New Jersey and Colorado sell property tax liens in October!

Explaining Fundamentals and Community Benefits: Why Tax Liens Are Not A Predatory Investment

The reason I started Unique Exchange was to establish a digital exchange for the US $25B property tax lien market. Ostensibly, to make the market more liquid and efficient. Importantly, to also to allow a broader group of investors to access the asset class and to more easily buy, sell and manage their tax lien portfolio.

Investing in the US property tax lien market generally produces high returns from what is a secure investment class.  But it is fair to say that tax liens are sometimes viewed in a negative light because it is seen as taking advantage of a property owner’s economic circumstances.  In reality, property tax liens exist to fill holes in the revenue collections and budget of local municipalities and to provide relief to property owners so that they have time to pay their taxes (with penalties) at a later date. Tax liens are, in effect, an interest-bearing loan that is secured by the underlying property and must be repaid in a prescribed time period.  Now investing in tax liens is not without risk and of course Investors need to be diligent.  But let’s address the fundamentals of tax liens and why they benefit the local municipalities and can also be helpful short-term loans for property owners.

  • If a Property owner is unable to pay their property taxes, let’s say due to economic hardship, then by issuing a tax lien and selling it to an investor the local government (county/municipality) allows that property owner to repay tax amount at a later day – as much as 3 years later.
  • The penalty that the county/municipality charges for unpaid tax is very high – could be as much as 36% interest yearly, that’s before a bunch of other fines. Investors purchase tax liens at a much lower interest, sometimes as low as just 0.25%, or even zero. Therefore in many cases the property owner would end up with a very low interest charged to them while repaying their unpaid taxes.
  • 99% of delinquent tax property owners with tax liens issued get to keep their property. There are multiple rules and provisions that allow property owners to repay the unpaid tax even after the tax lien-based foreclosure process has started.
  • If a tax lien is not sold to an investor, then the county/municipality receives a right to foreclose on that property in just 3 or 6 months. By purchasing a tax lien from the county/municipality, investors allow property owners to avoid fast foreclosure, keep their property and use that additional time for repayment of taxes.

  • Every year $7 billion worth of property taxes go unpaid, putting significant pressure on local governments budgets. Already overstretched, those local governments cannot support collections on these unpaid accounts and instead, would have to cut important spending elsewhere. By selling tax liens to accredited investors, those local governments are able to collect taxes in a timely manner and close the gap in their local budgets.
  • Local governments spend their property tax dollars on critical services. By buying tax liens, investors are in fact providing funds for local schools, emergency services, and infrastructure.

  • Local governments would be forced to cut services or raise tax rates to cover the unpaid property taxes. Like with any other operation that depends on continued cash flow, the property owners that pay on time would have to cover for those who can’t. By purchasing tax liens from the county, investors help to avoid tax hikes and higher tax burden on the property owners.
  • The presence of poorly maintained, decaying, or simply abandoned properties has a negative impact on the local real estate market, attractiveness of location, crime rates, and quality of living in the area. When properties are foreclosed, they are often put through rehab/renovation, repaired, or rebuilt from scratch, improving the quality of the local realty market. By purchasing tax liens, investors help to drive new funding to the area, and bring new tax paying residents.


So in short, property tax liens provide three principal benefits – they provide gap funding for local governments to maintain essential services and secondly, they provide a form of loan to property owners that are unable to make payments, they provide opportunity to improve community and improve real estate market in the area.  The tax lien investor benefits from a government mandated interest bearing asset and the property-backed security the lien provides.  Talk of tax liens may inspire differing opinions, but once you understand them, you’ll realize they are simply a SMART investment instrument that very few people know or appreciate.

 

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