Tax liens have always been of interest to me. As a teen, I
would remember the infomercials advertising tax lien investments as the way to
own tons of property for pennies on the dollar. Since my father was a
contractor and property manager, I was introduced to real estate ownership at a
young age and read my first book on tax liens in my late teens. At the time, I
could not figure out why more people were not investing in tax liens. As an
adult, real estate professional and attorney, I can now appreciate the
risks/reward trade off that comes with this asset class. So, here is my take on
tax liens.
Tax liens are a low cost way to obtain exposure to the real
estate market. Although the supply and demand of tax liens is very much
influenced by local events, tax liens will be around as long as there are
municipalities in need of money and property owners who do not pay their taxes.
Although cheap and available, investments in tax liens propose some unique
risks and benefits.
One of the unique benefits of tax liens is that they
initially offer passive income at high rates of return. Most tax liens are purchased
via auction and most auctions employ one of two bidding methods--bidding up
price or bidding down interest. Whether the price of the lien is bid up or the
interest rate is bid down, the amount of back taxes owed does not increase and
statutory penalty rates of interest typically offer an attractive return to
purchasers that do not overbid. Moreover, upon the purchase of a tax lien, the
municipality continues to serve as the collection agency for a statutorily
mandated length of time, in most cases. This allows investors to collect on the
purchased lien with minimal effort, for a period of time.