Find bargains at real estate tax lien auctions

My home county, Maricopa, in central Arizona, could boast one ignominious record already this year: its property tax lien auction was the biggest ever. Maricopa is not alone. All across America, counties are working through record levels of property tax auctions due to persistently high levels of foreclosures.

To savvy investors, this is an amazing opportunity to participate in one of the most low-risk investments in the property sector. That is also why the competition is brutal -- especially from institutional investors such as banks that purchase millions of dollars' worth of tax liens in one vast swoop of their investment arms.

In the United States, all property is taxed. It doesn't matter if it is a house, condo, commercial building or raw land; it is all taxed because the counties use this income to pay for government, courts, schools, and police and fire departments. If the property owner for one reason or another doesn't pay those taxes, the county, which still needs that income, places a lien on the property and in about half the states auctions off the lien.

The way the bidding works (much of it is online these days) is, you are offering (in bid) lower interest rates for what the obligation accrues until someone pays off the tax lien. That interest rate varies across the country, from 6 percent to 24 percent. In Arizona, the beginning interest rate is 16 percent, and interested parties bid down at 1 percent increments.

"The tax liability is a fixed amount so that's how much you are going to pay out for the tax lien, but you win by being the lowest interest rate competitively bid on that lien," said Mark Manoil, an attorney who specialized in tax issues and is author of "Arizona Property Tax Liens: Guide to Profit, Protection and Prosecution." "The interest rate is what you will earn on an annual basis from the taxpayer or any other party who decides to redeem the tax lien," he said.

Larry Loftis, who bills himself as America's top tax lien/deed expert and is also the author of a book, "Profit By Investing in Real Estate Tax Liens," lives in Florida, which bids down from 18 percent. "Last year I averaged 17 percent across the board," he said.

An easy example: Let's say a house was worth $100,000 and the property tax bill is 1.5 percent or $1,500. It goes unpaid so someone buys that lien for the $1,500. Now -- here is the good part -- the lien is secured by the property that is worth $100,000. "That," said Loftis, "is good security."

Initially, the beauty of the investment in the tax lien is the interest rate that gets paid to you, which as you can see is much higher at the moment than any fixed-income investment such as a certificate of deposit.

The other attraction of that lien is its position in the payoff pecking order in the event of a foreclosure, and that is ahead of the mortgage holder. Potentially, if the tax lien is not redeemed, as the holder of the lien you can foreclose. And that $100,000 house can be yours for your minimal investment of $1,500. The likelihood is, you would probably have to hold that lien for about five years for that to happen. And it doesn't happen often.

"What percentage of liens sold get foreclosed? The answer is just 1 to 2 percent," says Manoil. "Before the lien matures, most are redeemed by the property owner, mortgage company or someone else who wants to protect their lien interest against the property." ...CONTINUED

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