By David Franklin
The attraction of tax lien states for real estate investors lies in the opportunity to purchase tax lien certificates. Property owners have to pay delinquent taxes, interest and any additional penalty and court fees to remove the tax lien.
Twenty-two of the tax lien states are Alabama, Arizona, Colorado, Florida, Illinois, Indiana, Iowa, Kentucky, Louisiana, Maryland, Mississippi, Missouri, Montana, Nebraska, New Jersey, New York, Ohio, Rhode Island, South Dakota, Vermont, West Virginia, and Wyoming. The District of Columbia is also a tax lien jurisdiction.
Tax lien certificate purchasers do not immediately obtain title to the properties upon purchasing tax lien certificates. They may not evict property owners. The homeowners may remain on the properties during the redemption period set by state statutes. They also have the opportunity to pay the back taxes plus interest paid by the tax lien investors. The time frame for the redemption period varies from state to state; it may be from six months to four years. Investors in tax liens are primarily Americans, but this investment is available to all investors worldwide.
During the redemption period, tax lien purchasers may enforce the tax lien certificates and collect the amount of delinquent taxes from the property owners. After the redemption period expires, tax lien purchasers have the right to file a petition in court and pursue a foreclosure against the property. They have the right to sell the property at a public foreclosure auction or evict the property owner and obtain title to the property. By doing this, the investor can make a substantial profit on his tax lien investment.
Residential taxes for the US on average are .96% of value. For the tax lien states it runs from .16% to 2.36%, although because of the decrease in values, it could be a little higher. At 1%, the value of the property is 100 times the taxes and at 2% it is 50 times. For example if the property is worth $100,000 the taxes are $1,000 at 1% and $50,000 at 2%.Toronto, as a comparison, is at about 1% of value for new properties.
Some examples of states of taxes as a percentage of value, interest rates, and redemption period for tax liens are:
- Arizona: .16-1% of value, interest rate 16%, redemption period 3 years,
- Florida: .47-1.15% of value, interest rate 18%, redemption period 2 years,
- Illinois: 1.51-2.25% of value, interest rate 18-36%%, redemption period 2 years,
- Indiana: .82-1.05% of value, interest rate 10-20% redemption period 1 year,
- Kentucky: .78-.97% of value, interest rate 12%, redemption period 1 year,
- Maryland: .64-.91% of value, interest rate 6-24%, redemption period .5 years,
- New Jersey: 1.4-2.36% of value, interest rate 18%, redemption period 2 years, and
- Washington DC: .54% of value, interest rate 18%, redemption period .5 years.
In addition to receiving interest on those properties where the owner pays the arrears, the investor can make a profit on the properties foreclosed on and resold, especially since the loan to value on the properties is so low.
These investments have been rated by Kroll Bond Rating, Moody’s and S&P as AAA. S&P in April 2013 affirmed the AAA rating on a 2010 pool and stated there were no realized losses. The fact that there were no realized losses was surprising considering what happened to real estate values and mortgages during this timeframe.
Compare this investment, the first charge on the property, to a first mortgage being in reality a second charge, to investing in private first mortgages of up to 80% of loan to value at interest rates at about 6% to 8%. By comparison the investor is lending 80 times value as compared to the 1% example. What would you say is a safer investment? The returns are also higher, especially as compared what the banks charge on first mortgages, which in today’s market is around 3%.
Residential taxes as a percentage of value, interest rates and redemption periods
LTV Interest Rate Redemption Period Years
Alabama .18-.32% 12% 3
Arizona .16-1% 16% 3
Colorado .51-.74% 9% above Fed discount rate 3
Florida .47-1.15% 18% 2
Illinois `1.51-2.25% 18-36% 2
Indiana .82-1.05% 10-20% 1
Iowa 1.05-1.51% 24% 2
Kentucky .78-.97% 12% 1
Louisiana .12-.47% 12% 1
Maryland .64-.91% 18% .5-2
Mississippi .33-.61% 18% 2
Missouri .46-1.12% 10% 1
Montana .57-.94% 10% 2-3
Nebraska 1.67-1.92% 14% 3
New Jersey 1.4-2.36% 18% 2
New York .46-2.99% 10-24% 2
Ohio .86-1.85% 18% 1
Oklahoma .9-1.02% 8% 2
Rhode Island .92-1.36% 10%/6 months 1
South Dakota 1.06-1.37% 10% 3
Vermont 1.49-1.62% 12% 1
West Virginia .26-.42% 12% 1.5
Wyoming .42-.63% 15% 4
Washington DC .54% 18% .5
In Canada municipalities do not sell tax liens to fund their operations. If taxes are not paid for three years the property is auctioned off with the proceeds paid to those having registered claims on title and the balance to the owner. Interest rates and penalties vary with Toronto charging 1.25% a month (15% annually); Edmonton charging a penalty of 14% the first year and then charging 1.25% a month, and 15% on the tax arrears and penalty; and Vancouver charging a 5% penalty the first year and then charging 7% on the arrears and penalty.
David Franklin, B.Comm, JD, has been practicing law in Ontario for over three decades, specializing in securities, mortgages, tax and real estate, and overseeing and transacting millions of dollars of transactions. Contact David at email@example.com.