Once a property becomes tax delinquent, the taxing authority can place a tax lien on it which a third party can buy at auction. Investing in tax liens gives investors the opportunity to realize lucrative returns. There are drawbacks, however, since the title you’re receiving may be encumbered, and you could end up investing in a property that requires substantial repairs.
Purchasing a tax-lien certificate gives the investor the rights to the tax-related debt associated with a property, plus interest. The taxing authority assigns a fixed rate of interest to each certificate. The holder of the certificate collects interest on the tax debt until it is paid in full. In order to satisfy the tax debt, the taxpayer has to pay the outstanding debt plus interest, which allows the investor to realize significant returns.
Another positive is that the taxing authority gives the taxpayer a certain amount of time to pay the tax-lien certificate. If the debt is not satisfied, the investor receives the deed on the property. As a result, the investor can become the owner of a property at a fraction of the market value of the home.
A big risk of tax-lien investment is homeowner bankruptcy. If you purchase a tax-lien certificate on a property where the homeowner has declared bankruptcy, your investment may be at risk. Once a homeowner is in bankruptcy, the IRS or other creditors may have other claims on the property, rendering your tax lien worthless.
Investors need to be prudent and inspect the property before investing in a tax lien. Some investors purchase certificates without getting the property inspected, which is risky, because the property could be worth far less than the investor thought, or even be worthless. A homeowner behind on taxes may not have properly maintained his property, and the home may require expensive repairs before it can be sold. Also, the property could be uninhabitable due to significant damage to the structure.
To avoid the risk of title problems on the property, it is important to have a title search performed against the property. There may be outstanding liens on the property that you have to satisfy before obtaining a clear title to the property. You can hire a local title company or a real estate attorney to assist you with the title search.