Tax lien certificates

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eltron
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Joined: Wed Apr 06, 2016 2:25 pm

Tax lien certificates

Post by eltron » Wed Mar 13, 2019 10:05 am

I'm finishing up reading Rich Dad Poor Dad and in the latter part of the book he briefly mentions tax lien certificates and how the lowest yield he looks for is 16%. This obviously caught my eye. Granted this book was written over 20 years ago things might have changed.

However, I was wondering if anyone on the forum is familiar with, or participates in, accumulation of tax lien certificates and if this would be something wise to look into?

From what I've read there is minimal risk involved. But if there was, and just for some background, I'm 100% into stocks and not risk averse. My horizon for retirement is probably another 15-20 years so I have time on my side.

Anyways, would appreciate any feedback.

Thanks.

SRenaeP
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Re: Tax lien certificates

Post by SRenaeP » Wed Mar 13, 2019 1:32 pm

I researched this in my area (GA/AL) a few years ago and decided against it. Generally speaking there are two possible paths if you purchase a tax lien. Either the owner redeems it within the specified time frame in which case you get your original funds back plus a set rate of interest (8% around here). OR the more unlikely scenario is that they *don't* redeem and you now own the property. However, once you own the property, you have to follow the legal process to foreclose and possibly evict them from the property.

In the first scenario, unless you have 10s, if not 100s, of thousands of dollars you don't mind tying up, there are easier ways to earn a few thousand dollars. For the second scenario, in my area, the same handful of companies with deep pockets buy as many liens as they can, cherry pick the best of the lot to keep for themselves then sell off the lemons for a slight profit.

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celia
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Location: SoCal

Re: Tax lien certificates

Post by celia » Wed Mar 13, 2019 1:40 pm

I read about this several years ago, but the places I would consider owning property were not in tax lien states. Basically, when someone doesn't pay their property taxes, you can pay for them while attaching a lien on the property. The state (I believe) determines the interest rate that the lien holder would get.

I guess you'd have to be careful if the property owner didn't pay their property taxes for multiple years and different people paid the taxes each year and added a lien on the property, who would eventually get the property if it eventually went to the lien holders? I guess the "new" owner would have to pay off the other lien holders with their high interest rate. Would you still want to be that lien holder?

JediMisty
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Re: Tax lien certificates

Post by JediMisty » Wed Mar 13, 2019 1:48 pm

SRenaeP wrote:
Wed Mar 13, 2019 1:32 pm
I researched this in my area (GA/AL) a few years ago and decided against it. Generally speaking there are two possible paths if you purchase a tax lien. Either the owner redeems it within the specified time frame in which case you get your original funds back plus a set rate of interest (8% around here). OR the more unlikely scenario is that they *don't* redeem and you now own the property. However, once you own the property, you have to follow the legal process to foreclose and possibly evict them from the property.

In the first scenario, unless you have 10s, if not 100s, of thousands of dollars you don't mind tying up, there are easier ways to earn a few thousand dollars. For the second scenario, in my area, the same handful of companies with deep pockets buy as many liens as they can, cherry pick the best of the lot to keep for themselves then sell off the lemons for a slight profit.
+1. In New Jersey, there's an auction at regular intervals for tax liens. The bidding is fierce and typically drives down the interest rate to zero!. Usually it's three or more years worth of taxes owed. The owner has years to redeem after several notifications. Meanwhile, the tax authority continues to sell liens (potentially) for the same property that you bought a lien on. Big business buys most of these, which by the way, you must buy without inspecting the property at all. I was able to buy a couple of liens at zero interest for the few hundred dollars of neglected sewer bills. They were all redeemed, one after several notifications. My SO at the time was a lawyer, so he handled all the paperwork. I gave up two days of work attending two different auctions. I wouldn't do it again.

not4me
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Re: Tax lien certificates

Post by not4me » Fri Mar 15, 2019 5:56 am

OP, I haven't read the book, but it undoubtedly has changed -- and will continue to change. The law & process for these varies with each taxing authority. That is, two adjacent pieces of property may be treated differently because one is in the county & the other in the city. So, you really need to study up on the tax jurisdictions you are interested in. You'll need to know the terminology -- sometimes what you get is in essence a debt situation & in other cases you are actually buying the property. Know your rights & obligations, as well as those of the "current" owner. Then, you need to know the piece of property. A locked warehouse may be filled with hazardous material & the owner is just looking for someone else to deal with it as the property is worth less than the tax owed.

I've not personally done this, but have known some who did. Some were business owners who already had property in an area & knew some circumstances around why the owner was delinquent. It can work, but it can take work. Good luck if you decide to pursue

bberris
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Re: Tax lien certificates

Post by bberris » Fri Mar 15, 2019 7:17 am

It's amazing that people still read this thoroughly discredited author. The road to personal wealth is apparently stiffing your creditors.

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unclescrooge
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Re: Tax lien certificates

Post by unclescrooge » Fri Mar 15, 2019 9:55 am

bberris wrote:
Fri Mar 15, 2019 7:17 am
It's amazing that people still read this thoroughly discredited author. The road to personal wealth is apparently stiffing your creditors.
He probably learned that from Disney. That's right, many US companies stifle their creditors when times are rough.

Just cause someone is a crook, doesn't mean they have nothing to teach.

Back to the original question, I would never buy a tax lien without inspecting the property first.

I know someone who paid $45k in back taxes for a vacant parcel in SoCal. She was so excited to get it. Then she found out their is an easement on it that effectively prevents any sort of use. :oops:

Investors are better off looking at buying notes than tax liens. I recommend a book by Jim Napier, called invest in debt.

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alpenglow
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Re: Tax lien certificates

Post by alpenglow » Fri Mar 15, 2019 10:39 am

unclescrooge wrote:
Fri Mar 15, 2019 9:55 am
bberris wrote:
Fri Mar 15, 2019 7:17 am
It's amazing that people still read this thoroughly discredited author. The road to personal wealth is apparently stiffing your creditors.
I know someone who paid $45k in back taxes for a vacant parcel in SoCal. She was so excited to get it. Then she found out their is an easement on it that effectively prevents any sort of use. :oops:
Ouch! Gotta do your due diligence if you are going to play with these things.

I think I'd only do this if I owned a title agency or something.

gsmith
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Re: Tax lien certificates

Post by gsmith » Fri Mar 15, 2019 11:54 am

I know people who've invested in several IL/IN tax liens.. and it is critical to understand it varies greatly by state.
In my experience the redemption rate (How often the homeowner pays back the property taxes+penalties+your interest+your lawyer+your title search fees) is about 20-30%. 70-80% you will get the underlying property.
This is a niche field where individually they are highly speculative, but at scale they are profitable.

The interest rate is very misleading. You can be on the hook for attorney costs, publishing costs, mailing costs, posting costs, all of which can go over the limit of reimbursable costs if redeemed. (The county typically caps the costs the homeowner can be charged). Like applying for a patent, you are essentially buying a lawsuit and the purchase price is a token of cash required to defend the investment.
Often, before a title company will offer insurance, you will be required to file a "quiet title" lawsuit, asking a judge to clean the title, or pay the title company extra.

As mentioned earlier, easements are not wiped out, but the good news is perfecting the lien wipes out mortgages and any non-essential liens (water/sewer). The properties often don't have a mortgage lien, or the bank has decided it's not worth throwing good money after bad, and have abandoned their collateral.

You are not allowed to enter the home until the certificate is converted into a deed, but many break-in to abandon homes, and it requires a certain type of fortitude that you won't need with a SP500 index fund.

This is very emotionally exhausting. You may be forced to evict people who have had the home in the family for generations.
They can burn the building down, or take out the doors and windows and destroy the place.
You might find a body or two, or items people left behind.

I can provide stories, but they'd not address your question

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