Land Tax Lien Foreclosures are a little known method to acquire properties for as little as 5-10% of the true market value of a property. In the US, every year hundreds of thousands of property owners do not pay their Real Estate property taxes on time. As a result in 18 states there are laws allowing the Counties to do so called tax Lien auctions and auction off the Delinquent Tax obligations to investors in exchange for them receiving several rights.
Collecting investment and interest (usually a high rate interest) is the first right of the lien investor. Normally the rates are between 12 and 36%, but in many states the going rate is 16%. In Illinois the rate is 18% per half a year for a total of 36% per year. There are exceptions, a rate may be prorated if the owner redeems (pays off the taxes) the back taxes and any penalties. Some states require full payment of the tax and the annual lean percentage regardless of the time frame the property is redeemed.
Right 2: The Right to Foreclose on the property: Once the investor pays the outstanding property taxes to the county, a lien is being placed against this property to make sure the Investor gets paid back his investment plus interest when the property is sold. However if the property is not sold or the owner does not redeem the Tax lien Prior to a Tax Lien Redemption period, the Lien Holder has the right to foreclose on this property. Redemption periods very from state to state but usually range between 3 and 5 years.
Depending on which state it is, the foreclosure can be fast (in some cases the State does the foreclosure for the investor) or take up to a few months. But in most states, the Tax lien supersedes most other liens including Bank Mortgages and Mechanics liens. The only exceptions are Federal and State IRS Liens and very few other, rare liens. As a result a Tax Lien Foreclosure usually leads to a free and clear title to the property.
Right 3: To buy the subsequent years Tax liens in advance without competition. Most Tax Lien States have a provision in their statutes allowing Holders of Tax liens to purchase the next years delinquent property taxes as soon as they become delinquent, without competition and therefore months in advance of the next tax lien auction.
Because of the rights of the investor noted above, tax liens are considered a very safe investment. You either acquire the property through foreclosure proceeding at the end of the redemption period, or earn an excellent return on investment. This is the best of both worlds!
Lets look at an example: Property value is $100,000, taxes are $1,500 per year, the redemption period is three years, and the owner does not redeem the property by the redemption closing date. In each year you would invest $1,500 for a total of $4,500. Assuming foreclosure proceedings to cost $1,000, your total 3 year investment is $5,500. In foreclosure you are granted fee and clear title to a property worth $100,000 for your future investment purposes.
The investor now hit the jack-pot and can decide what to do with his property. Sell it, move in, build on it (if it is a vacant land parcel) or just hold on to it for future appreciation.