I recently received a question from someone who was looking to get involved in tax lien reversal in the state of Indiana. She was surprised by the amount of money paid for tax lien certificates and wondered if it was worth it. It sounds like the people you were getting involved with in the tax reversal were making some of the typical mistakes new investors make. They were buying liens on “junk property” and she couldn’t see the benefit of this. In addition, she witnessed institutional buyers offering large premiums for tax liens and she couldn’t understand how they were making a profit on their investment.
The reason for your confusion has to do with the type of bidding method used (premium or “over-bid”) in Indiana and the Indiana state laws that govern the tax lien reversal process. What he witnessed in Indiana is extreme competition due to favorable state laws for tax reversals. In Indiana, there is a hefty penalty (10 – 15%) on the amount of the certificate and you earn interest on the premium or “overbid” amount if the lien is redeemed. You also earn interest (10% per year) on subsequent taxes paid. Redemption periods vary from county to county, but are short, from just four months to a year. And all you have to do to foreclose is apply to the court for the deed to the property. However, everything must be done in a timely manner, or you could lose your claim on the property.
When most new investors go to these sales and see the large overbids paid by liens, they assume that the companies and investors paying these large amounts are doing so in the hope of foreclosure. While occasionally that may be true, whenever you see banks do this there is usually another reason for it. Banks don’t want to be in the property management business, they want to invest their money with higher returns than they can get by lending it, and they want to diversify their investments. The reason they’re paying so much for these links is because it’s worth it: they’re getting a good return on their investment.
Because they have the ability to allow large amounts of money to settle into an investment, institutional buyers may bid large amounts on properties they believe will redeem. And because they’ve done their due diligence on these properties, they know that even if the property isn’t redeemed, they’ll be able to sell it for a big profit. The danger for new investors is that they see these institutional lien buyers and other experienced investors paying large premiums for liens and start paying large premiums for property tax certificates they didn’t review. Perhaps you heard about tax investing from a real estate guru who touted investing in tax bonds as completely risk-free and “government guaranteed.” What they need to realize is that no one guarantees that they will pay you on a tax certificate and that the only thing that the lien guarantees is the property. Therefore, it is better for the property to be worth more than what you paid for the lien. And because you will have other expenses involved in your investment and later taxes to pay, the property should be worth several times what you paid for the tax lien certificate.
