auction off these liens, ranging from hundreds to hundreds of thousands of dollars, to lien buyers, who then hold the debt of the homeowner. This allows the counties to collect their necessary revenue and provides a great opportunity for the investor.
Once the investor has bought the lien, there is a redemption period of 1 year, in which the homeowner can pay back the investor and remove the lien from the property. The exact figures vary among states, but the investor will get a return anywhere from 10% to 15%, in Indiana. Most of the time, the mortgage company will actually pay off the lien, since the outstanding mortgage would not be paid if the tax lien buyer sues for the property’s title. However, in some cases nobody pays back the tax lien within the redemption period, and then the buyer will receive the tax deed. After they have the deed, they may sue, to clear the title of all liens, known as suing for the quiet title. The suit process is very simple: just hire a real estate attorney.
There is one important caveat to suing for quiet title. Once a lien is sold at auction, the lien holder (meaning the homeowner) must be notified that it has been sold. Some counties notify the lien holders and others require that the lien buyer (you) do that. If this is not done properly, the lien holder can contest the sale when the buyer sues for quiet title. If this occurs, then the buyer might not get the property, but they still maintain their lien position and will get a return when the tax lien is paid off.
If the suit is successful, then the property legally belongs to the lien buyer. The best thing about obtaining a property this way is that it is not the buyer’s responsibility to pay the outstanding mortgage or any other liens on the property! This process allows an investor to purchase a property for a very small fraction of what the property is actually worth. There are however, risks to tax liens that should be researched before actually participating in a tax lien auction, but tax liens can be a great investment for any real estate investor. For more information, visit www.practicallyfreehouses.com, RF Tax Lien Investment’s website, a company that specializes in tax liens and can help you on your endeavors.
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Based out of Indiana, Cliff Redding is a real estate entrepreneur, real estate broker, and property manager with experience in single family and multi-family management.