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Investing in Tax Liens: The Rate of Return

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Investing in Real Estate Tax Liens

Tax Lien Investing, An Underutilized Investment Tool

The goal of an investor is to seek new opportunities while evaluating risks vs. rewards. Many stock market investors are happy with a safe return of 10-15%. Investing in tax liens/tax certificates is a less familiar strategy. Although it’s less popular and not fully understood, tax liens can preform just as well or better than stock investments. Another advantage of tax lien investing is that you have a more pre-determined return without having to second guess the market.

In many jurisdictions, real estate tax lien investors see returns between 10-25%. As with any other investment, the key to tax lien investing is to fully understand the strategy and know as much about the property as possible.

What is a Tax Lien?

When a property fails to pay the real estate taxes, the city or county in which the property is located has the authority to place a lien on the property. A lien is a legal claim against the property for the amount of unpaid taxes.

When a lien is issued, a tax lien certificate is created by the municipality that reflects the amount owed on the property, plus any additional interest or penalties due. These certificates are then auctioned off to the highest bidding tax lien

Tax liens are assigned by county. However, the guidelines regarding tax liens vary from state to state. There can be some variance regarding the redemption period and the bidding process.

There are two ways to profit from tax lien investing. First, the most common way is profiting from interest payments and the 2nd is taking ownership of the property. Penalty jurisdictions

 

 

Rates of Return

 Here’s an example of Rates of return.
State Sale Type Interest Rate Redemption
DelawareDeed (hybrid)15% penalty 60 days
D.C.Lien18% per annum6 months*
FloridaLien18% per annum, 5% minimum 2 years
Georgia Deed (hybrid)20% penalty 1 year**
Lousiana Deed (hybrid)12% per annum + 5% penalty3 years
Maryland Lien6% to 24% (varies by county)After 6 months*
PennsylvaniaDeed (hybrid)10% per annum*Possibly 1 year*
South Carolina Lien8% or 12% per annum1 year
* varies
** not self-executing

 

 

Lien vs. Deed vs. Hybrid States

Each state has a process for enforcing payment of property taxes. About half of the states are tax “lien” states, while the other half are considered tax “deed” states.

In a deed state, the county is not selling a lien on the property for failing to pay property taxes. Instead, the the county is actually auctioning the property itself to pay the taxes.

A “hybrid” state is technically a deed state. However, it operates like and has much in common with a lien state. It has aspects of both systems.

All states fall into one of these categories:

  • Lien states
  • Deed states
  • Hybrid states

 State by state
Lien Deed Hybrid
Alabama Alaska Connecticut
Arizona ArkansasDelaware
ColoradoCalifornia Georgia
District of Columbia Idaho Hawaii
Florida KansasLouisiana
Illinois MaineMassachusetts
Indiana Michigan Pennsylvania***
IowaMinnesotaRhode Island
Kentucky Nevada Tennessee
Maryland New Hampshire Texas
MississippiNew Mexico
MissouriNew York**
MontanaNorth Carolina
NebraskaOhio*
New Jersey Oregon
North Dakota Pennsylvania***
Ohio*Utah
OklahomaVirginia
South Carolina Washington
South Dakota Wisconsin
Vermont
West Virginia
Wyoming
* Ohio is historically a deed state however, counties with populations over 200,000 are also allowed to conduct tax lien sales.
** New York City is also allowed to conduct tax lien sales.
*** Pennsylvania counties may operate under the hybrid system where the property is improved and has been legally occupied 90 days prior to the sale.

 

Lien States

  • The investor only has a lien on the property and does not have any other rights in, or title to, the property.
  • The investor receive a statutory interest rate until the property tax is received.
  • The property owner has a statutory redemption period within which he or she must pay the tax bill.

Deed States

  • The investor actually requires title to the property.
  • No interest rate or redemption period is involved since the investor receive the property itself.

Hybrid States

  • The investor actually acquires title to the property, subject go the prior owner’s right to redeem and get the property back.
  • Should the prior owner redeem (ie; pay the tax bill plus interest, penalties, and costs), the investor will receive an interest or penalty payment on his or her investment.
  • The prior owner has a specified redemption period (six months to 3 years) to redeem the property and reacquire title.

 

Who Should Invest In Tax Liens?

Property tax liens can be a viable investment option for investors familiar with the real estate market. Investors that fully research properties prior to buying liens can generate substantial profits.


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About Dana Ash-McGinty 208 Articles
Dana Ash-McGinty is the Principal Broker of Ash McGinty, a Washington, DC Real Estate Brokerage. This real estate maven has 15+ years experience in residential, commercial and land sales in addition to multi-state residential renovation, re-zoning, and condo conversion projects. A sought after real estate authority, she has been featured on CNN and in various real estate and financial publications. Dana is married to the highly esteemed Dr. Dana W. McGinty, a Washington, DC based internal medicine physician. They are often referred to as "The Danas".

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