Transcript:
Hey guys, it’s Casey Denman here from Tax Sale Academy.com
Thanks so much for joining me on today’s livestream here on Facebook.
For this week’s live streams, we’ll be going back to the basics. Today’s livestream will be on tax liens and Friday we’ll be discussing tax deeds.
So, what exactly is a tax lien and why is it such a great investment vehicle.
By definition, a property tax lien, not to be confused with an income tax lien, is a priority lien against a parcel of real estate for failure of the owner to pay their taxes on time. Tax liens are available in many states in some fashion.
Let’s dive into tax liens by explaining the process to you.
The first step in any tax sale process will always begin the same. That’s when the owner of the property fails to pay their taxes timely. After this has happened, and the timeline depends on the state, a lien against the property will be sold. This is known as a tax lien.
When an investor purchases this lien, the county receives the funds and can now meet their budgets and the investor will earn a return on their investment. Essentially, the investor is paying the taxes on behalf of the owner in exchange for earning some sort of return on their investment.
This return can vary depending on the state and the process used.
In some states, a bid down process is used. This means that the interest rate charged to the defaulting property owner and subsequently the interest rate received by the investor will begin at the maximum allowable interest rate as set by the county. For example, in Florida a tax lien can be sold for up to 18%. So, your bid could be 18%. If no one else bids, you’ll receive 18% for buying that tax lien. Otherwise, the person willing to accept a lower interest rate will win. The investor will always pay the same amount in order to purchase that lien, which is the amount of back due taxes, interest and fees. It’s just a matter of how cheaply you will consider loaning your money out compared to the competition at the auction.
In other states, an overbid process is used. With this process, the lien will be sold at a set interest rate. So instead of bidding down the interest rate like in a bid down state, you actually bid above and beyond the face value of the lien. The person willing to pay the most amount of money for the lien will win the property. For example, in Mississippi the interest rate is set at 1.5% per month or 18% per year, which is great IF you purchase the property at face value. Suppose there is a $1,000 lien and you pay $1200 for it, in this case the $200 is your overbid. In Mississippi you’ll receive interest on the $1,000 or the face value and the overbid of $200 will not receive interest. So at 1.5% per month interest you’re receiving $15 per interest per month, which means it’ll take you 13.3 months to breakeven for this property. If they redeem the property prior to that point, you’ll have lost money. If they redeem after your break even point you’ll have made money. It’s a calculated risk that you must take in order to buy liens in overbid states based on your experience and data in the area.
The bid down process and overbid process are the two most common types of system.
Also used is the ownership bid down method, where you actually accept a percentage of ownership less than 100% ownership if you end up foreclosing on the property. Another method used in some states is a lottery or random selection process where the liens are sold at a set interest rate to randomly selected buyers in a real luck of the draw scenario.
Now, in most states, the redemption period for that lien is around 1-3 years. This means that during this 1-3 year window called the redemption period, the delinquent property owner has the ability to come in and pay what is due and cancel the lien or redeem the property. Their payment would include everything that the investor is due, at which point the investor would receive their funds and the lien would become void. The stats say the countrywide, tax liens are redeemed 95% of the time.
In the event that the lien is not redeemed within the redemption period, which would account for 5% of all tax liens, is where it can get rather beneficial. Once the redemption period on the tax lien expires, the tax lien holder has the ability to acquire ownership of the property.
In some states, this is a very easy non judicial process where the tax lien holder simply walks in, completes some paperwork, perhaps pays a nominal fee and then they become the owner of the property.
In other states, an actual foreclosure process is required. This process can be similar to foreclosing a mortgage or any other type of lien and can be a lengthy and costly process.
Tax liens can be a great way to beat the stock market. But you must remember that the underlying asset for that lien is the actual real estate. If the real estate is worthless, your lien is also worthless. So you will need to research the underlying property as if you will someday become the owner, and the property must be worth more than your total investment in that lien and hopefully a lot more of course.
It’s also important to note that this is just an overview of a system that can be a little more complex. In addition to the rates above, many states have things such a minimum penalty received by the investor, different timelines based on property types, subsequent lien requirements, and all sorts of other stuff. The best place to learn about the available tax liens in your area, as well as the ins and outs is to call your county’s delinquent tax department and simply ask.
Of course, some states don’t offer liens at all. You can take a look at our state guide by going to taxsaleacademy.com/state-guide; that’s taxsaleacademy.com/state-guide and I’ll add a link below in the comments of this video. You’ll be able to see a color coded map on that page with details on each individual state.
So, that’s tax liens in a nutshell.
I hope you’ve enjoyed today’s livestream. If you enjoy these livestreams, be sure to let us know by subscribing to our channel and clicking that thumbs up button below this video.
And of course if you’re looking to learn more about investing in tax defaulted real estate, be sure to head to TaxSaleAcademy.com. That’s taxsaleacademy.com – and once you get there be sure to pickup a free copy of my new book, The Tax Sale Playbook.
That’s it for today guys. Make it a successful day.
Take care. Bye bye!