Tax liens are certificates issued by a municipal taxing authority placed on a property when the property owner fails to pay property taxes. Municipalities rely on annual property tax revenue to fund general budgetary expenses and provide services to their residents. When a property owner fails to pay taxes, municipalities may face a budget deficit. To fund this deficit, municipalities in states that permit the sale of delinquent property certificates offer tax liens to private investors via in-person or online auctions. Currently 30 states offer tax lien sales.
Tax lien sales are typically conducted as Dutch auctions, with bidders bidding down the interest rate and potentially offering a “premium” in order to obtain the tax lien. Proceeds from the auction are retained by the municipality, with the winning bidder obtaining the right to collect taxes from the property owner plus applicable interest, penalties and fees at the lowest interest rate bid in the Dutch auction plus applicable / allowed fees. The property owner has a statutory redemption period to pay property taxes as well as interest, penalties, and fees. The redemption period, interest, penalty, and fees vary state by state. The property owner benefits from the lowest interest rate resulting from the Dutch.
The tax lien certificate is superior to all other liens on the property except federal tax liens (the exception being certain types of aged liens in Puerto Rico). At the time of a municipal auction, the delinquent tax certificates sold is typically below 10% lien-to-value of the appraised property value. If the property owner does not redeem the tax lien during the given redemption period, the tax lien holder has the ability to begin foreclosure and obtain title to the property. The typical redemption period is 2-3 years once the delinquent tax is auctioned and purchased by a private investor.
Typical tax lien investment funds purchase delinquent certificates as a secure buy and hold asset until redemption or foreclosure. More recently, fund managers, investors, and lenders are seeking liquidity prior to the redemption deadline or foreclosure. Tax lien holders may decide to sell on the secondary market due to the age of the tax lien portfolio, fund strategy, equity and / or debt capital structure, inability or lack of desire to commit capital to foreclosed assets, or exit from the industry. Conversely, funds acquire tax liens on the secondary market for specific real estate market opportunities, to improve portfolio returns, to compliment primary market auctions, and to balance accelerated redemptions. In response to market demands, Mission Capital Advisors has entered into the institutional secondary market to advise participants on tax lien sales, disposition strategies, and offer specific tax lien warehouse financing.
For more information on tax lien sales, acquisition, or portfolio financing, visit Nicholas Paidas’ team page, or him directly at 917-831-4419 and/or email at email@example.com.