Tax LiensTax liens are kind of like real estate certificates of deposits (c.d.). At the bank, you can get a c.d. which is like a special savings account that earns a higher than normal rate of return for a very short period of time. A bank cd can be for 6 months, 9 months, 1 year, etc. The basic idea is that you deposit a certain amount into this account and leave it there for 6 months. Then after the time is over you get your money back with interest. Tax liens are the same thing. You are depositing money into a piece of real estate for a designated period of time. Once that period of time is over you get two benefits. The first benefit is you get your money back plus interest. The second benefit is that you get to keep the property itself! Win or WIN!! Some states like Iowa offer interest rates on tax liens that are 24% returnon the amount of the lien. Other states like Tennessee and Maryland have interest rates of 10% per annum.The amount of the lien is the total amount of property taxes that are delinquent on a piece of property. So, say for instance that a property in Maryland, had gone for three years without the owners paying the property taxes, then those three years of back taxes added together would be the amount of the tax lien on that property. If an investor came along and paid that amount they would get a tax lien certificate for that property. The property owner has a stipulated time period to pay the investor back. In many cases it is up to one year. So, if the property owner doesn't want to lose their house, they must pay back the investor the full amount that was paid in addition to the specified interest rate for that state. If the property owner fails to repay the investor in the specified time frame, then the investor becomes the legal owner of the property. You act like the bank and YOU foreclose on the property!If you are the holder of a tax lien certificate and the property owner has not paid you back in the lawful time period, you now become the bank and you can foreclose on the property.Liens are like IOU's. A mortgage is a lien because the property owner owes the bank the amount of the loan that was needed to initially purchase the property. Most properties have at least one lien against it, this usually being the mortgage. However, there are other liens that can also be attached to a property. All liens or loans against a property are assigned in order of when they were put on the property or the order of importance. The mortgage loan is usually in the first position. If a property has two loans, a first and a second, then the second loan which is usually for a smaller amount is in the second position.
Understanding Lien PositionHowever, tax liens can be placed against a property at any time that there are delinquent tax bills. These liens automatically assume priority position and bump all other liens and loans to second position and so on. Moreover, if the lien or loan that is in first position decides to foreclose on the property because they are not receiving payment as agreed, then all the other loans and liens in lower positions will be wiped off.In a regular foreclosure, if the first mortgage is not being paid, that bank can decide to foreclose on the property. Here is an example, there is a property that has a first mortgage in the amount of $320,000 and a second mortgage in the amount of $80,000. This is a typical 80:20 purchase for a house costing $400,000. The first loan is with Bank of America and the second loan is with Wells Fargo. If B of A forecloses on the house, then automatically Wells Fargo's loan gets wiped out and they get absolutely nothing! That's the chance that second mortgage noteholders take and also the reason why they charge a higher percentage rate. Tax liens automatically get first position. So, if you are the lien holder and you decide to foreclose on the property, you will wipe out B of A and Wells Fargo and they each get NOTHING! And you now get a property that was worth $400,000 for only the price of back property taxes which may have been a total of $11,000.
A $400,000 House for only $11,000Now please understand that most (97%) homeowners are not going to let their home slip like this. They will pay back your $11,000 with the lawful interest required by the state. But that's a great scenario. You get about 10% return on your $11,000 investment. Not a bad return for one year.
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