Can Buying Tax Lien Certificates Really Be Profitable
Buying tax lien certificates can be a very profitable way to invest in real estate and with the right knowledge can provide very healthy returns on your money. But it’s not to be treated as a “get-rich-quick” scheme, as the in-experienced can find it soon becomes a “lose-your-shirt-quick” investment model. By way of a brief introduction, a tax lien is basically a means that guarantees that a business or individual that lends money or provides a service will be repaid for that investment, by securing a lien on the property of the person receiving the money or services.
The tax lien is secured on the personal property or real estate owned by the debtor - the most common form is the mortgage lien. There are several other types of tax liens but we’ll leave those for another line of discussion. Each variation of lien carries its own set of rules on how it is implemented, and each may also vary from state to state.
Here we are talking about property tax liens specifically, of which there are two main types; the particular lien and the general lien. A particular lien allows the investor (the person lending the money or providing the services to the owner) to claim access to the property (or the equity held within it). Liens are either legal (or federal) in nature - which means they are enforceable in a court of law - or equity liens which are bound by equity courts.
When buying a tax lien certificate, rather than buying the property, you are actually only lending the property owner the money they need to repay their back taxes. Initially, you are not buying the property. In return however, the property owner is legally agreeing to repay a predetermined amount of interest on your loan - which can be anywhere from 6% to 50% depending on the agreement and the state where you are buying the lien. The property owner is also agreeing to repay your money within a predetermined time period, which will be stated as part of the tax lien certificate.
In many cases the property owner is able to repay the tax lein certificate within the allotted time span, in which case the property deed ownership reverts back to them. In such an event, they save their property from being repossessed and maintain their credit rating.
If the property owner fails to repay the lien in time, ownership of the property is transferred to the holder of the tax lien certificate - in this case you, as the recent purchaser of the lien - and you are free to manage that property as you see fit as the new legal owner.
Tax lien investments are pretty much guaranteed to make money whatever the outcome. Where the property owner is able to repay the lien on time, your profit is the amount of interest that was due from the lien certificate. If the property owner is not able to repay the certificate, you become the new owner of the property with nothing more to pay other than your original investment in the tax lien certificate.
As with most investment opportunities, you need money to make money, but hopefully you can see that investing in tax lien property certificates is a fairly safe way to profit from and acquire real estate.
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Tags: Investments