Tax Lien Investor Handbook...2018/09/04 · Tax Lien Investor Handbook: A Reference Guide to Smart Tax Lien Investing Understand how tax liens work, why to invest in tax liens now,

Tax Lien Investor Handbook: A Reference Guide to Smart Tax Lien Investing Understand how tax liens work, why to invest in tax liens now, and how to adequately evaluate investment opportunities.

Tax Lien Investor’s Handbook

2

Contents

Introduction 3

How Tax Liens Work 4

Tax Lien Methodology 5

Geographical Market Overview 7

Table of Jurisdiction Data 8

Why Invest in Tax Liens 9

Risks Associated with Tax Lien Investing 10

Tax Lien Redemption Process 12

Foreclosure Process 13

Industry Terms 14

Conclusion 16

The materials contained in this this Handbook have been prepared for information purposes only and are based on information believed to be reliable. Because the laws relating to tax liens are constantly changing, no representation is made that can be completely accurate or complete, and no responsibility is accepted for the use of or reliance on information provided herein, under any circumstances. The opinions and methodology expressed herein are subject to change without notice.

We do not provide any guarantee or opinion on the accuracy or currency of any article or presentation. Opinions expressed are current opinions only. No part of this handbook constitutes investment advice nor should it be considered as such. Research available through this handbook do not constitute investment advice or any form of recommendation, and should not be construed as such.

Because the information and commentary provided herein is for informational purposes only, you should not rely on this information for tax, legal, accounting, or investment purposes. Do not take specific action without consulting a professional first. You should contact an investment professional or attorney to obtain advice with respect to any particular issue or problem.


© 2018 ProSource Tax Liens. All rights reserved. 4

How Tax Liens Work

The collection of real estate property taxes is paramount for state and local governments across the country. States, counties and municipalities use property taxes to fund public schools, fire and police departments, and public construction projects. Without money for such essential public services the municipal government would not be able to function.

Consequently, tax collection is top priority. When a property owner fails to pay his property taxes budgeting issues arise. This lack of payment creates an accounts receivable credit on the local government’s balance sheet where there should be a cash flow credit in the form of paid tax revenue. If the amount of dollars in accounts receivables grows too large the cash flow revenue cannot support daily municipal demands for cash, and the county or municipality runs a deficit.

In order to avoid such a deficit, many municipalities have implemented the auctioning of tax lien certificates to raise cash for these delinquent taxes in a more favorable time frame. A lien is a legal action that encumbers personal and real property to compel payment of debts. After numerous warnings to the property owner, counties auction off tax lien certificates for these properties to investors.

The investor is compensated for “loaning” to the property owner. The primary, and most common, means of earning a return on a tax lien certificate investment is simple interest. The investor is entitled to the face amount of the tax lien certificate plus interest and penalties, to be paid when the property owner settles the debt.

The secondary method of earning a return occurs in the event that the property owner does not pay the certificate face amount plus penalty/interest rate, thus redeeming the tax lien certificate. After a statutory period of time, which varies by municipality, investors have the right to enforce payment of the debt through foreclosure. State statute dictates whether the foreclosure process is judicial or non-judicial.

Note that in some instances additional back-taxes and penalties must be paid as well, however these are generally minimal compared with the excess return on investment that the foreclosure generates.



Tax Lien Methodology

Tax Lien Certificates are purchased at municipal/county auction in one of the following processes. State law dictates which process is to be used within its jurisdiction.

Bid Down the Interest

Under this method, the stated rate of return offered by the government is the maximum rate of return allowed. However, investors can accept lower rates of return, including zero percent in some cases. The investor accepting the lowest rate of return is the winner. In the event more than one investor will accept the same lower rate, a random or rotational method will be used to break ties. (Florida and Arizona use this method)

Rotational Selection

Under this method, the first lien offered for sale will be offered to the investor holding bidder number one, who has the right of first refusal. If bidder number one refused the lien, bidder number two may then bid. However, bidder number one will not be offered another lien until his number comes up again in the rotation. The next lien will go to the next number in line. Under this method, the investor has virtually no control over which liens he will obtain in the bidding, except to take or refuse what is offered. (Kentucky uses this method)

Premium or Overbid

Under this method, the investor willing to pay the highest “premium” (or excess above the lien amount) will be the winner. The premium may or may not earn interest, and may or may not be paid back to the investor upon redemption of the lien. (Colorado and South Carolina use variations of this method).

Bid Down the Ownership

Under this method, the investor willing to purchase the lien for the lowest percent of encumbrance on the property will be awarded the lien. For example, a bidder may agree to take a lien on only 95% of the property. If the lien is not redeemed, the investor would only receive 95% ownership of the property with the remaining 5% owned by the original owner. In practice, few investors will bid on liens for less than full right to the property or sale proceeds. Therefore, with multiple owners bidding on the 100% encumbrance, the process then generally reverts to the random selection. (Iowa and Louisiana use this method)

Bulk Sales & Negotiated Sales

Under this method, the county or municipality sells large amounts of liens grouped by type, region, or random selection. Negotiated sales are rare, and the stipulations of such vary from municipality to municipality. (Ohio and Connecticut use this method)



Secondary Market

Although tax liens have existed in the primary market for over a century in some jurisdictions, the formal secondary market for tax lien certificates is relatively new. The service of a neutral third party matches buyers and sellers and provides tax lien investors with crucial liquidity enhancement, access to a range of potential counterparties, and singular focus on efficient execution.



Geographical Market Overview



Table of Jurisdiction Data

Statutes Referenced

Onondaga, NY: Schenectady, NY: Mahoning, OH: Montgomery, OH: Lucas, OH: Florida Kentucky

Defined Terms

Title 2 Sec. 1110, Title 2 Sec. 1112, Title 3 Sec. 1123, Title 3 Sec. 1124 Title 2 Sec. 1110, Title 2 Sec. 1112, Title 3 Sec. 1123, Title 3 Sec. 1124 Title LLVII Sec. 5721.32, Title LLVII Sec. 5721.36, Title LLVII Sec. 5721.37, Title LLVII Sec. 5721.37(B) Title LLVII Sec. 5721.32, Title LLVII Sec. 5721.36, Title LLVII Sec. 5721.37, Title LLVII Sec. 5721.37(B) Title LLVII Sec. 5721.32, Title LLVII Sec. 5721.36, Title LLVII Sec. 5721.37, Title LLVII Sec. 5721.37(B) Title 14 Chpt. 197.402, Title 14 Chpt. 197.416, Title 14 Chpt. 197.417, Title 14 Chpt. 197.522 Title XI Chpt. 134.420(1), Title XI Chpt. 134.420(3), Title XI Chpt. 134.490(1), Title XI Chpt. 134.420(2)

The length of time a tax lien certificate retains value and remains legally enforceable. The period of time that the property owner has to redeem a tax lien or tax deed. The order in which tax liens are redeemed if there are multiple tax liens on a single parcel. Tax Lien Certificates are redeemed from oldest to newest. Tax Lien Certificates are redeemed from newest to oldest. Type of procedure for the tax lien holder to take possession of a property in order to receive payment of the debt. Process of filing a lawsuit to foreclose on Real Property in order to collect a debt. Process of submitting a “tax Deep Application” to obtain Real Property in order to collect a debt. The period legally required to give public and/or private notice of pending legal action such as foreclosure. A deed that is encumbered for a period of time during which it may be redeemed by the delinquent property owner. The party in which is responsible for calculating redemptive values, accepting payments, applying payments and discharging liens. The frequency in which the interest rate is applied to the outstanding tax lien debt. Simple interest is determined by multiplying the interest rate by the principal by the number of periods. Subsequent taxing occurs when an investor buys the next year’s delinquent taxes on a property they already possess a tax lien on. The Rate is a set government mandated rate applied to the purchase of subsequent taxes. Whether or not the tax lien holder is required to pay all outstanding tax liens prior for foreclosure. Tax based on the assessed value of real estate property. Ad Valorem taxes are also known as “property taxes”. Tax based on the assessment of the improvement or service cost allocated to the property and levied on a benefit unit bases.

Expiration Term: Redemption Period: Lien Preference: Chronological Lien Preference: Reverse Chronological Lien Preference: Foreclosure Method: Judicial Foreclosure Method: Non-Judicial Foreclosure Method: Notification Period: Redeemable Tax Deed: Liens Service By: Interest Charges: Interest Accrual Rules (Simple Interest): Sub Tax Interest Rate: subsequent Tax Interest Rollup Due Upon Foreclosure: Ad Valorem: Non-Ad Valorem:

Location Expiration Term

Redemption Period Lien Preference Foreclosure

Method Notification Period

Public Notice

Redeemable Tax Deed

Liens Serviced By

Interest Charge

Interest Accrual Rules

Sub Tax Interest Rate

Rollup Due Upon Foreclosure

Onondaga, NY None 24 Mo. Rev. Chronological Judicial 60 Days Yes No Private Monthly Simple Interest None None

Schenectady, NY None 24 Mo. Rev. Chronological Judicial 60 Days Yes No Private Daily Simple Interest None None

Mahoning, OH 6 Yrs. 12 Mo. Chronological Judicial 30 Days Yes No Private Monthly Simple Interest 18%

Ad Valorem + Non-AdValorem

Montgomery, OH 6 Yrs. 12 Mo. Chronological Judicial 30 Days Yes No Private Monthly Simple Interest 18%


Lucas, OH 6 Yrs. 12 Mo. Chronological Judicial 42 Days Yes No Private Monthly Simple Interest 18%


Florida 7 Yrs. 24 Mo. Chronological Non-Judicial 20 Days Yes No County Monthly Simple

Interest 18% Ad Valorem

Kentucky 11 Yrs. 12 Mo. Chronological Judicial 50 Days Yes No Private Monthly Simple Interest 12% None



Why Invest in Tax Liens

Real Estate taxes are calculated annually by multiplying the local government total millage or tax rate against the property assessed or taxable value. Many lenders require homebuyers to hold an escrow account to help pay future real estate taxes. In the past few years, increasing numbers of sub-prime mortgages no longer carried this requirement. As property values increased, so did property taxes. Many homeowners could no longer afford these fees along with their mortgages, and without escrow accounts to cover the taxes liens are being placed on properties at a rapid rate.

Estimates from the National Association of Counties (NACO) place the delinquent property tax debt owed to the nation’s counties and municipalities near $100 billion dollars annually. Local Government dependence upon the ad valorem property tax as a revenue source is best evidenced by the fact that county and city operation budgets continue to receive 70-75% of infrastructure funding from this source.

The sheer size of the tax debt receivables facing municipalities and county governments, regardless of population size, has by necessity invited private sector participation in the tax collection process. The earnings rate, typically ranging from 8% to 50%, carried by most tax liens is sufficiently punitive to discourage continued delinquency. Interest rates and total return will often outperform conservative and higher risk investment vehicles.

In the majority of instances tax liens supersede all privately held liens, including mortgages, in priority. This relatively high creditor position and the low lien amount to property value ratio (LTV ratio) can make the careful selection of tax liens a relatively low-risk, highly secured investment.

Tax lien certificates are immune to many of the fluctuations in the financial markets which affect more traditional forms of investment.

Investment in tax lien certificates historically results in a relatively low rate of tax foreclosures. A carefully selected portfolio of TLCs in demographically desirable areas limits the possibility of additional out of pocket expenditures required to bring the property to a foreclosure, a tactful research team may be able to turn this sale into an opportunity for enhanced total return.

Tax certificates are a negotiable instrument. They have a face value. Tax certificates draw interest at a specified rate from the date of issue until redeemed, and they are transferrable by endorsement. Unlike bonds, however, a certificate does not state the date upon which the principal face value must be paid to the holder. Rather, the owner of record may redeem them at any time up until the point of a foreclosure sale.



Risks Associated With Tax Lien Investing

Redemption Risk

Redemption risk is associated with the chance that a property owner might not redeem, and force the investor to foreclose on the property.

Property Value Risk

The underlying value of the home may change from the time you purchase the original certificate and when it redeems or becomes eligible for foreclosure.

Foreclosure Risk

Tax foreclosure may be necessary to encourage redemption, but it does not mean that the investor will necessarily become the owner of the property. Proper due diligence can greatly reduce the risk of establishing an inventory of REO. However, to say that a parcel will never be acquired would be too optimistic. The bigger issue with tax foreclosure is that it will mean additional out of pocket monies from the investor as the tax lien holder applying for tax deed foreclosure must typically purchase or redeem any other outstanding tax lien investors. On the up-side, any out of pocket monies necessary are typically recoverable with interest, and considering a tax lien’s superior position on the creditor scale, the remaining 5% typically produce even higher returns for the fund than the penalty rate would have. Thus foreclosure is seen as a positive for total returns to some investors.

Maturity Risk

Investors have essentially no control over the maturity date of tax liens, as they are open ended, and payable by the mortgage holder or delinquent homeowner at any time between the date the investor purchases the tax lien and the date the investor files for foreclosure. Think about it as a callable municipal general obligation bond. To some this “loss of control” is the biggest negative associated with purchasing tax certificates.

Liquidity Risk

Traditionally, tax liens offered for sale are illiquid receivables that cannot be readily converted into cash, as is the case with certificates of deposit. Initial investment may not all be redeemed at once, and is often a laborious process. Multiple owners of tax liens may also equate to partial redemptions.

Bankruptcy Risk

The property owner could declare bankruptcy, thus delaying and possibly even modifying the terms of repayment. In extreme cases bankruptcy judges have overturned the interest rate issued on tax certificates and replaced with “cram down” rates.



Litigation Risk

As with any investment involving property and contracts, litigation by property owner or bank owning the primary mortgage is always possible.

Environmental Risk

Environmental concerns are unique to tax liens. Inhabitability may make the acquisition of property unattractive.

Miscellaneous Risks

Miscellaneous risks include post tax lien purchase damage to the property, including Acts of God, vandalism, and rezoning by officials. On the alternate side, any property improvements made on parcels of land for which tax liens are issued can be destroyed, removed or condemned.



Tax Lien Redemption & Collection Process

The tax lien redemption process is the process by which the delinquent taxes and associated penalties are paid to the tax lien certificate holder. Each jurisdiction has their own, unique set of codes and laws governing the act of collecting on a tax lien. Those looking to service liens themselves should consult with an attorney prior to any solicitations for payment from the property owner.

As standard practice, all tax lien certificates purchased by us are sent to a trusted law firm, Guardian Law, for the purpose of collecting on the outstanding balance of the tax lien. Those who purchase tax liens from us are, by default, eligible for this same service. A summary of services are provided here:

Skip Tracing

Skip Tracing describes the process of locating a property owner’s whereabouts for the purpose of calling or mailing for debt notification or payment solicitation. Skip Tracing software searches utility records, loans, credit reports, etc. to obtain recent contact information for property owners. This software is relatively expensive and rarely used by novice investors.

Phone Calls

A phone call is placed to the property owner in the attempt to collect on the delinquent taxes. A qualified, trained representative discloses the nature of the call and arranges for the outstanding taxes to be paid. If possible and payment is collected immediately while on the call, otherwise a “commit to pay by” date is determined or a payment plan is set up.

Payment Processing

Debt payments from homeowners are acceptable in any of the following forms: Credit Card, Debit Card, Check, Wire, Money Order, Cashier’s Check. When a payment has been received, the lien is recorded “redeemed” and a payment to the tax lien certificate holder is mailed.

Mail Letters

Several letters are mailed to the property owner notifying them of the outstanding tax debt. This letter also includes proof of tax lien certificate ownership, as well as instructions for paying the balance. Each letter is unique and urges the property owner to pay the debt, citing possible consequences.



Foreclosure Process

If the property owner does not pay the delinquent taxes, the tax lien certificate holder may be eligible to begin foreclosure proceedings as soon as the foreclosure waiting period has passed. The tax lien holder should consult with an attorney regarding the process unique to the jurisdiction, especially for those judicial foreclosure states. Those interested in starting the foreclosure process on a tax lien should contact us, who would them refer them to a trusted law firm, Guardian Law, specializing in real estate law.

Consultation with Law Firm

This initial consultation will include verifying proof of ownership of the tax lien and an initial review of the tax lien foreclosure laws associated with the jurisdiction the property is located in. Counsel will explain the general foreclosure process, including fees and costs generally required to prosecute the claim. You need to be prepared to provide counsel with ownership, location, and other information necessary to provide accurate information and guidance. Foreclosure requests and delinquent letters will then be mailed, if they have not been mailed previously.

Case Files Prepared and Filed

Either prior to or during a foreclosure action, a title search must be ordered to verify the debts or liens against the property. Title work is also necessary to notify all those with recorded interests in the subject property. Case files are then prepared and processed when information from the jurisdiction is verified and updated. You will be required to provide documentation necessary to complete the chain of assignment between you and the entity issuing the tax lien certificate..

Subsequent Taxes and Outstanding Municipal Fees Paid

The title search will determine if there are other liens on the property. Municipal officials may also be called upon to provide up-to-date information. If there are any subsequent taxes or municipal fees, they must be paid by the tax lien holder prior to a judgment. But because each jurisdiction handles tax lien foreclosures differently, the attorney handling the foreclosure will help you to identify when such outstanding taxes must be paid, including at the beginning of the tax lien foreclosure process in some states.

Final Hearing and Judgment

For the judicial foreclosure states, the process may take some period of time depending on court dockets and judicial resources where the action was filed. Once the action has completed the foreclosure process through the administrative or judicial process, and objections are resolved, a judgment regarding foreclosure is made. If applicable (according to jurisdiction) an auction is held. The property deed is awarded to the tax lien holder, if they are the highest bidder.



Industry Terms

Assessed Value: The price placed on a home by the corresponding government municipality to calculate property taxes. In general, this value tends to be lower than the appraisal fir market value of a property.

Due Diligence: An investigation or audit of a potential investment. Due diligence serves to confirm all material facts in regards to a sale. Generally, due diligence refers to the care a reasonable person should take before entering into an agreement or a transaction with another party.

Encumbrance: A claim against a property by another party. Encumbrance usually impacts the transferability of the property and can restrict its free use until the encumbrance is removed. The most common instances of an encumbrance occurs in real estate such as an outstanding mortgage or unpaid property taxes.

Expiration Term: The statutory time period a tax lien is enforceable.

Face Value: The nominal value or dollar value of a lien as stated by the county. For tax liens, this is the original tax lien debt prior to interest penalties.

Foreclosure: A situation in which a homeowner is unable to make principal and/or interest payments on his or her mortgage, tax liens or other debts, so the creditor can seize and sell the property as stipulated in the terms of the contract.

Jurisdiction: The practical authority granted to a formally constituted legal body to make pronouncements on legal matters and, by implication, to administer justice within a defined area of responsibility. The term is also used to describe a geographical area.

Municipality: A city, town, or other district possessing corporate existence and usually its own local government.

Over-the-Counter (OTC): Unlisted on or not part of an organized exchange. Over-the-counter tax liens are liens available for purchase from a county after an auction has ended.

Parcel: A distinct, continuous portion or tract of land. A parcel number is a unique set of digits assigned to a parcel.

Redemption: The act of a property owner paying all delinquent real estate taxes, plus expenses and accrued interest after a tax sale but before final issuance of a tax deed to the sale purchaser, and thereby regaining all rights to the property.

Redemption Period: The time allowed for the property owner to redeem the property by paying the delinquent taxes, penalties, interest and other costs associated with a tax lien.

Roll Up: The process by which multiple tax liens on a parcel are paid by a single tax lien holder in and effort to extinguish all outstanding debts and foreclose on the property.

Skiptrace: Term used to describe the process of locating a person’s whereabouts for any number of purposes. In the tax lien industry, skip tracing is popular for finding current contact information for the purpose of collecting delinquent taxes.



Tax Deed: A legal document that grants ownership of a property to a government body when the property owner does not pay the taxes due on the property. A tax deed gives the government the authority to sell the property to collect the delinquent taxes and transfer the property to the purchaser.

Tax Lien: A claim imposed by the federal government to liquidate a person’s property until the tax and debt owed is fully paid.

Tax Lien Certificate: A certificate of claim against property that has a lien placed upon it as a result of unpaid property taxes. Tax lien certificates are generally sold to investors by most counties and municipalities through an auction process. The tax lien certificate enables the investor to collect unpaid taxes plus the prevailing rate of interest applicable to such certificates.

Tax Lien Preference: The order in which tax liens are redeemed if there are multiple tax liens on a single parcel.

Documents

Tax Lien Investor Handbook...2018/09/04 · Tax Lien Investor Handbook: A Reference Guide to Smart Tax Lien Investing Understand how tax liens work, why to invest in tax liens now,