When you own property and subsequently become delinquent on your property taxes, the state and local governments must find a way to make up for this lack of income. This means finding ways to make up the difference and collect needed tax revenues. Around half of the states in the union operate using what are called tax deeds. The other half use tax liens. Both are the authorized means for governments to collect delinquent taxes.
Tax Liens Have Distinctive Structures
Each option is distinctive in structure. With tax deeds, government authorities sell the deed to the property at an auction populated by investors. For those using tax liens, the certificate is sold and the investor is paid interest until the lien is redeemed. States like New York, Ohio, and Florida use both tax liens and tax deed sales. Then there is Texas and Georgia who sell the property at a tax deed sale which allows for a redemption period in which the owner can pay off the lien.
Now that you have an idea of what tax liens and tax deeds are you might be wondering why investors express interest in these financial instruments. Each one has its own advantages and disadvantages based on their individual terms and conditions. As such, there may be some risks involved when you decide to invest in one or the other.
Where to Buy Tax Deeds
With tax deeds, you should know that they are issued at the tax sale auction in most cases. The deeds will be either wholly transfer or conditionally transfer the title to the property in question from the delinquent owner to the one who made the winning bid. In most cases the bidder becomes the first-mortgage holder when there is an unpaid portion of property taxes and mortgage payment. However, if the house was purchased using government-insured financing, the appropriate agency does have the opportunity to redeem within a year of the sale. This means that you could purchase the property and take the risk that they may not pay it back. If they do, though, you lose the property.
Investing Risks With Tax Lien Certificates
A tax lien certificate also has a few areas of risk that may make you question it as a safe investment. Let’s look at those now. First, keep in mind that these lien certificates are secured by the real estate property. This means that you need to know the status of the property’s title. You should be sure that it available for purchase with only the delinquent taxes against it. This lets you collect any other money that is received when the property is sold to recoup the tax bill.
Also, you should be sure that the owners of a property with a lien are not in the midst of bankruptcy. This would shift you from first place as beneficiary of the sale behind various creditors and the IRS. In other words, you won’t see any money until these other parties are paid. One last thing: tax lien certificates are considered liquid investments. This means that the cash unavailable until the property owner can pay or you end up getting the deed and selling it yourself.