Investment through tax liens is a fairly new idea, but it has yielded rich dividends for a number of investors. In fact, the phenomenon is hardly a decade old. It shouldn’t be seen as a “get rich quick” scheme but rather a sound investment with some risks. You should do your research before you get into this market because there isn’t a lot of knowledge available about tax liens, since they are fairly new.
How it works
The way tax liens work is that you, as an investor, will pay the property tax of someone else, who will need to repay you with interest. As everyone is aware, every homeowner will need to pay property tax. However, sometimes owners are unable to pay it. There is a fixed penalty that needs to be paid by the homeowner if they fail to pay on time. However, the government would rather get the money on time, in which case it will simply sell a tax lien to an investor. The investor will pay the government the full amount and he will get, over a period of time, the whole property tax paid by the homeowner along with the interest. This simple arrangement can give you up to 10% interest on your money.
As you can see, this is a simple win-win-win situation. The government gets the tax on time, the homeowner gets more time to pay the tax and the investor gets the additional interest on the amount that he has invested.
How you win
Up to this point, the concept of tax liens seems pretty straightforward. It works like the homeowner has borrowed from the investor at a fixed rate of interest with the government as the middleman. Now, what happens if the person is unable to pay the lien off? Some homeowners who have multiple properties and have seen the values of their property plummet may not really like to pay the property tax. Instead, they might decide to let go of the property.
In such cases, you will become the property owner. This can be both very good and bad for individual investors. On the plus side, you now have a property for which you paid just a few thousand dollars. If you can sell this off, you can make a very healthy profit. Very high percentages of up to 1000% are not unheard of in these cases. On the negative side, you will need to know about real estate and how to sell properties and you may not really prefer to do this.
The truth is, getting a property that will not be paid for by the owner is actually considered good in tax lien investment options. This is because investors find it very profitable to sell off distressed properties that they bought at just a few thousands of dollars. However, these are generally the exception and not the rule, so you shouldn’t invest in tax liens simply because you are looking to get lucky with some cheap property. Tax liens are held in an auction and you might just get lucky, but don’t make it your investment strategy.
Have you had any experience in tax liens?
Would you consider trying this?