Are Tax Lien Certificates Safe? The answer to this question is YES... they are extremely safe, in fact one of the safest real estate investments we know of. This is because the government has figured out a way to get paid for unpaid property taxes and guarantee a nice return for those who help them get money for the services they render. Let's dig a little deeper into tax lien certificates and find out why they are so safe.
Everything in realm of real estate, mortgages and trust deeds deals with lien priority. What is lien priority? Lien priority is the order in which creditors are paid when the assets of a borrower are sold. So when dealing with real estate, the first company to record would be in first position. Most often this would be a mortgage company. Hence this is our 1st mortgage who is in 1st position to get paid if or when the property is sold. The second company to record would be in 2nd position. If you have a 2nd mortgage, more than likely they would in 2nd position. And it goes on and on. There can be as many liens against a property as needed.
Creditors can even have liens against properties. Say for instance there is a judgment or mechanics lien for an outstanding balance owed because work was done but never paid or you owned money to an individual and it was never paid. Whomever records the lien next would be next in line. Lien priority is important to understand because it will show you the pecking order of the likely hood of getting paid.
Now this is where tax lien certificates and security come into play. Based on lien priority as discussed, a tax lien if recorded after the 1st, 2nd and any other judgments or liens, would be an extremely risky investment... in fact so risky, no investor in their right mind would ever invest in a tax lien certificate. So the government made a few exceptions to the lien priority rules. And by so doing made tax liens very attractive investments and very safe.
Here is the exceptions... state property taxes have priority over everything. Doesn't matter when it was recorded. Property taxes cut the front of the line so to speak and now being in 1st position, they will always get paid. Mortgage companies fully understand this rule and accept it as a risk they take in providing a mortgage for homeowners. They know property taxes are a fraction of the collateral so they don't get to worried about it. However, they also have to be careful to not lose their investment and not get paid at all.
This would only happen if foreclosure occurred. See if a home goes to auction and is sold, that money would go to paying off the lien holders based on lien priority. If by some random chance the home was sold for only the back taxes, everyone else is wiped out. They loose their investment. Banks will not let this happen so they are sure to forward enough money to pay off the back taxes so foreclosure doesn't happen and they can foreclose. Now you can see why Tax Lien Certificates are safe and certain, because they have priority over everyone and you will always get paid, it just may take some time.
A Tax Lien is exactly what is sounds like... it's a lien on a piece of property to ensure taxes are paid each year on the property. If you own real estate, you know that you have to pay taxes on the property you own each year, regardless if there is a house on it or not. Much like a mortgage company will place a lien against your property when you borrow money to purchase a home, the government will put tax liens on properties as a way to ensure they get paid. Failure to pay your property taxes could result in the issuance of a tax lien certificate.
Most homeowners don't realize that if they fail to pay their property taxes, investors can actually bid at county tax lien auctions for the right to pay the property taxes in behalf of the homeowner. The highest bidder receives a tax lien certificate. In return for paying the delinquent property taxes, the property owner agrees, by it's states mandated laws, to pay a specific penalty. This penalty ranges anywhere from 16% to 24%. In one state, the penalty gets as high as 50%, which is a huge return for paying someone elses property taxes.
Tax Certificates are extremely safe! Property taxes help pay for most of the government and local county operations like fire and police depts. You and I both know when it comes to the government, they don't mess around when it comes to money. If they don't receive money to fund their services, they find ways to get paid. Unpaid property taxes cut to the front of the line when we speak of lien priority, ensuring that they ALWAYS get paid first. Yes, even before the mortgages no matter when those liens were recorded. Bottom line... you will get paid!Are there any risks by Investing in Tax Lien Certificates?
There are always risks when investing. Investing in Tax Lien Certificates is no different either. There are two main risks one that very seldom occurs however it's always good to know as much as you can when you start investing in tax lien certificates. The main risk (which very seldom occurs) would be that the home is located in the middle of some hazardous waste material that requires more money to clean up than what the property is worth and so there was a good reason the homeowner decided to leave the property and not pay the taxes. So you might end up with a property you don't want. The other risk is that your money is tied up longer than expected. If the homeowner declares bankruptcy or the property goes into foreclosure, the tax lien stays with the property, but you may not get paid until after the foreclosure auction.
Can I own a Property Free and Clear through Tax Lien Investing?
YES! However, very rarely does this ever happen and I'll explain why. All the late night infomercials and gurus will tell this is what makes tax lien investing so exciting because you could end up with a property free and clear for only the back taxes. I would venture to say 1 in every 100,000 tax liens does this ever happen and here's why. Chances are if a property owner is not paying his property taxes, he's also not paying his mortgage. Mortgage companies know that tax liens are senior to even their position. So in the event a property is going to auction and property taxes have not been paying, the mortgage companies will forward money to pay the taxes and secure their position. They will NEVER let a property go for just the back taxes. So the only chance you have is when a homeowner owns his home free and clear... no mortgages.
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