Tax Lien Basics

Thursday, November 10, 2005

So you may have heard about a tax lien being a good investment, but don't really know what they are all about? Well this article is for you! The following article will teach you the basics of tax liens.

What is all this Tax Lien stuff?
The state and county both have taxes on real property. They raise these taxes so that the government can pay for the essential services that the government provides. Since the government budgets the money from taxes for their services, they cannot wait around for the overdue taxes to be paid.

Since the government does not wait for the taxes to be paid, they offer the taxes to investors in the form of a lien. How a tax lien works is an investor pays the government the owed tax at the auction. Then when the property owner goes to pay off the tax lien they pay the county. The county then cuts a check to the investor for the amount of the principle investment plus the penalty.

So how much can I make off of a Tax Lien?
A tax lien can yield anywhere from 5 to 300 percent on an investment. In the state of Texas, there is a maximum return of 300%. The downside is once you buy a lien, your money has very little liquidity. It is very hard to cash in a tax lien before they have been paid off. The investor has to wait until the property owner pays off the tax to receive their payment.

What if the property owner does not pay off the lien?
As a tax lien holder you have the first priority on the property. These first position rights ensure you that your lien will be paid off first. If they do not pay your lien you have the first rights to the property. Even if the owner of the property does not pay off the taxes, if a bank holds a mortgage on the property they will most likely pay off the tax. This is because they may have, for example, a $30,000 interest in the property, and if they don't pay you off it is all lost if you foreclose on the property and claim it.

The only time you do not have the first position on the property is when you have the second lien. However, do not dismay, if that person wants to foreclose on the property, they will pay off your tax lien before they can foreclose. This is called buying out the lien.

Summary
A tax lien is the right to receive the property tax and penalty on a specific property. The yield can be anywhere from 5 to 300% depending on the state. A tax lien can be a great investment because it has a first position on the property. If a bank holds a mortgage on the property, they will often pay it off before the property forecloses. So if you want to learn more about this great investment opportunity, feel free to read more articles on Lawyer Locater.