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Tax Lien Certificate FAQ

I figured a tax lien certificate FAQ would come in handy to answer all the myriad of questions most people have when they're thinking of investing in tax liens.

How much do tax liens cost?
What kind of return on investment do you get investing in tax lien certificates?
How long does an owner have to pay off their taxes due?
What if the owner does not pay within the redemption period?
Does every state auction off tax lien certificates?
What kinds of properties can you acquire through tax lien sales?
Why should I invest in tax lien certificates?

How much do tax liens cost?

Tax liens can cost anywhere from a few hundred dollars to a few thousand dollars and even significantly higher. It all depends on what kind of property it is and how much it is worth. A tax lien certificate is for the amount of one years worth of property taxes.

What kind of return on investment do you get investing in tax lien certificates?

This depends on the state in which you are purchasing tax lien certificates. Your rate of return or return on investment(ROI) can be anywhere from 5% to 240%. Let me explain...there is a difference between your ROI and your Effective ROI. If your ROI is 10% per year, and the owner redeems their lien after one year, you earn 10% interest on your investment. But if the lien is redeemed in one month your Effective ROI is 120%. This is because interest rate is always calculated over the period of one year. If the interest is paid off in one month, you still have 11 months out of the year to invest that same money and earn more interest. So if you kept investing that same money, and each month were paid off 10% interest, after one year you will have earned 120% interest on you principal investment. This is what makes tax lien investing worth it, not only can you earn high yield returns, but you most likely will not have to wait a full year to earn them.

How long does an owner have to pay off their taxes?

The owner has a certain amount of time, called a redemption period, to pay off their taxes and redeem the tax lien certificate. It varies by state and county and can be anywhere from 6 months to a year. Click on the individual state links to see what the redemption period is in your state.

What if the owner does not pay within the redemption period?

The lien holder can now foreclose on the lien. There are various ways in which this can occur based on the area the lien was purchased. but in most cases, if the owner doesn't pay up, the property now becomes yours free and clear. If you purchased the lien in an area where this is not the case, the property is still foreclosed on and sold at an auction, and your investment will be paid back same as if the owner had redeemed, you may even earn a higher penalty rate.

Does every state auction off tax lien certificates?

There are three main property sales that states go by.

Tax Lien - A lien is placed on the property due to non-payment of taxes and can be purchased by an investor. The tax lien certificate earns an interest rate and the owner has a certain redemption period in which to pay off the bill.

Tax Deed - The investor acquires the title to the property. No interest rate or redemption period is required.

Hybrid State - This is a deed state which functions like a lien state. The investor acquires the title to the property subject to the owners right to redeem within a certain amount of time and get the property back. If the owner redeems, the investor receives an interest rate or penalty on the investment.

What kinds of properties can you acquire through tax lien sales?

The answer is simple: all kinds. People think that only poor people in terrible houses don't pay their property taxes, but this is utterly false. There is nothing more common than a wealthy person who buys an expensive house, only to fall on hard times later in life and not be able to afford the property taxes on it. There are many reasons why an individual or business may not pay their property taxes on time. They don't have enough money, they're procrastinating, lost their job, moving, going through a divorce, etc.

And when dealing with businesses, the more reputable the business, the more reason to invest. 99% of the time they will pay off their taxes, and quick. Anything from banks, to gas stations, to whole cities can be up for auction at a tax lien sale, and most of the time you are just dealing with missed payment deadlines. People travel, misplace things, have other people that pay their bills who may not have received the bill. Things of this nature happen all the time. We've all been late paying a bill before.

Why should I invest in tax lien certificates?

 

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