As foreclosures continue to pile up, so do unpaid property taxes. That's an opportunity if you're willing to wade into the arcane world of property tax lien sales. Before you do, however, understand the risks that come with these little-known investments.
"Every year, $7 to $10 billion in property taxes go delinquent," says Howard Liggett, executive director of the National Tax Lien Association in Pensacola, Fla., a trade association of investors, tax collectors, and service providers involved in tax lien sales. "The subprime mortgage crisis has spiked those numbers. For example, four of the 67 counties in Florida saw spikes of 30 percent to 33 percent in the number of tax liens offered for sale last year."
Homes on the auction block
Tax collectors in 29 states, Washington, D.C., Puerto Rico and the U.S. Virgin Islands use tax lien sales to force owners to pay unpaid property taxes.
"It's a method for people responsible for collecting property taxes to make everyone pay their fair share," says James Hughes, president of SRI Inc. in Indianapolis, who's represented governments in tax lien sales for 20 years. "If there were no enforcement, nobody would pay their property taxes."
The process varies by state, but here's how it generally works: When property owners don't pony up for their property taxes, tax collectors wait the time period required by state law and then put those unpaid property taxes up for auction.
"The time period varies from just a few months to several years," says Hughes. "In Florida, if owners don't pay taxes due in April, tax collectors will sell a lien June 1. In Indiana, it's about 15 months before a property goes to a tax sale."
In most states, the person willing to pay the most cash for the tax lien wins the auction. Some states, however, have a bid-down process, where investors' bids indicate how much interest they're willing to accept on their investment, and the lowest bidder wins. Whatever method is used, the tax collector takes the payment for the overdue taxes from the winning bid. In exchange, the purchaser gets a lien on the property.
As the winning bidder, you'd get a return on your investment in one of two ways: interest on your bid amount, or ownership of the property.
1. Interest on your bid amount. If owners redeem their property by paying the overdue taxes within the time allowed under state law, you'll get your investment capital back, plus the amount of interest allowed in your state.
"Tax lien sales are good investments because they usually have a statutory interest rate, typically between 10 and 12 percent," says Walter Spader, an attorney at the Marcus Law Firm in North Branford, Conn., who represents tax lien purchasers. They can go much higher, too. For example, Connecticut offers 18 percent, and Nebraska offers 14 percent.