Things to Know About Tax Lien Investing

Investing in tax lien certificates can offer a secure and collateralized addition to a well-rounded investment portfolio. However, success in this venture requires not only time and knowledge but also the ability to reinvest funds when short-term certificates are redeemed prematurely.

The process of tax lien investing operates as follows: When property owners default on their property tax payments, the government places a tax lien, representing the outstanding debt, on the property. To recoup the unpaid taxes, governments auction off tax lien certificates to investors. Subsequently, homeowners have the opportunity to settle the overdue amount along with accrued interest to prevent the investor from initiating foreclosure proceedings based on the tax lien held.

Tax lien investing may appear akin to investing in certificates of deposit (CDs) due to their perceived short-term safety. However, according to Westover, tax lien investing demands active involvement. Unlike CDs, where investors typically make an initial investment and then adopt a passive approach, tax lien investment necessitates ongoing engagement. Managing a tax lien portfolio involves monitoring the redemption of certificates and fulfilling any notification obligations to property owners before pursuing foreclosure actions. Thus, tax lien investing entails a high level of attention and management to maximize returns effectively.

Tax Lien Investing Is Active!

While investors might perceive tax lien investing as similar to depositing funds into a certificate of deposit due to its apparent short-term security, it's distinct from a CD, explains Westover. "Tax liens demand a more hands-on approach compared to CDs, where investors typically make an initial investment and then adopt a passive stance," he notes. "It's a highly involved business, requiring ongoing servicing and management of the tax lien portfolio." This active engagement entails monitoring the redemption status of tax lien certificates and fulfilling any notification obligations to property owners before considering tax foreclosure proceedings.

Property Value Reassessments Could Benefit Investors

Sean P. Salter, assistant dean for assessment and associate professor of finance in Middle Tennessee State University's Jones College of Business, notes that municipalities have been exploring avenues to boost revenues. One approach utilized by local governments involves reassessing property values for tax purposes. "As municipalities implement this strategy, the chances of property owners facing challenges in meeting the elevated tax obligations rise, consequently increasing the likelihood of tax liens," explains Salter. This trend could significantly amplify opportunities for involvement in tax lien investing.

Your Return May Surprise You

State statutes determine interest on tax lien certificates to be as much as 1.5% per month. Florida has a maximum simple interest rate of 18%, while Iowa charges 2% monthly on the unpaid balance.

Tyler v. Hennepin Alters the Landscape

"In May 2023, the U.S. Supreme Court issued a pivotal ruling in Tyler v. Hennepin, with potential ramifications for tax lien foreclosures in states where governments previously had the practice of retaining surplus equity post-foreclosure sales," explains Salter.

The ruling renders the retention of excess equity beyond the property owner's debt illegal. Consequently, "municipalities in these states now have heightened incentives to opt for lien sales rather than retaining the lien and proceeding with a foreclosure sale," Salter notes. "By auctioning off the lien, municipalities can expedite debt recovery. Moreover, with the government's potential upside from foreclosure sales restricted by Tyler, lien sales are likely to yield better outcomes for municipalities."

However, the ruling does not prohibit tax lien auctions entirely. "Individual investors still stand to gain substantial returns if property owners fail to redeem their properties in time," Salter adds. "Moreover, for the time being, these states likely do not have restrictions against individual investors retaining surplus equity."

Feb-9-2024 05:53:35 AM