Reverse mortgage defaults could soon be a hot topic because as a tax lien or tax deed investor, you purchase defaulted debts or the right to collect on those debts from county governments. What debts are we talking about? Tax liens, of course.
When residents of a country neglect to pay their property taxes, states and municipal governments deal with the issue in various ways.
Some states sell off the actual debt, then regulate the investors who purchase the debt to protect the interests of the homeowner to the greatest extend possible while still enabling the investor to collect the debt (with interest) or foreclose on the property and take ownership.
Other governments sell tax deeds to investors, enabling the investor to take ownership of the deed to the property itself, albeit usually with caveats placed on that ownership and process to protect the homeowner in this case as well.
Tax liens are complicated but highly profitable
The extreme regulations placed on the buying, selling, and acquisition of tax liens, tax deeds, and the associated properties makes them a relatively complicated but highly profitable investment because government entities know that in order to attract investors willing to meet their requirements for homeowner protection, including long investment timelines in many cases, they must offer high returns on the investment. This is why many of these debts often come with very high interest rates that are well into the double-digits and are often available for purchase at extremely low prices.
The description “pennies on the dollar” is extremely apt when it comes to tax lien and tax deed investing.
Reverse mortgage defaults and tax liens
However, because tax lien and tax deed investing are often misunderstood, investors who invest in these assets must be prepared to confront a new and likely troublesome aspect of the conversation: reverse mortgage tax defaults. In most cases, if a property goes into foreclosure due to a default on a property tax payment, the primary mortgage holder will pay the debt in order to retain control of their interest in the property. However, when this happens with a reverse mortgage, the elderly resident of the home may still lose their home even if the foreclosure happens as a result of action taken on the part of the lender, not an individual investor. Nevertheless, this type of action creates loud, nasty, and negative headlines that you will likely be compelled to confront, so let’s get the truth about the story out there.
Here is what happens in reverse mortgage defaults
In a reverse mortgage, an elderly homeowner essentially cashes out a portion of the equity in their home. They receive monthly payments out of that equity, which feels like a reverse mortgage. The reverse-mortgage lender makes the loan and agrees to make the payments either for a predetermined number of years or until the homeowner dies. To be blunt, the lender is betting that the individual will die, refinance the house, or sell it before the lender enters “the red” with their monthly payments. If the owner refinances or sells, then the reverse mortgage is paid off. If the owner dies, the reverse-mortgage lender receives the title to the house. Many people do not like reverse mortgages because they believe they are unfair to the homeowner’s heirs or they believe the monthly payouts are too small. That has been the case since the invention of the loan vehicle.
However, in today’s market, there is another factor: reverse-mortgage defaults. This happens when the homeowner fails to make payments on the costs associated with their home that are still part of their responsibility: usually utilities or property taxes. When this happens, the reverse-mortgage lender can pay off that debt, but then may foreclose on the home if the homeowner cannot make the payment themselves to remove the lien. This is in accordance with the terms of the reverse mortgage, but the fact is that it is portrayed, rightly or wrongly, as “draining” valuable equity from seniors even though it actually rarely happens that those seniors are evicted. This very seldom will have anything to do with you, the individual tax lien investor.
However, people will read these headlines and assume you are part of the problem. Make sure you are prepared to deal with questions about this type of tax-lien complication or that, at a minimum, you realize you might get asked questions in a confrontational manner. This is one reason many tax-lien investors opt to invest through a third party or a fund that enables them to participate in this incredibly profitable transaction without having to deal directly with the confrontational media or homeowners who do not realize what has happened or how to remedy the situation.
Whether you want to buy tax deed certificates, collect on tax liens, or actually work with higher-risk, higher-return foreclosures, PIP Group can help. Learn more about the states in which we invest and the investment vehicles we prefer at PIPGroup.com.