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

That’s because when the county forecloses for the reason of unpaid property taxes, all other liens and mortgages are wiped out. As a result, the tax lien investor, on achieving ownership of the property, does so with free and clear title. If a lender does not pay the unpaid property taxes, it can’t foreclose and recoup its investment.

Loftis explains it this way: "Typically a property has a mortgage on it, but I’m ahead of the bank if there is a problem. If the property owner doesn’t pay off my lien, guess who will? The bank, and it does so because if I foreclose on my lien, I’ll wipe the bank mortgage out. The bank is not going to lose a $100,000 mortgage over a $1,500 tax bill."

The banks are also the reason why it’s tough to win at tax lien auctions. They bid them — and very aggressively. "Unofficially, I heard that (one large banking firm) has bought over a billion dollars’ worth of tax liens just in the state of Florida," says Manoil.

Loftis recalls bidding against Wachovia (now Wells Fargo) and even some investment banks.

It’s a good spread business for the banks. They will get a 10 percent to 16 percent return on the tax liens and then pay you 1 percent to 2 percent on your certificates of deposit.

It’s not just the banks, but other big companies, such as homebuilders and even private investment groups, that are in on the action. As one blogger wrote, "If you try to buy properties at auction, you’ll be bidding against companies that invest in tax-sale properties full-time. They employ teams of researchers that figure out which properties are the best investments and they’ll outbid you on these properties every time."

I’m not so pessimistic. As I mentioned, counties across the country are dealing with waves of foreclosures and unpaid property taxes. Two years ago, Maricopa County property tax delinquencies totaled $35 million. That rose to $45 million in 2009 and this year could go as high as $70 million. It seems there will be plenty of opportunity, even for the smaller investor.

However, the key to doing this well is being able to research the parcels you are going to buy. Otherwise, you could end up investing in a tax lien on a property that is identified as "privately owned" but really is just not worth owning due to the shape and size of the property, dedicated uses allowed, or environmental troubles. In other words, it won’t support the lien values you are going to be investing.

Steve Bergsman is a freelance writer in Arizona and author of several books, including "After the Fall: Opportunities and Strategies for Real Estate Investing in the Coming Decade."


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