Tax liens. Sounds pretty dry and boring, doesn’t it? In fact, one almost expects to blow on the words and see dust rise off the page. But like Superman hiding behind the guise of Clark Kent, a super investment opportunity hides within this seemingly dull term.
Go to almost any site that discusses tax liens, and you’ll invariably come across expressions like “undiscovered gem” and “amazing returns.” Tax liens deserve your attention because they are, indeed, full of potential profit.
A tax lien is placed by a government entity (normally a county or municipality) on a property in an effort to recoup unpaid property taxes. Many government agencies don’t want to wait for the slow payment of the delinquent taxes, so the government sells the tax lien certificate at sale or auction. The government gets its money at the time of the sale, and the buyer gets a great money-making opportunity.
The purchase of tax lien certificates is a surprisingly safe investment, and the transaction is a rapid one – especially if you have access to a self-directed IRA with checkbook control. And tax lien purchases are ideal for those with limited funds; in fact, some investors have secured liens for as little as $200.
By purchasing the lien, the investor is positioned to receive the benefits of two possible scenarios:
Scenario 1. Once the tax lien has been sold, the property owner still has a redemption period in which to make the delinquent payments (anywhere from a few months to a few years, depending on the state). If the property owner pays off the debt, the investor holding the lien collects the overdue tax monies plus interest (determined by the state and through the auction process) for the period of time he/she held the lien. If the property owner puts the land/building up for sale, the lien must be paid before a legal sale takes place.
Scenario 2. If the property owner cannot pay the tax debt within the redemption period, then the state may tack on additional penalties, which the investor receives. In most situations, if the property is two-to-three years behind on tax payments, the property itself will go through a public foreclosure auction. In the event that the property is not acquired at auction, the lien holder acquires the property free and clear with all other liens voided. What the investor then does with the property is up to him/her. Some choose to sell it; others hold onto it to let the value build or to use for rental income.
Buying tax liens in regions experiencing rapid growth provides a particularly attractive opportunity. If the investor does eventually acquire the property, then that real estate is destined to reap a substantial profit when it’s sold. Investors should expect, however, that most property owners will pay off their debts. Naturally, losing a few thousand dollars paying off liens makes more sense than losing one’s property altogether.
Each state – and often each county within each state – structures the tax lien system differently. Many sell tax lien certificates on specific dates through live auctions; others offer online bidding or purchase-by-mail opportunities. Some states require that the buyer be physically present for the auction or sale. These varying requirements and sale/auction calendars demand that you do some heavy-duty homework before purchasing or bidding on tax lien certificates. You certainly don’t want to miss your window of opportunity, nor do you want to overbid on the value of the lien.
There are some excellent online resources available, especially now that more people are discovering this golden investment opportunity. You might take a look at www.taxliens.com, which lists the sales/auction information for each state. (Do note that some states don’t offer tax liens but sell property deeds instead. These are similar, but differ in some significant ways. For a detailed explanation of the differences, see “Tax Liens and Deeds” at www.guidantfinancial.com/resources/self-directed.aspx.)
One of the most efficient ways to finance your tax lien purchase is through the use of a self-directed IRA. This unique retirement account structure will allow you to carry a literal checkbook tied to your retirement funds. When you purchase a tax lien as an investment on behalf of your IRA – and if your account is structured correctly – there are no taxes or penalties for taking a distribution. In other words, you have access to your retirement money before retirement age for many types of investments, including tax liens. With a self-directed IRA checkbook in hand, you can make tax lien purchases the moment they become available.
This type of self-directed IRA is set up by only a handful of institutions skilled in these specialized structures. Many will offer free advice on how to utilize such accounts to purchase tax liens. Guidant Financial Group of Bellevue, Wash., one of the industry leaders, offers free phone consultations, and extensive educational materials are available at its website: www.guidantfinancial.com. In fact, Guidant account facilitators report that tax liens are one of the most popular investments their self-directed IRA clients are making today.
So, take the time to study and explore this excellent means to growing wealth. Like a plain-looking date with a good personality, tax liens are much more exciting once you get to know them!
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