Tax Leins

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Tax Leins

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Tax liens and tax deeds are offered throughout the United States. They are sold to allow municipalities, large and small, the ability to collect the taxes necessary to operate in the event a property owner defaults on paying their property taxes. A tax lien or tax deed have become more commonplace recently as they are promoted as being able to generate practically a guaranteed return on your investment.

Have you ever found yourself watching a show that promises to give you a free system on how to buy 250 thousand dollar houses for just the back taxes owed…that’s just a few pennies on the dollar! And it is not limited to houses. You can purchase duplexes, condos, apartments, raw land, time shares, and commercial property! Or maybe you do not want to buy the house, but instead you want to make investments that will pay you 18%-25% guaranteed government returns. The common theme in all of these infomercials are fast money and large (should we say unrealistic?) returns.

If you are interested in exploring this type of investment, you first need to determine if the state you are investing in is a tax lien or tax deed state. The principles are similar, just be aware that there is a distinction.

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A tax lien is a first position lien on a parcel of real estate. They are sold in order to give property owners additional time to pay their taxes, while allowing the municipality to collect the funds that they need to operate, in order to pay teachers, firemen, policemen, and other public works costs. When you buy a tax lien you are not buying an ownership interest in the property. You are creating an obligation against the property that is recorded and generally prevents the owner from selling or refinancing the property until the debt is paid.

In a tax deed state, the local municipality places a lien on the property, but to collect it they sell the entire property, not just the lien. When you buy a tax deed you are, in essence, buying the property.

When loans are sold the terms do not change.

So how do you get a tax lien? You bid on one and win it at an auction. State law typically establishes that a municipality that has uncollected taxes must have at least one tax sale per year. This sale is advertised in the newspaper and/or on a website. If the auction is live you need to show up at the municipal building on a specific day and hour. If you are the winning bidder you need to pay with cash or cashier’s check, typically within 1 hour of the auction. Some townships hold their auction electronically (online). If that is the case you need to register in advance and fund an account for payment. Both auctions are “bid down”, meaning the bidding starts at 18% and goes down depending on the return the other bidders are willing to accept.

The amount of return you can make on your investment is established and guaranteed by law. The primary risk is that if the property owner never redeems the tax lien, you have to foreclose to gain ownership of the property. In NJ the foreclosure process cannot start until 2 years after you own the lien.

Investing in tax lien certificates is one option to make excellent returns in real estate, but it is no longer an unknown secret. And like any type of investing, it takes time, effort, knowledge and capital.

Unlike other types of real estate investing, you cannot buy tax liens with no money down or on assignment. You need capital on the day of the sale.

I am here to help! Most of my hands-on knowledge comes from investing in tax liens in New Jersey. That is where I live, that is what I am familiar with, and if I wind up owning the property that is where I want it to be. But I have the knowledge and tools to invest in back taxes in any part of the United States. I often look at areas where I vacation or frequently visit when I evaluate tax lien investments.