DROdio Real Estate

What is a Tax Lien and How Do They Work?A tax lien is a lien placed upon a property due to nonpayment of property and/or personal taxes.   They move with the property and not with the owner.  Therefore, if you purchase a home with an tax lien, that lien now becomes your responsibility.  Keep in mind that depending on your state, the tax lien can also become the owner's personal responsibility.How Does It Work? When a property owner becomes delinquent on their property taxes a lien is placed on the home by the state or local county government .  The tax debt is then sold to another party who then holds the lien until the debt is paid.  The homeowner has a certain amount of time as determined by their county to pay the property taxes.In DC, this is usually up to the time of a court-ordered foreclosure to pay the debts and redeem the property.  If the owner forks up the cash for the property then they will be able to redeem the property and the third party will be reimbursed plus interest and any other costs associated with the lien.  If the homeowner fail to pay the delinquent tax lien, then they lose the property to the party who holds the tax lien.Smart Move or Risk?This depends on your perspective and personal situation, as with most deals involving money there's a certain level of risk associated depending on the variables involved.Risks

• Your investment will be tied up until the homeowner decides to pay the delinquent debt.  In other words the sale is final until the house goes into foreclosure.  Therefore it is to your advantage not to use money that you will need for emergencies or that you cannot afford to do without for a period of time.
• If the property owner goes bankrupt then it will take you that much longer to see a return on your investment.  And, eventhough you may hold the tax lien, you run the risk of the IRS and other creditors being satisfied first.
• More than likely if the owner cannotpay their back taxes, they can'tafford to maintain the upkeep of the home.  Some tex lien investors find that once they get in o n a property, it will be costly to get the property up to par in order to be sold.  Research is key.
• Attending a tax lien certificate requires time and money on travel, lodging food etc.  The biggest risk is spending money to attend auctions and come away with not buying a tax lien certificate at all.  In order to determine your real return on investment on must include the time and money spent acquiring the tax liens.

Benefits

• Foreclosure.  If you go into foreclosure with the property, and you hold the first lien, you're in first place to be paid upon sale of the property but perhaps at a loss of market value.  Still you come out on top with your investment plus interest.
• It is possible that a homeowner will let the property lapse due to current economic conditions.  That is, they do not pay taxes needed to redeem the property and they abandon the property altogether.

Tips

• As mentioned above, stay close to home when beginning your search as travel expenses can get high and cut into your ROI
• Research, Research Research!  Make sure that you get all needed information before making a bid so that you will be making an informed decision.  We know that the possibility of netting a high ROI is exciting but go into the process knowing as much as you can about a particular property.
• Get comparables in the property you intend to buy
• Be sure to conduct a thorough inspection of the property noting the construction, condition, age and landscape.  Is this a property that will need work if the home lapses and goes into foreclosure?  Are you prepard to just buy the deed or will you be investing more of your own capital?  These are all questions to anwer or consider prior to bidding on a home.
• Begin your search in your home state to minimize the expenses acquired in the pursuit of tax lien certificates.  If you state does not sell tax lien certificates then start with the states closest to you and then move outward.  Money spent in this area should be minimal in order to maximize the return on your investment.

Impact  on the DC MarketOn July 1, 2008, the  Office of Tax and Revenue (OTR) mailed 6,500 notices of property tax delinquency  to property owners informing them of outstanding real property taxes to be paid before July 31, 2008 or else their properties will be sold at the September 17, 2008 Tax Lien sale.  For you this means more opportunities to purchase a tax lien that may become yours if the home owner doesn't pay the delinquent debt.Still take into the consideration the risks and benefits, then decide if investing in tax liens align with your investment goals.

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This entry was posted on Tuesday, August 12th, 2008 at 10:59 pm and was filed under All the questions you were afraid to ask, drodio.com. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.