So, you’re considering purchasing tax lien certificates? You may be intrigued by the potential of getting a good deal on a property that is worth more than the purchase price. But that’s not what typically happens.
When you purchase a tax lien certificate? You’re not purchasing the property. And you can’t bank on the likelihood of the property owner not paying you back the delinquent tax, penalties, and interest. Because normally they do pay it back.
Occasionally you’ll get the right/opportunity to foreclose on the property because the property owner didn’t make good by the end of the redemption period. Only in those cases can you end up owning the property. However, even if you don’t end up with the property, purchasing tax lien certificates can still be a good deal.
Below are some tips to keep in mind when purchasing tax lien certificates.
What Is a Tax Lien Certificate?
When a property owner fails to pay their property taxes, the county (or, in New Jersey, the township) will secure their interest in the property by selling a tax lien certificate to a buyer, who will then be responsible for paying the delinquent property taxes.
Once you have purchased the tax lien certificate, the property owner will be required to pay you the amount of tax owed and any interest and penalties. Tax lien certificates pay fixed secured interest rates ranging from 8% to 25% interest per year depending on the state. Each state has what is known as a “redemption period,” which is the amount of time the owner will have to pay. In most states, this is six months to four years.
If the owner does not pay in this time period, you will then have the right to take title to the property via property tax foreclosure and become the property’s owner. This is an unlikely outcome, but if you do end up with the property, you should be aware that although all liens junior to the property tax lien are extinguished from the property, including the mortgage and IRS liens, local municipality liens, like city liens are not.
Disadvantages of Buying Tax Lien Certificates
There are several advantages to buying tax lien certificates and some potential disadvantages. One potential disadvantage is that if you don’t do your due diligence before investing, you may end up stuck with a property you can’t resell due to its condition, location, or other factors.
You can take steps to avoid this issue by making sure the tax lien certificate property is in a desirable location with good schools. Commercial or industrial properties or those that are in neighborhoods where houses don’t sell well could prove to be bad investments, even if the owner did not pay and you ended up with the property free and clear.
Are Property Tax Lien Certificates a Good Deal?
Investing in property tax lien certificates can diversify your investment portfolio beyond the typical real estate investments, as long as you realize you are not usually going to end up with the property. They can be a good deal if you are realistic about what kind of return you can expect to get on your investment.
You must consider the risks as well as the benefits before deciding to purchase tax lien certificates. These investments are not for the faint of heart, and what’s a good deal for one investor may not be right for everyone. This is why it’s important to research the investment process and do thorough homework before you start.
You will need to do research to know whether or not there are additional liens on a property before you invest in it. Ultimately, it’s up to you to decide whether or not a particular property is a good investment, but the US Tax Lien Association (USTLA) can help you get started.
How to Purchase a Tax Lien Certificate
Some county governments auction off tax lien certificates to investors who get principal and interest repayments from the property owner. It’s also possible to purchase a tax lien certificate directly from the county without bidding in an auction. Several websites can help you with this, including the USTLA website.
Once you’ve found a property tax lien certificate you’re interested in, you’ll need to contact the county tax office to find out more information about the lien. You can also search for online auction sites where properties with unpaid taxes are often sold.
If you win the bid at an auction, you’ll be responsible for paying the back taxes and any other fees associated with the purchase of the property.
Purchasing a tax lien certificate can be a good deal, if you know what you’re doing and make informed decisions. However, it’s important to research and understand the process before making any investment.
To find the right tax lien certificate investment, you will need to consider some factors that can be complex. But if you’re patient and willing to do your due diligence, you may see a return on your investment.