Lien and Mean Business

Tax liens are a secure, safe bet

Mention an opportunity with the word “taxes” in it and many people won’t even want to hear the rest of the pitch. But not everything that has to do with taxes is as complicated as the IRS code. Tax liens, for instance, are a safe investment guaranteed by state mandate and secured by the value of a property. And they are a great outlet for first-time investors and seasoned ones, too.

“I strongly encourage anyone to start out making tax liens a small part of their investment portfolio, then simply compare the returns from tax liens to the returns from your traditional investments,” says Wayne Gray, a real estate specialist who specializes in tax liens and tax lien training. “That will speak volumes.”

In fact, tax liens are such a sound investment that even people who aren’t interested in the real estate market are getting involved.

“This is not just something for real estate investors to take advantage of, since you don’t have to acquire the property, ” Gray says. “If you are looking for a great return, this is the investment for you.”

Check It Out

Here’s how it works: Counties need money to operate — to pay for schools, fire departments and police departments, and to keep public pools clean and grounds maintained, along with other necessary obligations. They raise this money from property taxes. When someone fails to pay property taxes, the county still needs that money to meet operation obligations. So the county puts a tax lien on that property for the amount of the unpaid taxes. Then, they invite investors to buy the tax lien.

“What investors are really doing is loaning money to the county that the county didn’t get from the property owner,” says Leland McKay, a tax lien specialist based in Utah. “Because it is a loan, the county is going to pay you back that money, and when they do they are going to include a nice rate of return mandated by the government.”


Property Perks

Every tax lien has a redemption period, or a window of time given to the property owner to repay their taxes. These timeframes vary depending on the state, as do the penalties for nonpayment, which range from as low as 8 percent to as high as 50 percent. For instance, in Atlanta, the penalty is 20 percent and the redemption period is one year. Both the redemption period and penalty are determined by state law.

“It’s not that the state guarantees the investment but that the state guarantees the interest rate that is paid back,” McKay says.

Ideally, the loan plus guaranteed interest rate are paid back within the redemption period. In cases where the homeowner does not repay the debt, the tax lien holder can exercise his or her legal right to foreclose on the property.

“You now own the deed to the property and you can move into it, you can sell it for quick cash, you can hold it or rent it out,” he says.

Tax deed states like California, North Carolina or Utah operate differently. Rather than placing a lien for unpaid taxes, the counties in tax deed states foreclose on a property then put it up for sale in an auction.

“All they really want is the property tax that wasn’t paid,” McKay says. “They aren’t in the business of making money on real estate. They’re in the business of getting taxes that weren’t paid.”


Missteps and Misconceptions

Because an investor could someday own the property, it makes sense to do research before bidding on a tax lien.

“There are a number of mistakes that you can and will make if you don’t have proper guidance,” Gray says. “You have to know exactly what you are investing in. Your lien is only as good as the property it is against.”

Investors who don’t perform due diligence could be the proud owner of a piece of sidewalk or worse.

Another mistake people make is to buy a tax lien associated with a property that already has IRS liens attached to it. Although a county tax lien will supersede a mortgage or other loan on the property, an IRS lien takes precedence.

Although there are a few potential complications, educated investors still look at tax liens as a great bang for their buck.

“I prefer tax liens for a very shallow reason — I enjoy money,” Gray says. “The security of tax lien investing is incredible. If you are making intelligent investments in tax liens, you know you will be receiving returns that no other investment can touch. And the beautiful thing is, the county is ensuring that you get paid!”


Cash In or Out

Tax lien investing doesn’t require a lot of cash. Liens can be had for hundreds or thousands of dollars. McKay says he has seen tax liens for as little as $12.35 and as high as $1.6 million dollars.

“It is perfect for the seasoned investor as well as the beginning investor,” he says.

A common misconception about investing in tax liens is that an investor is taking advantage of someone who is down on their luck. But that isn’t the case.

“That person has to pay their property taxes to the county to keep their home,” Gray says. “There is no way around that. He or she either has to pay the county the back taxes with interest or pay it to you since you made a short-term loan to the county on his or her behalf. If it has to be paid, it might as well be to you, the investor.”

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    3 / 22 / 2012 AT 3:15 AM

    This was my favorite part of the seminar tonight!! Thanks for the great dinner and information!!

    RickInAmarillo, Realtor

    9 / 15 / 2012 AT 8:46 PM

    So, how does one know whether or not there is a IRS lien against the property? Will the tax office know and disclose that?

    I feel like I should know the answer to these questions, but I do not.

    I do have all the “foreclosure report,” from the upcoming tax sales in my area right here on my desk, though.


    12 / 20 / 2012 AT 6:59 PM

    I went to Dean Graziosi real estate meeting in Gainesville, FLA. on Dec. 18th at the convention center & it was a great event with so much info to help everyone there to jump start in real estate & assistance to give all a chance for a three day event in Jan 2013. Thanks Dean Graziosi & all the instructors there. Have a great new year!