Buying & Investing In Tax Delinquent Properties
America has huge numbers of tax delinquent properties. Why buy or invest in them?
It’s hard to keep up with taxes. When owners fail to pay their income or property taxes, liens can be attached to these homes, condos and commercial properties. This distress can create great opportunities for buyers and investors. Not only to acquire good deals, but to help bailout the cities and counties they are located in, and the owners themselves.
How do these situations happen? How do you get involved? What should you know?
The Two Types of Tax Liens
There are two main significant types of tax liens involved in real estate.
- IRS Tax Liens
When taxpayers don’t keep up with their federal income taxes, the IRS can garnish wages, bank accounts and place liens on property or even force the sale of assets. If an individual has an outstanding IRS tax lien against them, it can be very difficult to purchase, refinance or sell a property.
It’s worth noting that credit bureau Transunion recently had to stop reporting these tax liens on credit reports due to inaccuracies. That’s great news if you had one of these liens. You could see a bump to your credit score. Borrowing could be much easier. Though this can make it more difficult for lenders, property managers, investors and title companies to evaluate true financial status. This trend could be reversed later in 2019 if the credit bureaus feel they have fixed the problem.
- Property Tax Liens
The most common type of tax lien in this space is property tax liens. Despite the fact that many of the most affluent and successful destinations in the world have thrived by doing away with these types of taxes, the chances are that if you buy property in the United States, you are still going to be paying annual property taxes.
Some places like Pennsylvania have tried to do away with property taxes. Others have become far too reliant on them as a source of income. Many are rapidly hiking annual taxes. Both higher tax rates and tax assessments can increase these taxes. As well as special assessments.
When these taxes are not paid, a lien is placed on the property. Those liens are auctioned off to investors like bonds. If they are still not paid within the local grace period, the property may be foreclosed on. According to CQ Researcher, these regulations really began being enacted in the 1920s and 1930s, when 20% of property owners became delinquent.
According to WalletHub, average property taxes in America can range from just $558 per year in Alabama to over $7,000 per year in New Jersey. Many local neighborhoods can have even far higher property taxes. Especially in the Northeast.
Why People Fall Behind on Property Taxes
Just like foreclosure in general, there are many reasons for tax delinquent properties.
- Unforeseen financial circumstances leading to inability to pay (job loss, divorce, etc.)
- Paperwork mistakes and hidden fees causing owners to unknowingly be delinquent
- Large jumps in property tax bills and tax rates
- Reassessments by the county
- Being unprepared for tax increases after renovations and home improvements
- Losing tax exemptions
- Leaps in taxes after new construction properties are completed
- Special assessments for disasters, special projects and school taxes
- New caps on tax deductions
- Purposefully deferring taxes until properties are flipped or refinanced
- Fraud due to failure of mortgage or title company to pay taxes in escrow
Even with the best intentions, property owners have been hit with 50% or higher annual increases in areas areas like Nassau County, Long Island. Others have lost homes to just a few dollars in miscellaneous fees they didn’t know they owed, even though the actual taxes were paid. It’s tragic, but all of these issues are quite common. Many owners just don’t know enough about these taxes when they buy and aren’t financially prepared for it.
Tax Delinquent Properties & Distressed Owners
Tax delinquent properties are a major sign of distress. When property taxes are not paid, owners can lose their homes and investment assets for the sake of just a few dollars.
While it would be nice just to loan these owners the money to pay them, they have often failed to catch up for months or years, and just can’t sustain their housing expenses. The city and county and neighbors suffer because of this. It’s often just best for them to get out from under the burden, start fresh and move on.
Selling the property is often by far the best choice. Why not clear all the debts and collections, instead of losing it all and still having you credit or reputation destroyed? And maybe still being pursued for debts, long after you lost the property.
How to Buy Tax Delinquent Properties
There are two ways to get involved with tax delinquent properties.
- Tax Lien Investing
Investors can bid on tax lien investments via both online and local court house auctions. These offer a stable return, providing the owner catches up and pays the taxes. It is a relatively simple way to invest. Though returns can vary widely depending on the local competition. If owners don’t catch up, then it can become a route to take over the property.
- Buying Properties with Past Due Taxes
After 2008, a huge number of properties became available for sale with past due taxes. These are often owners who need and want to sell fast. The clock is ticking for them. They can be found via the MLS, for sale by owners, auctions, Kribbz, searching local county tax records and targeting motivated sellers using the REWW Smart Suite.
Delinquent tax amounts can range from a few dollars to hundreds of thousands of dollars. Also look out for other liens, mortgages, and code violations. In some cases properties can be bought for the amount of past due taxes alone. In others, those taxes may far exceed the property value.
Get good at negotiating in this space and you can uncover a lot of value, while helping others and local communities.
These properties can be lived in as a residence, flipped or wholesaler for cash, held and rented out for cash flow or redeveloped.
Tax Lien Investing Strategies
There are two main reasons or strategies for investing in property tax liens.
- Passive Returns
When you invest in tax liens you get fixed returns based upon your bids. You sit on your liens, and wait for property owners to pay their bills. This may be in a few days or a couple years. If the owner never pays their property taxes then it will eventually be auctioned off, and you’ll be cashed out. While this makes it a little unpredictable of when you’ll get your money or returns, it is pretty much guaranteed you’ll get paid. Great if you want to sit back, let your money work for you and let someone else do all the chasing up for payment.
- Access to Tangible Real Estate Assets
If you hold the tax lien certificate and a borrower doesn’t pay, this can be a channel for pushing foreclosure of the property and taking control of the entire asset. This is no guarantee of there being positive equity beyond your investment. However, people have lost their homes to past due taxes, even when they have no mortgage or other debts. This is a channel to discounted property, which you could flip, rent or redevelop.
Where to Find Tax Liens for Sale
Tax lien certificates are put up for auction by taxing authorities. Many are now online. Some still do live auctions at the county courthouse. Both have their advantages. Online auctions make it easy to invest anywhere from anywhere. Local auctions require someone to go in person, but also mean that can limit the competition. Depending on local regulations yields can be as high as 18%. Though they can often be bid much lower as well.
Alternatives to Tax Lien Investing
- Direct investment in properties with past due taxes
- Other judgements and liens attached to real estate
- Commercial debt which can attach to real estate and other personal assets
- Other types of distressed real estate
- Mortgage note investing
Some of these are more common and more comfortable for many investors. They get the concept of flipping houses from TV. Most people have rented somewhere to live in their lives and get the concept of buy and hold rentals. Mortgage notes are probably more common than tax liens. They can be bought as first, second, residential, commercial, performing, non-performing and re-performing loan notes. Then there are other debts which can be pursued for the adventurous. For example; you like the idea of chasing down runaway billionaires and repossessing their private jets or Ferraris.
What Happens if a Property Owner Pays Their Taxes?
If an owner redeems themselves by paying up their taxes you’ll get your capital and any accrued interest paid. In most cases debtors will work really hard not to lose their homes for the small debt that property taxes represent. Though not all can afford it.
Where are the Best Profits?
This somewhat depends on what your strategy and desired exit is. It mostly depends on competitiveness. That is how much competition there is at the auction. The more competition, the less you’ll make. The more people who find out about this type of investing, and more auctions that go online, the tougher it is. The most desirable destinations for other things can be the most competitive. Like LA, NYC and Miami. That’s where more people live and want to get their hands on property. You may make more by going to less famous destinations. Yet, with such small amounts of capital required to get started, why not diversify in a variety of geographic locations and spread out your investments?