New Info 4 Real Estate

Property tax lien certificates can be a very profitable means of getting into real estate investment, so I thought I’d share some background information to explain what property tax liens are and why they offer such profitable returns. When a property owner is unable to pay their taxes for example, they can be issued with a tax lien certificate which simply provides a means to guarantee the creditor (in this case the tax collector) will receive the money they are owed.

The tax lien is secured on the personal property or real estate owned by the debtor - the most common form is the mortgage lien. There are several other types of tax liens but we’ll leave those for another line of discussion. Each variation of lien carries its own set of rules on how it is implemented, and each may also vary from state to state.

When the debtor is unable to pay their property taxes, the state issues a tax lien certificate against their property which also includes a time line by which the taxes must be repaid. This grants the lien owner access to the equity within the property in order to claim the money they are owed. If the property owner is then unable to repay the tax lien, it may be sold or auctioned off to the highest bidder.

When buying a tax lien certificate, rather than buying the property, you are actually only lending the property owner the money they need to repay their back taxes. Initially, you are not buying the property. In return however, the property owner is legally agreeing to repay a predetermined amount of interest on your loan - which can be anywhere from 6% to 50% depending on the agreement and the state where you are buying the lien. The property owner is also agreeing to repay your money within a predetermined time period, which will be stated as part of the tax lien certificate.

So here’s how we make our profits. If the property owner is able to repay the value of the tax lien certificate back to you within the allotted schedule, including all interest owed to you, he retains ownership of the property, and his credit rating remains intact.

If the owner is unable to pay the loan, you take possession of the property as the owner of the tax lien certificate secured against it. As the new owner you are able to manage the property as you see fit - renovate it, rent it, sell it etc.

So as a quick recap, s an owner of a tax lien certificate, you will either make a profit by way of the interest repaid on your loan to the property owner, or of the owner is unable to make the repayment, you take ownership of the property and make your profit from how you then manage that property.

The bottom line is that investing in tax lien certificates is relatively safe (providing you understand in detail how the process works, and where any potential risks lie), and is a profit focused way to invest in real estate.