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Tax Lien Sales: The Shadow Foreclosure Market

Outdated property tax laws in several states allow investors to pick up properties for next to nothing, as municipalities sell liens placed on houses owing back property taxes or even municipal bills such as water and sewer charges. Although this practice has been widely criticized as a way for unscrupulous investors to snatch up priorities and render vulnerable people homeless, the tax lien purchase can be a way to secure a property at a very low cost. For first-responder investors applying Jason Hartman’s investment principles, knowing the role of tax lien sales in property investing can help in making sound investment decisions.

When a tax lien is placed on a property for nonpayment of taxes, or for back taxes owed, municipal governments can then sell those liens to investors through a tax sale. Investors typically purchase liens, not the properties themselves, and then collect the interest due on it at rates ranging from as low as 7 or 8 percent all the way to a shocking 50 percent or more. The homeowner on whose property the lien is placed must then repay the debt, with interest going to the lien holder.

The ideal outcome is for the homeowner to pay off the taxes and for the investor to get a return on the lien purchase. But, say housing and consumer advocates, this rarely happens. Homeowners often find themselves deeply in debt and the high interest rates imposed on the lien keep them trapped into repayment with no real hope of getting out, creating another cycle of debt.

That can lead to the other unsavory outcome of a tax lien purchase. If the tax debt isn’t being repaid, lien holders can then foreclose the property, evict the delinquent homeowner and then either rent out the property or – as some investors do – sell it for a much higher price. Although this process isn’t that different from other kinds of foreclosure proceedings in which homeowners delinquent on mortgages face foreclosure proceedings initiated by lenders, the tax lien foreclosure often affects a different kind of homeowner.

Those affected by tax liens are often elderly homeowners who may be disabled or affected by cognitive problems such as Alzheimer’s. According to advocates for the elderly, these individuals may not have read or understood notices sent by the city to warn them of the consequences of failing to pay their bills or taxes. And, on fixed incomes or small pensions, they may not be able to repay the amount owed – and many cities expect a lump sum payment to clear the debt. These vulnerable homeowners can then end up losing their dwellings for good.

Tax lien sales are a legal way to invest in a property in states that allow such sales, and for investors they can be a win-win situation – interest income from the investment, possession of the property or both. But investors must keep in mind that this kind of foreclosure option arises from a different set of circumstances than those triggered by mortgage defaulting. As a result, the outcomes can be very different.

It’s up to the investor to decide how to manage a property sale. But for those interested in acquiring control of a property through tax lien sales, it’s important to keep in mind that this kind of foreclosure may come with a different set of responsibilities.

The Heroic Investing Team


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