Tax Liens
March 31, 2008
The collection of real estate property taxes is paramount for counties across the country. Counties use property taxes to fund many services, such as public school, fire departments, and police departments. Without this money, the county government would not be able to function. Because of this, tax collection is a top priority.When a property owner fails to pay his property taxes, a lien is placed on the property. A lien is a legal action that encumbers personal property to compel payment of debts. After numerous warnings to the property owner, and in order to get their money quickly, counties auction off tax lien certificates for these properties to investors. The investor is then entitled to the amount of the tax lien certificate plus interest and penalties, to be paid when the property owner settles the debt.Real Estate tax liens are attached to a property, not an owner. This means that even though an owner is allowed to transfer ownership of the property, the lien will still remain. This can be a difficult task for the owner, as people do not generally want to purchase a property encumbered by a lien. Homes with property tax liens, in particular, are hard for an owner to sell because of the high priority that tax liens carry. Tax lien holders have the right to enforce payment of the debt through foreclosure, allowing them to effectively take the title to the real estate. When this happens, junior lien holders (such as mortgage companies, to whom a debt of lower priority is owed) no longer have claim to the property. To an investor, this means that when one of your liens goes unpaid, you can acquire the property for the cost of what you paid for the lien certificate, and are under no legal obligation to pay off the mortgage on the home.Real Estate taxes are calculated each year according to the assessed value of a property. Many lenders require homebuyers to provide a fund, called an escrow account, which can help pay for future real estate taxes. In the past few years, increasing numbers of sub-prime mortgages no longer carried this requirement. As property values increased, so did property taxes. Many homeowners could no longer afford these fees along with their mortgages, and without escrow accounts to cover the taxes, liens are being placed on properties at a rapid rate. This means that there are consistently increasing numbers of properties being made available to tax lien investors. There is little risk when investing in government issued tax liens. Yields from government issued tax lien certificates are fixed by state law, unlike the inconsistent ups and downs of the stock market. The rise and fall of interest rates and the condition of the stock market have no effect on high yielding tax liens. These guaranteed returns can be up to 25% per year until the lien is redeemed.
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