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High Interest Returns For Paying Other People's Taxes

Written by M. Anthony Carr on Thursday, 16 August 2001 7:00 pm
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How would you like to make money paying someone else's real estate taxes? There's a little-known investment opportunity available in 31 states where investors can put up as little as a couple hundred dollars to get in on the action.

You're probably thinking: "I pay enough taxes as it is, why would I want to pay someone else's taxes, too?"

Well, how does an annual interest return from 18 to 50 percent sound?

These returns are available through tax lien and tax deed certificates sold throughout the country on a county basis. Tax liens are what the local government places on properties where real estate taxes are late. Figuring that they won't get that money right away, the local government auctions off the lien to investors once or twice a year. These are called "tax sales."

If owner Smith owes $2,000 in real estate taxes and hasn't paid it, the county will place a lien on his property and then auction that lien to an investor. The investor gets the lien for $2,000 and the county gets the money it needs right away to pay its ongoing expenses. Meanwhile, the treasury or finance department then starts going after the money from the delinquent tax payer. They send nasty little notes, warning them of further action and placing stiff penalties and interest charges on the tax. These interest charges can be as high as 50 percent -- and that's how the local government can then turn around and pay these investors 16, 18, 20 percent and more.

The place to find these nifty investments is at the local treasury or finance department. There are also web sites where the information has been compiled. You could end up paying as much as $39 per state for the information or, as on one site I visited, $49 for the whole country (encompassing 3,300 counties). Since more than likely you're going to go after local liens to start with, save yourself the money and just contact your local treasury or finance department. If you don't know where that is, then just call the main information number for your county or city and ask for the tax department -- they can help you from there.

Basically, these are short-term investment opportunities. After the lien has been auctioned off, the county lets the owner know that they may lose their property to the tax lien certificate holder if they don't pay the taxes -- and now taxes, interest and penalties. This gives the property owner another opportunity to redeem the tax bill and keep his/her property. If they don't, then the tax lien certificate holder can foreclose on the property.

In some areas, instead of a foreclosure, the government actually sells you a tax deed to the property -- meaning if the taxpayer doesn't pay the taxes, you become owner of the property straight out.

There are the amazing stories about people hitting it rich in these tax sales. There's one floating around about a gentlemen in Tulsa, Oklahoma who paid $17 at a tax sale for a property he then sold for $4,400 and another where the property was bought for $298 in back-taxes and sold for $8,450.

It's also true that each year people are hit by lightning. There are risks and hazards with tax certificates. The property might be trashed, you could lose your investment by not following procedures, title may be weak, and -- let's face it -- former owners may be both irate and well armed.

Because the liens are auctioned, a hot property might only be available with unattractive terms. In some jurisdictions, you may "win" the property but then be responsible for all unpaid taxes and mortgages. If you have to foreclose, that may result in another round of costs. In some jurisdictions, the owner may have an "equity of redemption" right that allows him or her to re-acquire the property after a foreclosure action.

Be aware of these and other risks and act accordingly. Investors must carry out due diligence to limit risk. This means researching the properties (which are usually publicized in a local newspaper or on the tax department's web site a few weeks before the sale), understanding your potential obligations, knowing what the rules are, speaking with local brokers and attorneys, and realizing that while you may do well in the best circumstances, the "best circumstances" may be rare.

Most impacted property owners (about 95 to 98 percent) actually pay the taxes. So most folks who invest in these certificates are doing so for the interest paid on their money.

There's a lot more to these sales, and various jurisdictions have different rules. As an example, visit the Montgomery County, Md., tax sale web page for a good example of what will be required of tax sale.

For those interested, research the process, visit an auction first to watch how it's done, know the rules, and then decide if this is an investment for you.

For more articles by M. Anthony Carr, please press here .

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