News and Articles

February 1, 2008

Cash Advances: The Profit in Real Estate Tax Liens

Looking for an alternative to mortgages, factoring, foreclosures, tenants, or flipping real estate? Consider delinquent real estate tax liens.

Buying the right to collect on delinquent real estate taxes can be a lucrative investment. Here's how it works:

Counties generally assess real estate taxes each year and allow owners to pay by a certain date. If the taxes are not paid when due, the county can charge interest.

This is where you come in. In many states, counties can assign an investor the right to collect delinquent taxes.

Where's the profit?
If the property owner eventually pays the tax lien to the county, investors receive their initial investment plus interest. The allowable interest, which varies by county, runs between 8 percent and 18 percent per annum on average.

On the other hand, if the property owner fails to pay the delinquent taxes within the required time frame, the investor can initiate proceedings to obtain a deed to the property. And tax liens take priority over all other liens, including mortgages.

Before you invest in tax liens, thoroughly research the property to confirm its marketability and to avoid any hidden problems. Verify that the value of the property far exceeds the taxes. A general rule of thumb is to require an "as-is" value of at least ten times the tax amount.

Case in point
An investor obtained an Arkansas tax deed in January 2007 by paying $710 for unpaid real estate taxes on a single-family residence. She then resold the property for $14,000 with a down payment of $2,000 due at closing. The $12,000 balance was owner-financed at the rate of 10 percent, payable in 60 payments of $254.96 per month.

Common sense tells you that's a pretty good return; a financial calculator says the investor made more than 430 percent! To sweeten the deal further, she made the deal in a self-directed individual retirement account (IRA) as a member of a limited liability company.

The benefits of using your IRA are clear: Your investment would be tax-deferred or even tax-free if you use a Roth IRA.

Be prepared for profit It's important to realize that processes and procedures will vary greatly by county and not all states participate in tax lien sales.

Also there's a difference between tax lien certificates and tax deeds. Control and ownership of the property is only possible through a tax deed after the specified redemption period has expired. Most property owners pay their delinquent tax bill before it gets to the tax deed stage. In these cases, however, you can still earn returns backed by real estate.

And when an owner fails to pay, you'll own a property worth thousands of dollars for an investment of just a few hundred dollars - with much larger returns available on resale. Because the investment is a fraction of the property value, it can be a solid cash flow choice, even in a softening real estate market.

Tracy Rewey can be reached at tracy@diversifiedinvestment.com

Source: GrowingWealthMag.com