Tax Liens Raising Interest Among Investors Seeking Alternatives

Once a little known alternative investment for retirement accounts, tax liens have become a viable option for investors given the minimal funds needed to get started and increased certificate availability.

The real estate market isn’t the only catalyst behind the recent surge in investors exploring tax liens as a viable alternative option within retirement accounts. Purchasing certificates has generated interest among investors who may have limited funds or are new to the self-directed industry but want to further diversify their portfolio.

Tax Liens Certificates Appeal to All Investors

A tax lien certificate is a first lien on property for which the current owner has not paid property, assessment or other state and federal taxes. As an investor, your clients can purchase the certificate, usually through a county auction, and collect their original investment plus interest when the owner or other interested party pays taxes on the property (along with any penalties or other expenses) by the specified date. If the property owner does not pay back the certificate, the investor often receives the property for only the taxes, penalties and interest due. Note, some county’s offer tax deeds that instead of an interest rate represent actual ownership in the property by the successful bidder after the redemption period.

Since the tax liens are offered at a public auction and require only a few thousand to invest, the certificates are available to the majority of individual investors. Traditionally county auctions have been in person but there has been a growing trend to online auctions, extending the investor pool beyond state lines.

Tax liens as an investment option are also getting a closer look by advisors and investors seeking options to the stock market for retirement fund growth. Purchasing certificates within a retirement account not only maintains liquidity with discretionary funds, but provides additional tax advantages on earnings and asset allocation benefits for your clients’ portfolio. Clients may find tax certificates enable them - with minimal investment - to maintain control of their retirement funds while exploring investing in alternatives.

Keys to Successful Tax Lien Investing

Even with the often low cost of hundreds or just a few thousand dollars of investment per lien, purchasing tax liens still requires due diligence on behalf of the investor and their advisors. For starters, every county and state rules for purchasing tax liens or deeds varies. A thorough research of the property including any other liens; knowledge of the particular county’s process; and detailing a bidding strategy as well as an exit plan should you eventually take possession of the property are critical to success. For the investor or advisor who does not have time or interest to conduct the due diligence (sourcing the houses, etc.) firms known as tax lien servicing agents will manage these details. Tax lien servicing agents invest, purchase and manage tax lien portfolios on behalf of the client.

While anyone can go to an auction at the county and purchase tax liens, investors must have at least three considerations in mind when conducting their due diligence according to Don Fullman, Tax Servicing Agent of Platinum Investment Properties - West. “A good quality tax lien will be for property that is marketable, so that if the investor does take possession of the property, it is valuable and they can liquidate it. You need to make sure that the property definition is one that is marketable, and it is not a strip of land along the freeway that is not buildable. It has to be something that is useful,” says Fullman.

“Secondly, the amount of equity backing up the lien should be very high, meaning the cost of the lien is very low compared to the value of the property. And finally, the properties should have a history of tax payments so that you can be encouraged that the lien will be paid off.”

When using retirement funds, investors will need to know a few important details as well, such as whether the county will allow more than one bid per Tax ID; if the county requires guaranteed funds; and if they refund overages. This last item is key since all expenses and income associated with the investment need to flow in and out of the IRA. Otherwise, the client may be hit with a penalty for the portion of funds that were distributed. Your IRA custodian should be able to detail what is needed based on the information discovered for each county. The processes and rules change for each county from time to time so it is best to check back regularly.

Tax default continues to present a wealth of opportunity for today’s investors. Having a pre-determined return upon purchase along with the small amount of capital to get started makes purchasing tax certificates a great place to get started for investors interested in further exploring alternatives.

Click here for more information on tax liens investing, including an educational webinar.