Investing In US Tax Liens

With the US economy and particularly the US housing market (in some areas) in a bit of disarray, interest from investors from overseas, including Australia has increased.

As always, price (and the potential for a good deal) is influenced by supply and demand – and given the number of foreclosures and emergency sales in the US at the moment, it is fair to say that in a number of markets at least, there is a underlying increased supply and decreased demand. (Add to this, the USA’s non-recourse lending and this adds further fuel to this property fire – but that’s another story).

One of the US property market’s “well kept secrets” is US Tax Liens, and this is presenting an opportunity for investors to take advantage of the current property market.

With the advent of the internet, an investment that used to be limited geographically to locals of the USA, is now opening up to international investors as well. But don’t be fooled, there’s no such thing as a “get rich quick” scheme, and US Tax Liens are no different. If you are interested in investing in this form of property transaction, there are plenty of things to learn and obstacles to overcome, however the returns could be significant.

So what are US Tax Liens?

When we compare to Australian property, a US Tax Lien is the equivalent of what could happen to you, if you didn’t pay your council rates for an extended period of time.

In Australia, the situation is this –

1. You pay your council rates to your local council, they use this money for spending on vital infrastructure for the community, waste disposal, etc.
2. If you fail to pay your rates on time, you generally get charged interest.
3. If you DON’T pay your rates (ever) then the council will eventually sue you and recover it’s dues by selling your house. (This is a pretty rare event in Australia).

In the USA, the situation is similar –

1. You pay your “property taxes” to the local “county”, they use this money for spending on vital infrastructure for the community, waste disposal, hospitals, the fire department, schools, police, etc.
2. If you fail to pay our taxes on time, you get charged interest and they send you several letters to advise you.
3. If you still don’t pay (within a couple of months) the county SELLS your debt in the form of a LIEN to an investor.

The investor who buys the lien pays the amount owed to the county, so that the county can continue to provide the necessary infrastructure for the community, and the investor then is owed INTEREST from the home-owner.

In the event that the home-owner fails to pay the investor the amount owed (plus interest) in a certain period of time (usually 2 years), the investor has the right to foreclose on the home.

In most cases, the home-owner will pay the debt and the interest, which is then passed on to the investor. The interest owed on the lien can range from 0.25% up to 18% PA or even 25% per 6 months (in some counties). Hence the return potentially is very good.

Now the situation is a bit more complicated than just this of course, and like any investing strategy, it may not be as easy as it sounds to generate the highest returns, however you can see the benefit in investing in a potentially high-return investment secured by real estate. If this interests you, then consider doing some more research in this evolving form of investing.

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