Many real estate investors who thought they knew everything about their chosen sector are surprised to learn about individuals generating double-digit returns with tax lien certificates. In some cases, these investors have licensed realtors who remember seeing the topic mentioned in continuing education classes. Still, they did not realize the profit potential they had missing out on. The reality of tax lien investing is that it is not limited to real estate professionals; similar to how Wall Street is open to the public, tax lien certificates and deeds can also be obtained are also open to everyone.
Investing in tax liens can be very profitable, but we cannot say that this strategy to derive financial gain is for everyone. Real estate is at the heart of tax lien investing, but you will not find a marketplace for tax lien certificates or deeds because such an idea would not be legal or ethical. Even the real estate owned (REO) portfolios of banks that have taken possession of foreclosed properties cannot be compared to tax lien investing. The reason is that the underlying value of the financial instruments put on the auction block is not always definitive.
Before we continue discussing the merits and caveats of tax lien investing, we may as well answer the question that serves as the title: The answer is yes, you can make money on tax lien certificates, and there are various ways you can accomplish this. We should also reiterate that there is no marketplace for tax lien certificates. Still, you have certain resources, such as Marketplace Pro software, which can point you in the right direction concerning investing opportunities.
What Kind of Investor Seeks Tax Lien Certificates?
Tax lien investors are pretty much the same as those who get into stock or commodities trading; they look for opportunities, evaluate proposals, consider the risks at hand, and hope for the best. Perhaps you have heard the analogy of Wall Street being a perfect information game? This means that all market participants have access to the same information, but this does not make stock trading the same as chess.
The vast majority of beginners who enter Wall Street do not have the same level of experience or even the same level of information access as institutional investors. A day trader has a lot more to lose when compared to a mutual fund manager. In the case of tax lien investing, a licensed realtor will have a better shot at becoming profitable when compared to someone who has never entered a lien certificate auction or a sheriff's sale. This is not to say that you cannot catch up to a realtor in terms of tax lien investing knowledge; in fact, you are taking an important first step by reading this article.
The type of investor who seeks to profit from tax lien certificates is usually a smart and curious individual who is not afraid to operate in a sector for which there is no marketplace. Some people compare property deed investors to house flippers, but there is a marked difference between the two. Flippers operate on a marketplace; the run-down properties they improve and sell are either on the Multiple Listing Service (MLS) or meet the criteria to be listed therein. There is no MLS for tax lien investors; however, software solutions such as Marketplace Pro inject MLS functionality into the tax lien investing world.
What Tax Lien Certificates Really Are
On the surface, tax lien certificates are easy to understand because they originate from the failure to pay property taxes. The taxes we spend on the lots, homes, and condos we own are used to fund municipal programs such as school districts, parks and recreation, libraries, road construction, and many others. If we fall behind on these obligations, the revenue collection agency has the right to file a lien on our properties; this is done to collect delinquent taxes at some point down the line.
A property tax lien is a legal claim or a right to an equitable portion of the property. The revenue collector has the statutory right to file these liens without court opinion. Like other situations in which liens are filed against a property title, they must be satisfied and cleared when the property is sold, which could take a long time. Depending on the legal jurisdiction, a homeowner could stop paying property taxes for years and finally pay them off years later at the closing table. Naturally, this is not a good situation for the revenue collection agency because county and state budgets are drafted each year.
A much better situation for revenue collectors is to enlist investors' help by offering certificates at public auctions, which in some counties, boroughs, parishes, and townships are called sheriff's sales. In essence, a tax lien certificate is a financial instrument that assigns repayment of delinquent taxes to an investor. If you think about it, this is a brilliant way of generating revenue. It also gives delinquent homeowners some breathing room because the certificate elicits a new repayment schedule.
At the tax lien certificate auction, you are bidding on the interest rate that the homeowner will have to pay the new lienholder, which happens to be the winning bidder at the auction. Technically, tax lien investors start as certificate holders who can potentially become lienholders, which can occur when the homeowner fails to satisfy the terms of the certificate, but this may require the tax lien investor to initiate foreclosure.
Making Money With Tax Lien Certificates
If you register as a bidder to attend a courthouse steps auction, and if you walk away with a tax lien certificate, you will be in a position to receive payments and enjoy interest rates higher than 10%. The same interest is promulgated and can vary significantly from one county to another. In Denver, for example, you can make just a little below 10%; in Cook County, however, some Chicago tax lien certificates can fetch 36%.
There is no telling how much a tax lien certificate will cost you. First of all, you have to keep in mind that these instruments are offered at auction, so the winning bid may end up being higher. Second, there is also the property value matter, and how far behind the homeowner has fallen. In some cases, the certificate maybe a few hundred dollars while it may be worth thousands in other cases.
The bottom line of tax lien certificates as investments is that they represent debt. As with any other investment activity, you should expect some level of risk, specifically in the form of the homeowner not being able to repay or simply refusing to do so;. However, these situations do happen; they are not devoid of recourse. It is important to remember that each certificate has an underlying asset, which brings us to deed investing or taking possession through foreclosure.
Making Money Through Property Deed Investing
There is another way you can make money from tax lien certificates, and it involves redemption. We already mentioned that state laws set interest rates; we will now go into repayment terms, foreclosures, and deed investing.
Most states give homeowners no more than three years to repay investors who hold tax lien certificates. Should the term come to an end without satisfaction, the certificate holder becomes a lienholder who can file for foreclosure. Should you prevail as a plaintiff in a foreclosure case, you may be able to take possession of the property and hold title.
In some states, revenue collection agencies can put deeds on the auction block. In this type of auction, participants are bidding for the right to get their name on the property deed, which means that they have a more direct path to ownership, which may not involve filing for foreclosure. This is what many people think about when they hear about properties being auctioned off because of unpaid taxes, but there is quite a bit of misinformation in this regard.
Deed investors do not always walk out of the auction with clear title to the property. County revenue managers who set up property deed auctions try to make the process seamless and painless, but this may not always be possible. In some cases, the winning bidder of a deed may also inherit outstanding liens, but they may also be considerably less than the property's market value.
It would not be accurate to say that deed investing is a smarter option to pursue instead of tax lien certificates. Both strategies offer the assurance of real estate as collateral, but they are not the same as holding a municipal bond that pays you interest and has a face value that other investors will pay for in an open marketplace. In some cases, the collateral value may not only be underwhelming but also disappointing, especially when you learn that there are encumbrances to title and many other liens to clear. In other cases, the underlying asset may be an undeveloped lot not far from the Mojave Desert, thus making it less than attractive to prospective investors.
The bottom line of tax lien investing is that you can make money from it, but you will need to conduct proper research with the right tools. To this effect, Marketplace Pro is the closest you can get to an MLS-like system to identify properties worth pursuing at auction.
To learn more about Marketplace Pro software, please get in touch with our office today so that we can arrange a real-time demonstration.