Author Topic: Tax Lien Auctions  (Read 10524 times)

Kazak

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Tax Lien Auctions
« on: August 10, 2012, 01:09:56 PM »
Ever since my economics teacher brought this up in high school, I had been interested, but I haven't ever explored them in depth. I was wondering if anyone had any experience with Tax Lien Auctions and would like to share. My basic understanding is that when someone doesn't pay their property taxes the county will host an auction for people willing to pay these taxes. What you are bidding on is the interest rate - starting high and people bid lower. At this point, the property owner will owe you the taxes + interest instead of the county. Most of the time you will just collect the tax+interest, but if they fail to pay you, then you actually have a lien on the property and can take ownership at a certain point if they continue not to pay. I figure this could potentially earn a decent interest rate with the security of being backed by real property.

Anyone have any stories or experiences?

smalllife

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Re: Tax Lien Auctions
« Reply #1 on: August 10, 2012, 01:44:53 PM »
How would the money get to you?  By the time it gets to a lien on wages it goes straight from their paycheck to the government.  What power do you hold over the delinquent tax payer?  Why would they pay you but not the government (with the power to jail, tax, etc.)?

JohnGalt

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Re: Tax Lien Auctions
« Reply #2 on: August 10, 2012, 02:21:46 PM »
How would the money get to you?  By the time it gets to a lien on wages it goes straight from their paycheck to the government.  What power do you hold over the delinquent tax payer?  Why would they pay you but not the government (with the power to jail, tax, etc.)?

As I understand it - you are buying the right that the county (or whatever entity is selling the lien) has of foreclosing on the property if the taxes are not paid within a certain time frame.  This gives you essentially the same power that the county does to enforce a foreclosure - take possession of the title and have local law enforcement remove the (no former) owners from the residence if they won't leave on their own. 

MrSaturday

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Re: Tax Lien Auctions
« Reply #3 on: August 10, 2012, 02:40:09 PM »
Unless the house is complete paid off, I believe you'll be the second or third lien holder, so you're last in line for payment when the home is sold in foreclosure.  So figure a very high chance of total loss, unless you're in a recourse state and are willing to pursue court judgements and wage garnishment.

I'd talk to a real estate lawyer before you consider it.  I may be way off base but the above is my understanding of how it works.

Kazak

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Re: Tax Lien Auctions
« Reply #4 on: August 10, 2012, 03:00:19 PM »
I'm not sure if it differs by state or county, but here in Maricopa County, AZ, the Lien is a FIRST lien on the real estate. I'm pretty sure this is pretty standard as I've always heard that the tax lien is backed by the property.

JohnGalt

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Re: Tax Lien Auctions
« Reply #5 on: August 10, 2012, 03:19:11 PM »
I'm not sure if it differs by state or county, but here in Maricopa County, AZ, the Lien is a FIRST lien on the real estate. I'm pretty sure this is pretty standard as I've always heard that the tax lien is backed by the property.

This is my understanding as well - this is why you are required to get title insurance when you mortgage a house, they check for stuff like tax liens that take precedence over the bank's right to the property.  I would definitely check with an expert though before getting involved.

Kazak

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Re: Tax Lien Auctions
« Reply #6 on: August 10, 2012, 03:52:14 PM »
It looks pretty promising in my county. The interest rate starts at 16% and is bid down from there. The average interest rate is 10.79% for 2011, and I'm not positive I'm figuring this correctly... but there were 39,037 liens sold for a total of $80,478,533 making the average single investment $2061. Sounds like a very safe spot to park your money, and if you get super lucky, you get property at no additional cost beyond the tax and lost interest they didn't pay you. I just don't know why more people aren't doing this - so much so that the interest rate gets bid down further. I'm assuming you would need a larger initial investment, but I can't confirm this yet.

Sparafusile

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Re: Tax Lien Auctions
« Reply #7 on: August 10, 2012, 04:40:05 PM »
Each state is different. Some states do just like you stated, bid down the interest rate on the lien. Others let you buy liens in a round robin fashion and still others let you bid up the price of the lien. When the home owner pays the taxes (to the government) the government sends you a check. The government does this to keep their income stream as steady as possible; you do this because it gives you a good return on your money.

arebelspy

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Re: Tax Lien Auctions
« Reply #8 on: August 10, 2012, 05:50:49 PM »
...and when there are multiple tax liens that you'll have to pay off if you foreclose? (I.e. yours is a senior lien over the mortgage, but why do you assume you are buying the only taxes they are delinquent on?)

I've researched into them enough to know I'm not too interested.  Most of the info out there is junk and "gurus" trying to sell you stuff.

It's a cute theory, but in reality it's not as profitable or reliable as most real estate investing strategies.
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arebelspy

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Re: Tax Lien Auctions
« Reply #9 on: August 10, 2012, 05:54:23 PM »
And the research involved is a lot, plus the cost of title searches for other senior liens, plus are you sure you want the property?

Do you have an extra 60,000+ in case you have to foreclose (a few thousand in legal fees) and then rehab a house which might be in bad shape?  Sure, some rare times it may require minimal rehab, but often it'll require much more, and you won't know without doing research, which is time consuming and often fruitless (considering you said there was 39,000+ sold, where do you start?).

Ending up with the house often is a worst case scenario, cause suddenly you have a liability (you're paying the property taxes, etc.)
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Kazak

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Re: Tax Lien Auctions
« Reply #10 on: August 10, 2012, 07:30:09 PM »
That is a great point. It's not really that secure if the property ends up costing you money, and who knows why they stopped paying property tax??

jpo

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Re: Tax Lien Auctions
« Reply #11 on: August 13, 2012, 01:06:08 PM »
As others have mentioned, it varies by state.

Here in NC, they just auction off the property, starting at the value of the back taxes owed. So, theoretically, you could purchase free and clear a property for dirt cheap. I think then all you have to do is go to court to get full/clear title.

tomsang

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Re: Tax Lien Auctions
« Reply #12 on: September 09, 2013, 02:35:57 PM »
The other side of the tax lien.  Sounds like a lot of people with mental issues losing their housesover a few thousand.  It shows you that you never really own your home.   

http://www.washingtonpost.com/sf/investigative/2013/09/08/left-with-nothing/

Mr.Macinstache

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Re: Tax Lien Auctions
« Reply #13 on: September 09, 2013, 02:43:50 PM »
The other side of the tax lien.  Sounds like a lot of people with mental issues losing their housesover a few thousand.  It shows you that you never really own your home.   

http://www.washingtonpost.com/sf/investigative/2013/09/08/left-with-nothing/

I read that this morning. This is why I believe property "tax" is a horrible thing. Its not a tax, it is rent to be paid. It proves your property is always held of the crown.

And making that even worse, a king allows the vultures to feast.

Sparafusile

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Re: Tax Lien Auctions
« Reply #14 on: September 09, 2013, 03:39:14 PM »
If you walked into a retail shop and refused to pay sales tax the wouldn't sell you anything. How is this different?

The state needs money to run. It budgets that money according to needs. If you decided not to pay property taxes there will be a shortfall. If somebody else offers to help the state out by paying those taxes, why shouldn't they be able to? Of course they would expect something in return. In most cases that's just interest on back taxes. In some cases that is the only thing left - the property itself. Now the property is in the hands of somebody that can and will pay the taxes.

The moral of the story: pay your property taxes. Even if it means you can't pay your mortgage, pay the property taxes or you'll lose your home. This is why most mortgage companies pay the taxes for you.

Mississippi Mudstache

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Re: Tax Lien Auctions
« Reply #15 on: September 09, 2013, 03:55:33 PM »
I just read the linked article. In the vast majority of cases, the investors are not predators seeking to foreclose. I know some guys that purchase tax liens in Mississippi, and the last thing they want is to deal with a foreclosure. They just want a decent return on their investment, and they have been doing it for years, so I'm assuming they're getting it.

fiveoclockshadow

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Re: Tax Lien Auctions
« Reply #16 on: September 09, 2013, 06:10:11 PM »
If you walked into a retail shop and refused to pay sales tax the wouldn't sell you anything. How is this different?

When you leave the shop having paid the sales tax you are done with paying taxes and no one can put a lien on the property you just purchased. I think you are conflating dissatisfaction with how taxes are levied with dissatisfaction about taxes in general. States handle this many different ways, some have no property tax but income and sales taxes. In such an arrangement the state still gets plenty of tax revenue and doesn't have to be in the business of evicting the elderly and enfeebled from their homes to collect said revenue. Understand the difference now?

Some take a middle road, like CA which during the inflation of the 70s was evicting fixed income old ladies into the street to collect property taxes based on rapidly increasing property values. Prop 13 changed the law to at least make property taxes predictable and fixed for home owners. Nonetheless this resulted in odd perversities such as tearing down all but two walls of an old house before building a mansion in its place to avoid reappraisal. Taxes usually have unintended consequences, I can understand someone advocating a structure that has no mechanism to throw elderly veterans into the street.

Mr.Macinstache

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Re: Tax Lien Auctions
« Reply #17 on: September 10, 2013, 09:00:49 AM »
If you walked into a retail shop and refused to pay sales tax the wouldn't sell you anything. How is this different?

The state needs money to run. It budgets that money according to needs. If you decided not to pay property taxes there will be a shortfall. If somebody else offers to help the state out by paying those taxes, why shouldn't they be able to? Of course they would expect something in return. In most cases that's just interest on back taxes. In some cases that is the only thing left - the property itself. Now the property is in the hands of somebody that can and will pay the taxes.

The moral of the story: pay your property taxes. Even if it means you can't pay your mortgage, pay the property taxes or you'll lose your home. This is why most mortgage companies pay the taxes for you.

Sales tax and property tax(rent) are two different things.

Sales tax is an excise tax which is consumption based. As mentioned you pay it once upon a purchase. Property tax is paid annually to a govt. It is a form of rent, but cleverly called a tax to disguise the fact. Even if you own your property outright, it can be taken if you don't pay this rent, so there really is no true ownership of any property if a govt allow for the confiscation of it.

Yes I understand taxes are needed. This is all fine and well. That is beside the point. My argument is that a tax on property is immoral and unjust, leads to predatory behavior. Where's the compassion for the elderly who have paid for their property in full and have paid taxes all their life? Do we need to bleed them dry? At least when you reach retirement age in life you should be done paying a property rent and be able to have true ownership.

All taxes should be consumption based, as the gas tax funds the roads and your sales tax funds the other functions of your local govt. Eliminate the property tax and it could be made up in a consumption based sales tax very easily.

jradc

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Re: Tax Lien Auctions
« Reply #18 on: September 10, 2013, 09:15:43 AM »
The series in the Washington Post makes clear that there are some very shady practices in the tax lien auction area.

It might be true that some people are just looking for a slow-and-steady return, but it seems clear that the real money is in racking up legal fees and then foreclosing. It should be illegal for an investor to "charge" a homeowner legal fees of thousands of dollars on an outstanding tax of a few hundred dollars. Sure, the homeowner should pay the taxes, plus interest, but anytime the "fees" get higher than the interest and original debt, I call foul.

Mr.Macinstache

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Re: Tax Lien Auctions
« Reply #19 on: September 10, 2013, 10:06:39 AM »
I call foul on authorities collecting tax on property. Eliminate that you get rid of this whole problem. Strike the root.

mpbaker22

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Re: Tax Lien Auctions
« Reply #20 on: September 10, 2013, 10:17:57 AM »
Question - Shouldn't owning stock count as owning property?  You technically own a little piece of every company ...
Can you guys imagine what would happen if the government tried to tax all your wealth at 1.5%?  I don't see any difference between property taxes and a general asset tax, except property taxes are levied even if you have negative net worth.

I would say property taxes are actually worse than income taxes, because you at least only get taxed on income if you have real income.

Mr.Macinstache

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Re: Tax Lien Auctions
« Reply #21 on: September 10, 2013, 10:50:00 AM »
Question - Shouldn't owning stock count as owning property?  You technically own a little piece of every company ...
Can you guys imagine what would happen if the government tried to tax all your wealth at 1.5%?  I don't see any difference between property taxes and a general asset tax, except property taxes are levied even if you have negative net worth.

I would say property taxes are actually worse than income taxes, because you at least only get taxed on income if you have real income.
I would say it's an asset.
Can you image if we had to pay property rent on ALL the items we owned? I mean, why stop and our land, houses, boats, cars, motorcycles and trailers. Why not include other physical property as well, like cups, dishes, silverware, picture frames, jewelry and board games. Think of all the jobs it would create for central services to send an inspector to itemize everyone's physical possessions.

Mega

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Re: Tax Lien Auctions
« Reply #22 on: September 10, 2013, 12:33:57 PM »
Stop giving the government ideas!

Seriously though, property tax is why I say housing is the worst investment people can make. I am taking about non-professional house investors.

No other assest has a "wealth" tax.

fiveoclockshadow

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Re: Tax Lien Auctions
« Reply #23 on: September 10, 2013, 09:35:13 PM »
@mpbaker - yes, but when I own stock I don't get a police department, fire department and school along with it. You've set up a poor analogy. Not that I like property tax, but it exists as it correlates with the services that go along with occupying said property. This could be done different ways and some states do.

Consumption taxes are typically not progressive which requires some other complexity to sort that out.

Income taxes are the easiest to make progressive but they have their own issues as the sea of tax laws around deductions, credits and exemptions makes clear.

If there was an obvious answer we would see most states doing the same thing, but that's not what we see...

aj_yooper

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Re: Tax Lien Auctions
« Reply #24 on: September 10, 2013, 10:40:19 PM »
+1 fiveoclockshadow.

In our county, tax liens are a nice way to earn a higher interest rate on secured property.  After several years, if the owner fails to pay you the taxes plus interest, you may take possession of the property.  That is why it is wise to study the properties before purchasing the lien.  It is competitive.

Mr.Macinstache

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Re: Tax Lien Auctions
« Reply #25 on: September 11, 2013, 08:37:28 AM »
Yay for legalized theft. And we condemn corporations for being greedy?

None of this is Mustachian at all.

aj_yooper

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Re: Tax Lien Auctions
« Reply #26 on: September 11, 2013, 08:45:04 AM »
Yay for legalized theft. And we condemn corporations for being greedy?

None of this is Mustachian at all.

Emphasis on may.  I would look on the income aspect, which is nice, not on going for the property, which is highly unlikely. 

mpbaker22

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Re: Tax Lien Auctions
« Reply #27 on: September 11, 2013, 09:20:58 AM »
@mpbaker - yes, but when I own stock I don't get a police department, fire department and school along with it. You've set up a poor analogy. Not that I like property tax, but it exists as it correlates with the services that go along with occupying said property. This could be done different ways and some states do.

Hmm ... but my use of the US military complex doesn't vary based on my income.  My use of roads doesn't (necessarily) vary with income.  So why do my taxes vary with income?

I guess the real response to my owning stock question would be to point out that the companies I own pay property taxes on their property?

Mr.Macinstache

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Re: Tax Lien Auctions
« Reply #28 on: September 11, 2013, 09:32:44 AM »
Yay for legalized theft. And we condemn corporations for being greedy?

None of this is Mustachian at all.

Emphasis on may.  I would look on the income aspect, which is nice, not on going for the property, which is highly unlikely.

I know you're looking on the income aspect of it, and nothing else. That is the problem with people who only care about a dollar at any cost. Individuals are no different than these mega greed based institutions, because they are made of up of people like you - engaging in these crimes protected by "law", praying and profiting off someone elses hardships. And there's always an excuse for it.