Analysis on buying tax lien properties
County governments hold tax foreclosure auctions each year to recoup unpaid taxes and additional charges. Each property has a starting bid amount, which includes the amount of the unpaid taxes plus interest, attorney fees, penalty fees, and other administrative fees. Some states are tax lien states and others are tax deed states. Depending on your jurisdiction, if you are the winning bidder on a piece of property, you will receive a tax lien certificate or a tax deed.
So before jumping at an opportunity to buying tax lien properties here’s a look at the advantages and disadvantages attached. In no specific order, they include:
Property tax liens attach to real property when the tax collector levies upon the property as a result of unpaid tax obligations. Tax collectors use property tax liens as a method of forcing taxpayers to pay outstanding property tax debts. The tax liens remain attached to the property until the property owner pays the delinquent taxes. If the owner fails to pay the unpaid taxes, the county government will foreclose and place the property for sale to satisfy the debt.
The winning bidder of a tax lien property has the opportunity to purchase the lien for a price that may be significantly lower than the market value of the property. If the property owner redeems the property by paying the unpaid balance during the redemption period, the tax lien investor receives a profit after the owner pays the property taxes, interest and all additional charges incurred.
If the property owner fails to redeem the property, the tax lien holder can petition the court to acquire the tax deed and take full ownership rights. Tax lien holders have priority over other lien holders to foreclose on the property. Essentially, the tax lien holder can acquire ownership in the property pursuant to a court judgment for an amount that may be lower than the market value. In tax deed states, the winning bidder receives ownership rights in the property immediately after making the investment; there is no redemption period.
There may be other liens attached to the property, which may be a detriment to the tax lien holder if the property owner does not pay the taxes during the redemption period.
Some tax lien holders may only purchase the liens for the purpose of recouping the original investment and receiving a profit. If the property owner fails to redeem the property, the tax lien holders may be required to pay expensive court costs to obtain the tax deed in addition to losing the ability to receive profits from the original investment. Also, if the property owner files bankruptcy, the tax lien holder may not be able to foreclose on the property while the bankruptcy is in pending status.
Loss of Property Value
When buying tax lien properties, there is an inherent risk of investing in properties that need considerable maintenance and repairs due to hidden defects in the property and environmental catastrophes. Also, during the redemption period, the property may lose its value and appeal.