Looking to capitalize in a down economy? Consider purchasing a tax lien in a tax lien sale. Unsure of what exactly that is? Here’s a general overview to arm yourself with enough information to make an informed decision on whether this investment strategy is appropriate for you.
When homeowners become delinquent on their property taxes in any given year, local municipalities can impose tax liens against them. Most people who become delinquent on their home mortgages are additionally unable to pay their property taxes, so foreclosures and property tax liens often go hand-in-hand. Consequently, there exists an opportunity for the savvy investor to take advantage of tax lien sales, so the tax lien that has been purchased will earn interest every year. It is also possible for an investor to become an owner of foreclosed upon property.
The process is different from state to state, so potential investors should research the relevant statutory law in their respective jurisdictions. Most states guarantee a return on your capital, plus any interest that the lien has earned, should the homeowner end up redeeming the property by catching up on mortgage and property tax payments. The rate you can earn on interest, however, varies from state to state, as does the time allotted for the homeowner to redeem the property.
A practical investor has the potential to further increase their earnings when a homeowner is isn’t able or refuses to redeem the property. An investor may attempt to gain title of the property in question by filing suit. If done properly, the investor can officially own the property, although the process of filing suit can at times take a long time, be complicated and costly.
Obtaining a tax lien is not without risks, however. Before an investor considers purchasing a tax lien, it is crucial that the property be inspected to ensure any home not only still exists on it but also remains undamaged. An investor should also take measures to verify that the appropriate municipality followed proper statutory guidelines when imposing the tax and lien on the property. Additionally, if the state in which the tax lien was purchased has a redemption period that is longer than a year, an investor should continue to pay the required taxes each year in order to obtain another lien.
The purchase of tax liens via a tax lien sale consequently has the potential to be a prudent investment opportunity, if an investor takes steps to understand both the risks and the overall tax lien sale process. Ultimately, patience is key to reaping the investment benefits a tax lien can offer.
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