The Ins and Outs of Tax Lien Certificates: A Guide to Profiting from Property Tax Liens

Tax lien certificates are those that are given to investors who demonstrate their interest in a property by contributing to the payment of the owner’s overdue property taxes with that property. When paying the unpaid property tax, the investor is given this certificate, and in exchange for it, he will get a certain amount in interest payments from the property owner.

Also, the holder of the tax lien certificate will have a claim over the property for which he has paid the property tax in the event that the owner does not pay the debt after a predetermined amount of time. The lowest bidder in the auction who is willing to accept the low-interest rate on its investments from the property owners is given this certificate by the regulating body.

How Does a Certificate of Tax Lien Work?

Let’s examine the procedure for investing in tax lien certificates.

It is a charge that municipalities impose on homes where the real estate taxes are persistently unpaid. In a tax lien certificate auction, the cities of the relevant areas are permitted to sell the tax lien for the full amount of the unpaid property tax.

Investors bid amounts in the auctions, and the tax lien certificate would be awarded to the highest bidder who offered the lowest rate of interest on the total amount of unpaid taxes. The successful investor will pay the municipalities’ unpaid taxes; in exchange, they will be entitled to recover the taxes paid, together with any interest, from the property owners.

Depending on the municipality and the area, the interest rate may change. The interest rates for these tax liens are typically between 3% and 8% for those sold in the tax lien certificate auction. These certificates, as well as the outstanding interest component, must be redeemed by the property owner within the redemption window of one to three years.

How to get tax lien certificates?

Let’s examine the investment process for tax lien certificates. It is not purchased on the open market. When the municipalities offer the tax lien certificate for auctions, these might be won by submitting bids in the auction market. The bids are made by the investors for various properties with unpaid property taxes, and the winning bidders will receive these certificates. The investor cannot purchase these certificates from a secondary market. The only way to purchase a tax lien certificate is to outbid other bidders for the property you’re interested in at an auction.

Example

Consider Jules, a Florida property investor who owns a prime piece of land. Yet due to a lack of funds, he is unable to pay the property tax. John now enters the picture, wanting to make a profitable investment by purchasing a tax lien certificate for a property. John agrees to a return of 15% with a maturity time of 3 years and invests in the Florida property certificate of Jules. As a result, in the case given above, John will pay the property tax and receive the certificate back from Jules along with a 15% return after three years.

Advantages 

Low capital expenditure

Only the amount of the property’s overdue property taxes must be paid by the investors in order for them to qualify for the tax lien certificate, hence it only takes a little capital commitment. It becomes available to the investor upon making a payment of property tax to the local governments where the property is located on behalf of the owner that has been past due for a considerable amount of time.

Return on investments 

When the certificate is redeemed, the owner must pay the fixed rate of return on the investor’s investment in addition to the amount of property taxes that the investor has already paid to the municipality on the owner’s behalf.

Lumpsum amount on redemption  

When the owner of the certificate redeems it, the investor will get a lump sum payment in addition to the interest earned on his initial investment.

Right to buy property at a very low price

If the owner is unable to redeem these tax lien certificates by the due date of redemption, the investor has the option to buy the property. In a foreclosure, the investor will be able to purchase the property for pennies on the dollar.

Safe investments

As they are issued by municipalities and are presumed to be redeemed by the owner of the property at maturity, they are among the safest investments. Investors will have the option to purchase the property at a low price if it is not redeemed.

Disadvantages

Let’s take a closer look at the drawbacks and risk associated with tax lien certificates.

No Recurrent Income

Under this, the investor’s investment does not consistently earn a return. At the time of redemption or certificate maturity for the tax lien, the owner will get a lump sum equal to the return on his investment.

Extremely slow process

This certificate’s issuance takes a very long time. Even the redemption of them takes a very long time. The process is slow because municipalities are the ones that issue the certificate; as a result, neither the issuing nor the redemption of the tax lien certificate are finished on time.

Low Rate of Return

Although these certificates offer a return on investment (ROI), these returns are still not as high as other options on the market that are available to investors.

High Competition

Due to the fact that these certificates are awarded based on bids, which are made by several investors, real estate agents, and money managers, there is intense rivalry among investors. As a result, new investors sometimes fail to return with the certificate, in contrast to other investors who frequently participate in similar markets and tend to place the winning bids.

As a result, the investor should consider the aforementioned risks when obtaining tax lien certificates.

Certificates of Deposit vs. Tax Lien Certificate

• Compared to certificates of deposits, tax lien certificates have the potential to yield higher returns.
• The risk is greater for the former than the latter.
• Those with a higher risk appetite should choose the former over the latter.
• The former need much investigation to be an effective investment. For the latter, there is no need for research.
• Tax liens do not have the option to be purchased from brokers or banks as certificates of deposits do.

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