Tax Lien: what they are and how to invest

Tax liens are very popular financial instruments for investments in the United States, while they remain virtually unknown in Europe, where this type of product is neither encouraged nor discouraged by our jurisdiction.

Technically, Tax Liens are liens placed by a County on a delinquent property and redeemable by an investor, in the form of bonds that in turn generate income.

In other words, it is a financial product that is created when a property owner is behind on their property taxes (similar to the Italian IMU [Municipal Property Tax]) and at the same time the County wants the to be debt repaid as soon as possible to avoid creating financial imbalances.

The function of Tax Liens is therefore to incentivise the payment of the outstanding balance, creates an ingenious investment opportunity and maintains the financial prosperity of the County itself.

How Tax Liens work

In order to understand exactly how Tax Lien works, we will proceed with a simple example: let’s imagine that the owner of a property, despite numerous reminders, has fallen behind in the payment of the taxes owed on his/her property.

That outstanding balance is transformed into a “Tax Lien”, a credit that can be bought by any investor, whether private or professional. This credit has the characteristics of a bond, i.e. it is a product that generates income at potentially attractive monthly rates that can be assessed by whoever decides to invest in this type of activity.

Once a Tax Lien has been created, it is auctioned off through either an  in-person or online auction. Anyone can participate, you don’t need to be a member of any registered group or be a professional investor.

If you buy the product, you become -in effect- the owner of a bond receivable which will then generate a fixed monthly income for an agreed period of time, usually determined by a deadline corresponding to the balance of taxes owed by the property owner.

In very rare cases, when the property owner is not able to pay off the accrued debt, the house can be foreclosed and the Tax Lien investor has a right of pre-emption on it. In other words, the Tax Lien holder becomes the new legal owner of the property.

Of course the above scenario is a borderline case, as this system is designed to benefit all parties involved, starting with the original property owner.

Are Tax Liens investments safe and ethical?

The debate often revolves around the fact that financial products such as Tax Liens are centred on the debt situation, and therefore the underlying suffering, of a private citizen who owns a property.

In fact, the Tax Lien certificate system was created for exactly the opposite purpose: by disbursing and selling it to an investor, the holder of the debt to the County enjoys a facilitated timeframe to put their tax position in order, while avoiding losing the privileges on the property they own.

In addition, as regards security, it is worth specifying that this is a very solid investment since even in the event of legal disputes, with the Tax Lien the investor has privileged credits in the proceedings, which are disbursed with priority even over the banks themselves.

Not to mention that, for as long as the Tax Lien is active, the buyer is entitled to very respectable rates of income, based on an underlying value – that of the property – that is much higher than the amount invested.

Which US States offer Tax Liens and how they are sold?

Liens can be auctioned off either live or online. To find out which ones are available, simply consult the official portals of the counties in the states that have them for sale.

In fact, not all States endorse this type of financial practice, only a few (e.g. Florida) allow it.

Alternatively, the most prudent choice is to work with real estate operators that are experienced in managing relationships with European investors, but at the same time operating directly in the U.S., and who are able to support and assist the investor in all phases of this type of operation. And if you are interested in high value real estate investments, we remind you of the other Remida Properties services such as Real Estate Flipping, Apartment Building and Rental Property.

Contact us to find out more.