There is a reason why vocabulary lessons were so important in grade school. They are the building block for understanding different concepts and ideas. Knowing the standard tax lien terms will help provide you with a deeper understanding of how tax lien investing works.
Redemption occurs when the debt is settled. Whether another investor or the property owner initiates, it occurs when the debt has been paid off. When a certificate redeems, the investor earns their money back plus interest and fees.
The redemption period is the period of time that protects a property owner from foreclosure. The property owner has a specific amount of time to pay their delinquent taxes before the property can be foreclosed on. This time period varies by state, but is typically around two years.
The face amount is the amount that the lien certificate started at. The face amount does not include interest or fees, but only the value of the lien.
Unlike the face amount, the redemptive amount equals the lien's value, plus interest and fees accrued. Tax lien certificates are purchased at the redemptive amount.
All lien certificates have an expiration date. Expiration dates vary by state, but some are as long as 7-10 years. The certificate life is measured from when it was issued, not when it was purchased.
Because there are often several certificates on a property, it's essential to understand the roll-up. The roll-up refers to all of the outstanding taxes on the property. To foreclose on the property, all of the delinquent tax years must be paid off.
Tax Deed Application (TDA)
When trying to foreclose on a property, a tax deed application must be filed. There is a fee to file the TDA, but the fees are reimbursed after the redemption check has been issued.
Tax Deed Auction
After the property owner has been notified of the foreclosure, the property owner has 30-60 days to satisfy their tax debt. If they fail to do so, the deed will go to a tax deed auction.
Working capital means setting funds aside to use toward roll up and fees. Utilizing working capital as a part of your exit strategy may help you prepare for any additional funds needed to foreclose on the property.
Horizon Lien to Value (HLTV)
Working capital means setting funds aside to use toward roll up and fees.
Using working capital as a part of your exit strategy may help you prepare for any additional funds needed to foreclose on the property.
Staying up to date on tax lien terms helps provide a solid foundation for your tax lien education. These terms are used frequently throughout our training materials, so take some time to familiarize yourself with them.
This is a common but slightly misunderstood term used in real estate investing, referring to research. By focusing time on research, the idea is that risk will be mitigated due to factoring in crime rate, public transportation access, and general benefits of specific locations for a property.
Quiet Title Action
You can pursue an action to quiet title to show that you are the property's valid owner. This typically lasts between three and nine months, resulting in more than $2,500 in legal fees to settle title disputes through the judicial system.
Tax Deed Title Clearing
You can secure the help of a title clearing service, which will verify that the county's foreclosure procedure was executed correctly, eliminating any uncertainty on the title. Tax Title Services offers this quiet title alternative through our unique certification process, which certifies the completeness and accuracy of tax lien foreclosure due process to ensure no one can lay claim to your property title. We'll also match you with one of our nationally-recognized tax title insurance partners located throughout the country.
Whether you've invested in a tax deed or a tax lien, your purchase may require additional time and money to ensure that it's truly yours. When you purchase a property through a tax sale, that property suffers a severe blemish on its title, meaning that the chain of title becomes unclear, and other parties who have owned the property in the past can claim an interest in the title. Additionally, you won't be able to secure title insurance for your investment. Without title insurance, you won't perform any real estate transactions with potential buyers to make a profit. If your buyers can't get title insurance, they can't get a mortgage, which means you can't make money off your investment.
Buyers may look to foreclosures to land bargains on houses. Foreclosure happens when a borrower can no longer make mortgage payments, and the lender seizes and then sells the home to recover losses. Foreclosed homes are often sold for less than their market value. That discount could bring a home within reach, but the financing and the home's condition could present challenges. Before you bid on a foreclosed home, make sure you know the risks and the limitations.
Low capital requirement
Tax lien certificate investing offers a much lower capital requirement than other forms of financing—it's possible to jump into this asset class for as little as a couple of hundred dollars.
Rate of return
The other significant advantage investing in tax liens gives you is a relatively standard rate of return. Unlike flip investments, which can be volatile, with tax lien investing, you have a solid understanding of what your return will be—without having to second-guess the market.
Lump Sum Payment
You are paid a fixed sum when the tax lien investment resolves, which means that it's easy to calculate precisely how much you'll be receiving and what your rate of return is. Also, because the payment is not in the form of an ongoing residual, you get all of your returns at once.
Even though tax lien investment requires very little up-front capital, they can (on occasion) need more capital as the process moves forward. This is because, as the initial lien holder, you will be required to purchase any subsequent liens. (New tax liens take precedence over old liens; sad, but true.)
ROI (Return on Investment)
Identify your financial goals before deciding to buy tax lien certificates to determine if the return on investment (ROI) is right for you. As I mentioned above, tax liens can be highly lucrative, depending on your location. Most states will limit the amount of interest charged on a tax lien certificate, though some states will have higher limits than others. The price of tax lien certificates can also vary by state, which could cut into an investor's potential profits. Always research your area before getting started.