More than $14 billion in property taxes goes unpaid across the United States and, of the 30 states and District of Columbia that sell tax liens, $4.2 billion of that is sold to private investors, according to the National Tax Lien Association, a nonprofit that represents tax lien investors, governments and servicers.
While TV infomercials and real estate guru books have lauded returns and the opportunity to score a property for next to nothing, neither is likely, said Brad Westover, executive director of the NTLA. Yet, for the savvy investor aware of the many risks, tax liens can be a great way to diversify a portfolio.
“As long as you are smart and invest safely, you will be fine,” he said.
While a municipality’s established interest rates and penalties could top 20 percent annually, the rates in some districts are actually often bid down in each sale to as low as 6 percent to 9 percent, Westover says. In other cases, the winning bid maybe awarded to the person who bids for the lowest percentage of ownership in the event of an eventual forced sale, or to the person who bids the highest on the lien, over and above the amount owed.
“Much of this irrational behavior was predicated on the belief that bidders could eventually end up with the property … an event that is quite rare,” Feick said.
Only about 6 percent of delinquent tax liens wind up in foreclosure, and of those, only one half of 1 percent are successful in that they are not redeemed [before the foreclosure is complete], according to the NTLA’s Westover.
If you do wind up foreclosing on a property, consider the costs of repairs and unknown problems. Smith set aside $10,000 for his property’s rehab, but he contacted the family of the previous owners to gather information on its condition. (The family was willing to let it go in the sale.)
Tharp at Conscious Capital Private Wealth Management says some municipalities charge bidders certificate and redemption fees, along with fees required to serve the owners notice of the sale. Westover of the NTLA advises bidders to divide the face amount of the delinquent tax lien by the market value of the property. It should be no more than 4 percent.
