Over the last few years several remarkable things have happened in order to create a sort of “perfect storm” for tax lien investing. First, one must understand how tax liens work. Property owners must pay taxes on their properties. If they owner does not pay their taxes, a lien is placed on the property for the amount of taxes owed. The jurisdiction where this property is located needs the funds from these taxes in order to pay for things like police department, schools, roads, etc. So, the city’s will sell the lien to investors. The city sets a mandated interest rate that must be paid by the property owner on top of the back taxes owed, in order to pay off the lien.
Now, why is the current market great for tax lien investing? For many reasons:
1. I am sure everyone has heard about the “subprime mortgage crisis” in the news. One of the great things about subprime loans is that they often did not include escrow accounts (accounts that automatically paid taxes and insurance). Without escrow accounts it is an added responsibility of the home owner to pay taxes each year. As more people fall behind on their mortgage payments, more people also fall behind on their taxes… If they are not making their mortgage payments, they are not paying their property taxes, which leads to more tax liens being sold.
2. Over the last few years EVERYONE was a “real estate investor.” Meaning, they refinanced their home and bought an “investment” property. Now that the values of these “investment properties” are less than what many of them paid, a lot of the owners are walking away from the properties, leaving the taxes unpaid.
3. The banks that made those compelling “subprime” loans, are now so inundated with foreclosures, that they dont have the manpower to closely monitor all of the property accounts, and are letting many of the properties taxes go unpaid, leaving many of them to go to tax sales.
4. Oh the beauty of securitzation! This amazing vehicle allowed the banks to make the risky loans, pool them together, and sell them off in peices with different ratings on different tranches of the bonds. Now that the loans are split into peices and sold off to seperate investors, banks are having a hard time proving who really owns the mortgage note. This is a fantastic opportunity for tax lien investors because when the banks get notice that one of their properties were sold at a tax lien sale, they cannot prove that they own the note and pay off the lien. Another benefit is that banks are not sure who is responsible for paying off the tax liens, and are transfering it from one department to another, leaving the liens unpaid.
As a tax lien investor for the last 5 years, I have noticed the amount of liens that are going to sales have substantially increased since mid-2006. This is leaving our citys, who already have a depleated tax base because of falling home values, without payment on an increasing number of tax liens.
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