We often are asked about tax liens, specifically investing in tax liens with a Self-Directed IRA.  While many Self-Directed IRA trustees do not provide the checkbook control typically necessary for success in tax lien investing, theCureIt Financial IRA/LLC absolutely does provide the checkbook control needed.

Here is how a tax lien works: a county has property owners who are behind on their property taxes.  The county needs that tax revenue to pay its bills and cannot wait for the property owner to get their finances in order or until the law permits the county to foreclose on the property in order to collect.  So the county puts the debt up for auction, seeking investors who will pay the county the money that they need now, in exchange for a promise of their money back plus interest.  In most cases the interest promised will be double digits in the form of a penalty that the property owner must pay to get caught up or that gets tacked on to their debt owed at foreclosure.  In some counties the penalty is 20% or even 25%.

No matter how many tax liens you bid on you will never get 25% interest on your money.  Here is why:  Investors bid on the debt by stating how much of the maximum penalty they are willing to accept.  So an opening bid might be 24% followed by 22% and bid on down from there until someone has a final bid that promises them a return somewhere south of 25%.  Banks and other professional investors will come to auctions with large budgets measured in the tens or even hundreds of thousands of dollars and just bid as low as it takes to win.

In fact, many investors assume that no matter what the starting bid may be that the winning bid will be for a return in the single digits or even nothing at all!  For example in FL, where the average winning bid is under 3%, bidders are willing to go that low because there is a mandatory 5% premium added to any winning bid.  So that 2% bid you won will actually pay out at 7%.  Another reason a winning bid may go low is that once you own the lien you own first rights – at full premium – for any subsequent tax liens that property may garner.  Would you be willing to accept single digit returns on most of your investments if a handful of those investments led you to 15%-25% returns a year later?  In some states, notably New Jersey, property taxes are due quarterly and so buying the first lien may lead to a second full premium (18% in NJ) tax lien available to you without competition just 3 months later.  In New Jersey it is not unheard of for investors to not only agree to receive zero premium but actually to pay an extra premium to the county just to get their hands on those potential no-bid 18% future tax liens.

Consider too that very few tax lien go unpaid all the way to foreclosure auction.  In fact,according to the National Tax Lien Association 99% of tax liens are redeemed by the property owner prior to foreclosure proceedings, so the odds are strongly with the investor that the return on investment will come sooner rather than later. If the lien you buy for a 5% premium is redeemed in 6 months that is actually an annualized return of 10%.

Only 28 states offer tax liens so one challenge that you may encounter if you consider tax lien investing is that they’re not available where are.  Some states have passed laws to bring tax lien auctions online and so the location based limitations are starting to disappear.  Florida in particular has been leading the way in bringing tax lien auctions online.  When using a Self-Directed IRA/LLC for Checkbook control of your IRA investments, you can bid in any state that you wish, however be aware that some states may require you to file an extra form known as a Foreign Entity Application before you can complete your investment.

For additional information on Tax Lien investing and other tax services, find out what tax services are available from Academy West Insurance.