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Buying tax lien certificates can be a low-risk investment with attractive returns, but buyers should research the sales process, understand the rights conferred by ownership, consider the impact of bankruptcy filings, and assess the condition of the target property and any environmental issues.
Buying tax lien certificates is an investment strategy known for its relatively low risk and attractive rates of return. Each year, many city and county governments in the United States offer tax lien certificates for public sale to replace revenue lost as a result of property tax delinquency. The potential benefits offered by this type of investment can be significant, although there are several key factors that should be considered before making a purchase. Some of the best tips for buying tax lien certificates include examining the sales process used by each jurisdiction, familiarizing yourself with the specific rights conferred by the certificate’s ownership, and researching the current condition of the target property.
Anyone contemplating the purchase of tax lien certificates must first determine the jurisdictions in which they would like to invest. It is important to research the registration and sale process used by the relevant government unit. The sales methods used can vary significantly in terms of when and how the sale is made and the type of advance documentation required from bidders. It is also advisable for those purchasing tax lien certificates to be aware of the payment methods accepted by each government unit, and how soon after the sale their funds must be remitted.
It is important that potential purchasers of tax certificates determine the specific rights that the acquisition of the certificate will grant. In many cases, a tax lien certificate is the equivalent of a first priority lien, ahead of all other existing liens. It may also be the case that prior assessments from other taxing or regulatory units are given priority. This is particularly true when federal taxes have not been paid by the property owner and liens have previously been attached. Performing due diligence on existing liens is therefore a worthwhile endeavor.
Investors should also familiarize themselves with the possible consequences of a property owner’s bankruptcy filing. The court may reduce the interest rate payable on the certificate. It is also possible for the tax lien to be partially or completely extinguished in the course of bankruptcy proceedings. Analysis of the actual position that the certificate holder would likely take in such circumstances helps facilitate a more accurate assessment of investment risk.
It is advisable for those interested in purchasing tax lien certificates to do enough research to understand the true condition of their target properties. Neglected, blighted, and otherwise undesirable properties pose a great risk to tax lien certificate holders, because they would likely require expensive improvements to sell if the lien and interest on it are not paid. One last step for potential tax lien certificate buyers is to investigate whether there are any outstanding environmental issues on the property that could ultimately subject them to expensive fines or remediation expenses, rendering the investment essentially worthless.
Smart Asset.
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