WHAT ARE TAX LIENS AND HOW DO THEY WORK?
Understanding the Tax Lien/Tax Deed Process
What is a Tax Lien?
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 personal income taxes or other taxes.
These tax liens are then purchased from the appropriate government agency. If the homeowner does not pay the property taxes, including the interest, by a certain deadline to the tax lien certificate holder, then the property goes to the holder of the deed. This process creates a unique opportunity to invest in distressed properties for profit.
Don’t feel you are obligated to pay your taxes? What do you think the government can do about it?
They can place a tax lien on your property and either sell that lien to investors in a public auction or collect the interest themselves. If you have a property tax lien assessed, you are required to pay the cost of your taxes plus 5% to 50% in interest. You will be allowed a certain amount of time to settle the debt, or “redeem” the lien. Failure to do so will result in the foreclosure of your property and the lien holder can take full possession of your property. It is all mandated by government statute.
To have a reliable and predictable source of revenue, local governments sell unpaid property tax liens and tax deeds to private investors. The lien against a delinquent taxpayer’s property accrues interest of 5% to 50% each year until the taxes have been satisfied (the exact amount varies from state to state).
What happens next?
If the taxes and accrued interest are not paid within a specific period of time (set by the local government) the lien may be foreclosed and the property sold by the holder at full market price. Certificates are issued for each lien. The certificates are recorded in the local government property records and provide all the information regarding the details of the lien.
What information do the certificates have?
Tax lien certificates provide the address, legal description and current owner of the property, as well as the rate of interest and the amount of time the owner has before the property may be foreclosed on by the certificate holder (investor). Government tax liens are superior to all other liens attached to property, including first mortgages.
More FAQs About Tax Lien Investing
We only buy liens in the state of Illinois at this time. During the early years of our company, we purchased in many states like Arizona, Florida, South Carolina, Indiana, Mississippi, Texas and Georgia. So why now only Illinois? First, internet technology changed the game. Where you once had 50 serious tax buyers at a Florida tax sale, online auctions made that number more like 5,000. With that kind of competitiveness, rates plummeted. Second, social media changed the game. False promises through coaching and weekend workshops caused the numbers of unknowing, novice investors to skyrocket. For example, where we once attended live auctions of about 150 people in Houston, Texas, that number has increased to nearly 1,500. Illinois has maintained a set of rules and legislation that have not provided the novice investor, or even the coach, an easy entry. Rates are great, but laws and process are very complex. As a result, Illinois has been relatively insulated from the novice investors, which keeps the competition low and the rates high (in most counties).
This is a good, but broad question, because there are three answers. First, as a tax lien buyer, PIP is buying the liens at tax sales on the behalf of investors — in your name or that of your trust, LLC, or SDIRA. As a secondary market tax buyer, you are buying an investor’s lien at the beginning of the foreclosure process. As a pre-deed tax buyer, the previous investor has pushed through the foreclosure already and is not interested in taking over the property. At this stage, you are actually buying the property.
There are obviously variables, but we like to say 30 percent redeems each year, with 10 percent remaining to make decisions on for foreclosures. Using Illinois (with its complex legislation) as an example: Considerations for foreclosure will initially exceed well beyond that 10 percent average. By law, PIP must start taking steps necessary to engage in foreclosures at the two-year mark. That means we are “considering” foreclosure on 40 percent of the unredeemed portfolio, even though we know only 10 percent will actually be a true consideration and of that, maybe 50 percent make it through a successful foreclosure. This is called reassessment, which enables us to force more redemptions, file additional calls to action and be completely prepared for the complexities that come with potential foreclosure in Illinois.
In the past years, we have always encouraged our investors to make repairs and flip the property. A number of our investors take possession and do nothing in the hopes we can offload to a fix-and-flipper, or a fix-and-cashflow investor. That methodology really ties our hands on liquidity of the assets, and we do not ever encourage it. Due to a number of nuances over the last few years in Illinois, 2020 through at least 2025 will be a cash-flow market. With any property you take possession of, we are going to encourage you to make the repairs and rent it – something PIP handles on your behalf. This has been our recommendation for the last two cycles of tax buyers in Illinois and for those who have followed it, their net cap rates have been between 16 percent and 30 percent.
Redemptions are processed by the county on a monthly basis and are paid out as we are notified and process on your behalf.
Without revealing any trade secrets, we can share that our process prior to lien purchase is 95 percent data-driven. We ask questions like these: Is the property occupied? Has it been included in past tax sales? Did those liens redeem? etc. Avoiding dilapidated property is unfortunately not in the equation. A property can look pristine and new when we buy, and by the time we get to foreclosure, it could be a burned-out shell – that’s just the nature of the business. As an example, let’s say we purchased the lien on a 3/2 occupied property. After foreclosure, this 3/2 property is now a seriously hot disaster. You are all in on the foreclosure of $12,000 and put up another $30,000 in repairs. This total investment of $42,000 on a $60,000 property is pretty standard. Outside the scope of Chicago-Metro, Illinois real estate is really cheap and there is a lot of inventory, so although this gross profit has now evolved into about a 42 percent profit, it is going to sit on the market and while it does, it is going to deteriorate. Although Illinois has one of the highest levels of home inventory availability, it also has one of the highest rental demands in the country. If you took that property and cash-flowed it, your gross annual profit would be about 20 percent, or nearly double the national average. That’s a very long answer to the question, but the point is not whether you acquire dilapidated property, but rather, what you do with it once you own it.
There are far too many variables to provide this average and that would apply to ANY state — owner-occupied, vacant, mortgage, no mortgage, probate, trustee run, legislative deadlines, etc. One would assume if we bought a tax lien at a Georgia sale, with a mortgage on it, we could reach out to them to force redemption faster. As the lender, I know the 20 percent redemption penalty is due tomorrow, or 364 days from tomorrow, so why not hold onto my capital and leverage it a bit, before I am forced to pay? So many variables… .
That can be a subjective choice. Notes have a better predictability, but lesser margin. We have seen people lose a lot of money in both, so the final decision probably boils down to more of what your exit is, or how long you want the funds tied up, as well as what your collateral is. Tax liens have more provisional escape if things get turned upside down, but notes have more a tangible “feel.”
$75,000 for tax liens, and that is a collective total.
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The Tax Lien Process
Local government collects real estate taxes from all property owners to pay for schools, roads, hospitals, etc.
The county “sells” delinquent taxes to investors, usually at auction – a tax lien is created.
The delinquent property owner has a set time (determined by local law) to repay the debt, plus all interest and penalties, OR forfeit the rights to the property.
There’s More to it, Though…
Each state and each county within the state has different laws, policies, and procedures. These can change frequently. Therefore, the purchase and management of investments in this field can seem overwhelming to most novice investors of tax liens and tax deeds.
Investments in tax liens and tax deeds require extensive knowledge and experience, as well as extensive continuous research of the field. The PIP Group has the knowledge and experience after many years of purchasing and managing these types of investments. Whether in a strong or weak market, The PIP Group has consistently earned its clients strong returns.
Our strategy is focused on obtaining the highest possible return for you. In tax lien investing, we focus on the highest-interest-yield tax liens, the highest amount of equity to secure the lien, and a high-yield compounding effect through reinvestment of redemption proceeds in more tax liens.
In tax deed investing, we focus on a combination of both: the highest interest yield (when applicable) and the highest equity profit upon purchase of the tax deed.
Finally, we are the only agency with a fee structure, designed to ensure YOUR success. Explore all the advantages The PIP Group has to offer!
Safety and Consistency
Recognized as an IRA Qualified Investment
Tax lien and tax deed investments are conducted by your county government
Investments are made in your name
Percentage is mandated and enforced by government
Percentage will not fluctuate, due to declining economy
Secured PURCHASE rates by The PIP Group can be up to 36% (gross rates annualized)
IN MOST STATES, TAX LIENS ARE A SUPER LIEN
Super liens are a category of lien that, pursuant to state statute, are given a higher priority than all other types of liens – such as first mortgages.
TAX LIENS OFFER INVESTORS SAFETY
- Percentage is mandated and enforced by government
- Percentage will not fluctuate, due to declining economy
- Secured rates by The PIP Group are currently 8% -50% (net to client)
- If you are able to foreclose, returns are endless
TAX LIENS OFFER INVESTORS SAFETY
- Investments are made in your name
- Investments are conducted by your county government
- Liens are secured w/priority status against the property (even 1st mortgages)
- Recognized as an IRA Qualified Investment
PLUS (You Give)
- Delinquent taxpayer additional time to pay taxes
- County budget the investments they need for schools, etc.
- Yourself and your neighbors cheaper property taxes, because the county has the funds to afford its budget
READ THE STATE LEGISLATION PERTAINING TO SOME OF THE STATES WHERE WE OPERATE
- Maximum bids are 18% penalty on the tax lien amount for each 6 months
- Up to 3-year Right of Redemption
- Set penalty of 20% from date of purchase
- 1-year Right of Redemption
- 3% per 3 months from date of purchase
- 1-year Right of Redemption
- 25% redemption/penalty if redeemed in 6 months or less (non-homestead and non-agricultural property)
- 50% redemption/penalty if redeemed in 24 months or less (homestead and agricultural property)