Here in this discussion, we will talk about some of the different between a lien and a deed, and the pros and cons to investing in them. Theses are just from our views. each local and state laws may vary.
Real estate with delinquent property taxes presents an investment opportunity. Although city and county taxing collectors use penalties and interest to motivate real estate owners to make timely tax payments, more aggressive collection action is taken when the delinquency is not cured. Such as online Auctions, or auctions at your local court house. In roughly half of the states, taxing authorities collect delinquent taxes by conducting tax lien sales and the other half by tax deed sales. And in some situations, maybe both. Purchasing either a tax lien or tax deed is a form of real estate investing that requires some sophistication and a good understanding of the difference between the two. I am sure you have herd tax liens, or sales are the way to invest, let us here at BMW Properties shade some light on this subject matter, and hopefully give you a better understanding of how every thing works. We will start with States that use tax liens.
Tax Lien States
These are states that allow tax lien sales authorize the local taxing authorities, such as the tax accessor of the county, to place a lien on real estate when property taxes are not paid. A tax lien is similar to a mortgage because it’s a public record of a debt and generally prevents the owner from selling or refinancing the property unless the debt is paid, and often times will super seed the mortgage on the property. If the tax lien remains unpaid long enough, the local taxing authority sells the tax lien to collect the taxes. When you purchase a tax lien, you are essentially paying the property taxes and placing your own lien on the real estate, often as the first place lien holder. The owner must pay the back taxes to you — plus interest — instead of the tax collector to clear the lien. Because the interest rate for tax liens is among the highest allowed by law, this makes the tax lien purchase a desirable investment. Now get this, if a bank foreclosures on the property, they still are required to pay you plus interest, before they can sell it, or take ownership.. Which is why many times the banks will catch them up. At that point normally the bank catche up the taxes, and adds it to the mortgage payment of the house. If not after a year or so, depending on the local laws, you will own the property free and clear.
Tax Deed States
In a state where tax deed sales are used to collect delinquent property taxes they do not allow its local taxing authorities, such as the tax accessor to conduct tax lien sales — even though a lien is placed on the real estate when the taxes are not paid. In a tax deed state, hey this is the government what can I say about making sense, at that point the only option for the local taxing authorities to collect the delinquent taxes is to sell the entire property, that means the local government OWNS the property, rather than just the lien. When you purchase a tax deed, you are buying real estate. Although various factors affect the value of such an investment, the primary reason to purchase a tax deed is to acquire ownership of the property for less than its market value.
Buyer Due Diligence Is Needed
A significant difference between tax liens and tax deeds is the amount of due diligence you need to conduct before purchase. Because you become the property owner after purchasing a tax deed, you should make a thorough investigation of the property’s title to determine whether a mortgage is recorded against the property, as well as the existence of any other liens for taxes or other debts. You also need a thorough analysis of the property’s market value to determine whether there is sufficient equity in the property to cover all the debts and give you a return on your investment. You may also need to go in and negotiate with the lien holders to lower or eliminate the liens. None of this information is necessary to evaluate a tax lien purchase. Unless, of course, a property with a tax lien against it has been abandoned, the property owner eventually will need to clear the lien due to a sale, refinance or use of the property as collateral, again after a certain time has passed and there is no action taken by the owner the house could become yours. Often this is compared to investing in a CD.
Other Considerations You May Want To Look At…
Purchasing a tax lien does not obligate you to pay any future property taxes that become delinquent or pay for other property liabilities. Furthermore, if it appears that your lien is unlikely to be paid, you can walk away from your investment, or take ownership of the house. You do not have this option after purchasing a tax deed. As the property owner, you are responsible for future tax payments and any other liabilities related to your ownership, as any normal property owner would. Also, unlike an investment in a tax lien, an investment in a tax deed requires that your adequately maintain the property until you are able to sell it, and again just like a normal property owner would. You also often times may risk much more capital investing in a tax deed than in a tax lien.
I will do a follow up here shortly of the pros and con of tax investing, this is just an general over view..