A tax lien is a lien imposed by law upon a property to secure the payment of taxes. A tax lien may be imposed for delinquent taxes owed on real property or personal property, or as a result of failure to pay income taxes. The local county government is very interested in getting these taxes paid because they use the money from taxes to fund government programs, schools, parks, road construction, etc. This failure to pay property taxes and other lawfully authorized taxes or liens can create an opportunity for investors when the government entity decides to sell off or auction its interest in these liens.
As with any real estate investment, there are known risks with tax liens. Understanding them will help you take steps to mitigate or guard against these pitfalls. The PIP Group differentiates itself from other companies in this industry because they perform due diligence, research and offer over 20 years of experience of investing in tax liens that provide the investor protection form certain tax lien investing risks.
1. The Property Attached to the Tax lien may be Worthless
A tax lien is only as good as the underlying asset. It is critical that due diligence is performed prior to purchasing and investing in tax liens. Most novice investors attending a bid or auction may be overwhelmed and end up purchasing liens that promised a 20 percent return at auction, but it could be a lien over a landlocked parcel. The taxes were not paid because the land was considered worthless.
The PIP Group understands that in the tax lien industry, due diligence is a key differentiator between investment firms that succeed and those that have a short-lived career. By focusing on the quality of the property, it’s improvements, and the property proximity to vital resources, we value a property and the probability the tax lien will be redeemed. For instance, if a property has a land value of $65,000 and improvements of $85,000, there is a very high probability that the owner will not want to lose this to a $2,500 tax lien. By utilizing a rigorous process, we are able to sift out the properties that are duds and select only those that will pay back the highest percentage of return on investment and maintain a high probability that an owner will redeem.
2. Code Enforcement Nightmares
A tax lien investor has little or no control of what code enforcement officers will decide to do on a land parcel or building you have a tax lien on. This can lead to open-ended uncertainty. Code enforcers can initiate fines for overgrown weeds, broken windows, etc. The PIP Group, stays updated on the condition of the property and researches ahead of time so the investor can better know what they are getting into.
3. Laws, Policies and Procedures are constantly Changing
Each state and each county within that state has a set of laws, policies and procedures that support tax lien creation, sales, and collection of these investor returns. These can change frequently. Therefore, the purchase and management of investments in this field appear overwhelming and risky to the novice investor. Investment in this field requires knowledge and experience, as well as continuing research.
The PIP Group researches and stays up-to-date on all the changes to state tax law that have been made. The experts at The PIP Group research how these changes are going to affect tax liens and certificates, depending on the state or municipality. Courts and legislative bodies are very sensitive to citizen hardships such as the deserving being denied use of their property (due to the enforcement of a legally created tax lien) by a real estate investor. Investors are easy political targets, therefore, the research and expertise The PIP Group offers in this industry is geared towards protecting the investor.
4. Government Errors
Government agencies are notorious for making errors and then not being responsible, sliding with the original property owner. The county will most likely declare the tax lien a “sale in error” and return your investment with little interest besides a low statutory rate of ½ percent versus 18 percent the investor planned for. The PIP Group has adapted and modified their investment strategies based on the ever-changing state laws and policies and have focused their efforts in Illinois. In Illinois, the rate for “sale in error” is 1 percent per month from the date of purchase, to the date a “sale in error” is declared.
5. Tax Debtor Bankruptcy:
If a property owner declares bankruptcy, the investor’s potential interest amount on a lien may be reduced. Until recently the norm was that if a delinquent taxpayer filed for bankruptcy protection, the tax lien would continue to earn interest set by state and retain priority over most every other creditor. The foreclosure crisis has prompted courts to take a more active role in reducing debt. They may reduce the priority of a tax lien held by an investor and even reduce the interest rate.
This is further reinforcement that working with an expert like The PIP Group is an absolute necessity when researching, buying and negotiating collection of delinquent funds recorded as a tax lien or tax deed.
Investing in tax liens can be a very profitable investment and has the potential for an investor to earn more than 24 percent per year on redeemed liens. However, due to the above risks mentioned, working with a guide and manager like The PIP Group is necessary to assure that the investor has access to the knowledge and expertise necessary to be successful in this industry. Regardless of the weakness and strength of the market, The PIP Group has consistently earned higher-than-average rates and returns on their investments in tax liens and tax deeds.
Interested in investing in tax liens, click here for more information and give us a call at 833-335-2529.