Pennies on the Dollar? (Part 1)

We’ve all heard the infomercials touting the great investment opportunity of tax lien investing. So can you really get homes for pennies? Well yes and no.

Counties need the funds from property taxes to pay the Sheriff and so on. Somehow these counties need to collect the taxes due. If the taxpayer cannot meet their obligation, then the counties look to outside sources to pay those taxes. The how to collect unpaid taxes are determined by the state. States either collect the unpaid taxes through tax lien sales, tax deed sales or a combination of the two.

Through tax lien sales you can purchase a lien for unpaid taxes on a property with the right to foreclose at a future time. Note the right to foreclose is not the guarantee to the property. Tax Lien states such as Arizona or Florida annually sell unpaid property taxes as liens to investors at an agreed interest rate. (The top interest rate in Arizona is 16% and 18% in Florida.) During the sale/auction, investors bid to win the right pay the taxes owed and place a lien on the property. After a period of time set by the state, generally several years, the lien holder if still not paid back has the right to initiate foreclosure proceedings on the property owner. Even during the foreclosure process the property owner can pay the tax lien and associated costs and keep their property. It is the aforementioned interest rate that attracts investors like myself to tax lien sales rather than the chance to acquire property.

At a recent sale I purchased an $800 lien on a property valued at over $80,000, hence the term “pennies on the dollar.” If after three years the property owner has not paid their back taxes, then I can begin the foreclosure procedure. I don’t expect to acquire this property; my objective is to earn a 12% rate of return on my investment until the property owner can settle up with the county.

An investor will typically only get the property about 2% of the time as a result of purchasing a tax lien sale certificate. That’s a far cry from the ads on TV. Tax deed sales result in the investor acquiring the property, but is it really “pennies on the dollar”? Check back for Part 2 for the answer.