TAX LIEN SALES - An Alternative Investment Strategy

In the midst of the current economic climate, it seems reasonable to believe that it will be more difficult for folks to pay their tax bills in the years ahead. Putting my investor's hat on for a moment, I've been wondering if there is money to be made in tax lien auctions.

Here's the scenario:

People don’t pay their property tax

The county publicly advertises who did NOT pay their property taxes...ouch.

Before the tax lien sale, investors put down a deposit ahead of time with the county in order to take part in the auction.

Investors then go to the tax lien sale

Preferably go IN PERSON to a small town’s tax lien sale, if this is even possible anymore. While online sales are more the norm, there are more bidders in internet auctions; as such, you'll likely experience higher bidding prices online

Everybody gets together in person or online on a particular day and bids
Example: You may pay 8% upfront on $1,000 tax owed by a homeowner ($80 upfront cost...this is non-refundable...basically, the bid amt. is the risk you must accept to take part in the auction)

If you win the bid, you'd then have the right to pay that person’s tax obligation for future years. This is an important legal requirement, as it gives you the ability to receive additional compensation (investment returns) from the homeowner when they ultimately pay their tax bill + penalties for paying late. Also, paying someone else's property taxes upfront can POSSIBLY result in you owning the property outright!! Read on...

Basically, you'd hold the tax lien certificate until the property owner pays the tax they owe

When time passes and the homeowner eventually pays their tax bill, you get a return on your investment…you usually have a high rate of return each year (could be a 14% return on your $1,000 investment)

First year you could get one rate of return (let's say, a 6% return)….the next year you could possible get a higher 14% return, etc.

After 3 years, let's say, you can potentially be awarded a “quiet title” (this grand prize is not likely, cuz' most folks end up paying their tax bill when push comes to shove); if you were awarded the quiet title, though, you’d want to advertise in the paper that the owner needs to pay their taxes (this ad serves as legal notice to all interested parties like the owner, bank, etc.) that you, the holder of the tax lien certificate, could purchase the property for $3,000 ($1,000 each year), plus the original $80, and thus take ownership of the entire property for a mere $3,080...these numbers are just used for illustration purposes...again, this grand prize scenario typically doesn't happen. With that said, you're STILL more likely to get a return on your investment from holding the tax lien certificate for a while, which is a good thing!!

Potential pitfalls:
If you pay the $1,080 upfront and the owner pays all of their tax liability the next day, you’re out $80...oh well, you have to accept some risk...however, the longer it takes the homeowner to pay his or her taxes,the more money you can potentially make on your investment when they finally make a payment...this return on investment is likely higher than anything you can get in the stock market at the moment.

You need to know what type of land/house you want to buy a tax lien on and what you can do with the property...do the homework...this stuff is not for amateurs!


Bottom line:
Folks who are breaking the law by not paying their taxes put their own assets at risk

It appears to me that savvy investors who can find in-person auctions may fare better than tax lien auctions held online.

This type of investing seeems like a reasonable alternative to the stock market; however, invest at your own risk…most folks eventually pay the tax they owe.

I haven’t decided whether or not to implement this investment strategy. On one hand, it seems kinda cruel to punish someone down on their luck; however, if folks are breaking the law by not paying their taxes, their local government is going to make them pay more no matter what...investors who agree to pay someone else's tax bill RIGHT NOW should be compensated for bailing these folks out on a temporary basis.

While I remain conflicted on this topic, I’m curious if this type of investment strategy will grow in popularity over the next couple of years, given the current economic crisis. If folks can't pay their mortgages, why should we believe they'd be able to pay their property taxes?

http://en.wikipedia.org/wiki/Tax_lien_sale

FMC