Delinquent Debt: Invest Wisely

Investing in other people's delinquent behaviour can be a risky but profitable venture. One way to do this is to invest in property tax liens. When a homeowner fails to pay their property taxes, a tax lien is placed on the property by the county or city, which then auctions off the tax lien certificate to investors. This allows investors to collect payments with interest from the property owner or foreclose on the property. Another way to invest in delinquent behaviour is through credit card financing, where investors use credit card companies' money to fund their investments without giving up ownership. Additionally, investors can use other people's money through hard money loans, business partners, crowdfunding, home equity loans, and government-backed loans. These options provide access to capital and increase purchasing power, but they also come with risks such as high-interest rates and potential losses.

Tax Liens

A tax lien is a legal claim against the assets of an individual or business that has failed to pay taxes owed to the government. Tax liens are often overlooked by investors but can provide excellent rates of return for knowledgeable investors.

How to Invest in Tax Liens

Property tax liens can be purchased at auctions, either in a physical setting or online. Investors can either bid down the interest rate on the lien or bid up a premium they will pay for it. The investor who accepts the lowest interest rate or pays the highest premium is awarded the lien.

Before investing in tax liens, buyers should do their due diligence on the available properties. In some cases, the current value of the property can be less than the amount of the lien. It is also important to check for other liens on the property, as this can prevent the investor from taking ownership.

Tips for Tax Lien Buyers

To find tax lien investment opportunities, investors should contact their local tax revenue official responsible for collecting property taxes. They can also reach out to their city or county treasurer's office to find out when, where, and how the next auction will be held.

Disadvantages of Investing in Tax Liens

Investing in tax liens can carry substantial risk, and is generally not suitable for novice investors. It requires a significant amount of research and due diligence. Investors should be cautious of purchasing liens for properties with environmental damage or that are located in undesirable areas.

How to Profit from a Lien

After purchasing a tax lien, investors become the new lien owner and can collect payments with interest from the property owner. In some cases, they may also be able to foreclose and attain the title to the property. However, it is important to note that about 98% of homeowners redeem the property before the foreclosure process starts.

The National Tax Lien Association estimates that the United States generates approximately $21 billion in delinquent property taxes each year, with between $4 billion and $6 billion posted for sale to the private sector. While property tax lien sales can be profitable, they require a lot of research and carry substantial risk.

Tax Sale Properties

Tax Sale Process

The process of a tax sale typically involves the following steps:

• Notification of Delinquency: The property owner will receive a notice of delinquency from the tax collector of their parish or local municipality, informing them of the delinquent taxes, the amount due, the due date, any penalties or interest, and the consequences of non-payment.
• Notification of Tax Sale: Before the property goes up for tax sale, the local government must notify the property owner through certified mail, local newspapers, or public notices. This notice includes information about the taxes due, the date and time of the sale, the minimum bid, and the sale terms.
• Public Auction: The local government, through the parish sheriff or appointed official, conducts a public auction of the property to sell it and recover the unpaid taxes. Bidding usually starts at the amount of delinquent taxes and any associated penalties and interest.
• Notification of Sale: After the tax sale, the original property owner and the purchaser will receive a notice of the sale, which includes information about the purchaser, the tax sale certificate, and the redemptive period during which the original owner can reclaim the property.
• Redemptive Period: The original property owner has a period, typically three years for residential properties, during which they can redeem the property by paying the delinquent taxes, penalties, and interest. If the owner does not redeem the property within this period, the purchaser can initiate proceedings to obtain full ownership.
• Obtaining Full Possession Rights: If the original owner does not redeem the property, the purchaser can apply for a tax deed or title to the property, which may involve additional legal steps such as filing a lawsuit to quiet the title and remove any remaining claims or disputes.

Types of Tax Sales

There are two main types of tax sales:

• Tax Lien Sale: In this type of sale, the liens on the property are auctioned off to the highest bidder, who then has the legal right to demand lien collection, along with interest, from the property owner. If the owner is unable to pay the liens, the bidder can initiate foreclosure proceedings.
• Tax Deed Sale: This type of sale involves selling the entire property, including unpaid taxes, at a public auction. In some jurisdictions, a right of redemption may be offered after the sale, allowing the original homeowner to reclaim their property within a specified period by reimbursing the purchaser for the amount paid.

Online Platforms for Tax Sales

With the advancement of technology, many tax sales are now conducted through online platforms such as CivicSource and GovEase, which provide an accessible and intuitive bidding experience for participants. These platforms offer tutorials, training, and support to bidders, making the process more efficient and convenient.

Credit Card Financing

There are also credit cards designed specifically for financing healthcare costs. For instance, the CareCredit credit card offers promotional financing options for healthcare expenses, such as medical, dental, vision, and even veterinary bills.

It's important to note that credit card financing can come with certain risks. If you're not careful, it's easy to accumulate debt and end up paying high-interest rates. Before opting for credit card financing, be sure to understand the terms and conditions, including any applicable fees, interest rates, and penalties for late or missed payments. Additionally, keep in mind that failing to make timely payments can negatively impact your credit score.

Overall, credit card financing can be a convenient tool for managing cash flow and making necessary purchases, but it's essential to use it responsibly to avoid falling into debt.

Home Equity Loans

To qualify for a home equity loan, borrowers typically need a credit score of 600 or higher, verifiable income history, and equity in their home greater than 20% of its value. The application process is straightforward, and funds can be accessed within three business days after closing, with no closing costs. Repayment terms can be up to 30 years, and interest rates are often lower than other types of loans, making them a cost-effective option.

In addition to home equity loans, there are also home equity lines of credit (HELOCs), which offer a revolving line of credit with a variable interest rate. With a HELOC, borrowers can access funds as needed and make payments over a set period.

HELOCs

One of the main risks associated with HELOCs is the possibility of delinquency and foreclosure. If a borrower falls behind on their payments, the lender may initiate foreclosure proceedings to recoup their losses. However, this typically happens only if the borrower has significant equity in their home. If the borrower is "underwater" on their mortgage, the lender may choose to sue them personally for the outstanding debt.

The delinquency rates on HELOCs have been rising in recent years. In the second quarter of 2022, the delinquency rate on HELOCs was 2.3%, higher than the delinquency rate on mortgages for the first time. This trend continued into 2024, with HELOC delinquencies ticking up to 2.0% in the fourth quarter of 2023 and further to 2.1% in the first quarter of 2024. While these numbers are still relatively low, they indicate a growing number of borrowers struggling to keep up with their payments.

Another risk to consider with HELOCs is the variable interest rate. Many HELOCs have a variable interest rate, which means the rate can increase over time, making the payments more expensive. This can be especially problematic if the borrower has only been paying the interest on the loan and has not reduced the principal balance.

To avoid delinquency and foreclosure, it's crucial for borrowers to carefully consider their financial situation before taking out a HELOC. They should ensure they can afford the payments, including any potential increases due to rising interest rates. Additionally, it's important to have a plan for repaying the loan, as simply paying the interest will not reduce the principal balance.

For borrowers who are struggling to make payments on their HELOCs, there are a few options available. Lenders may be willing to modify the loan terms, such as lowering the interest rate or extending the repayment period. Government assistance programs, such as the Home Affordable Modification Program (HAMP), used to provide help for borrowers with HELOCs, but this program is no longer accepting new applicants. Borrowers can also consider filing for bankruptcy, which may allow them to keep their home and restructure their debts.

Frequently asked questions