Tax Lien Repayment Deadlines
Let's revisit tax liens in general.
Does a property owner in the U.S. pay (z.B. If you don't pay your property tax on a property with a single-family house, the county can issue a tax lien on the property, a tax lien. Tax Lien Certificates can then be purchased by investors at auctions. If an investor buys this certificate, he pays the debtor's property tax, so he advances the amount.
This is the beginning of the "Redemption Period" for the property owner. This period varies depending on the state. Example: In Indiana, the redemption period is only 1 year, while in Arizona it amounts to a full 3 years.
What does it mean for the debtor, how does it go on after the Tax Lien auction, what possibilities does he have?
The investor has paid the tax debt for the property owner for the time being. In principle you could compare advancing the amount for property tax with a loan. The debtor, thanks to this "loan", is initially paid the tax debt, but he must repay the amount with interest within a certain period of time, until the "repayment deadline".
The property owner has thereby the possibility nevertheless still to pay its debts and to be able to keep its property. The debtor is given more time to pay the outstanding amount.
In the USA, the property tax is much higher compared to Germany. On average, an ordinary household there has to pay 2.Pay US$200 in property taxes a year. In Germany, on the other hand, we only pay an average of €400 a year in property taxes.
Why is the property tax in the USA higher than here in Germany??
In the United States, all public facilities are financed with the proceeds from property taxes. These institutions include schools, fire departments, hospitals, police departments and many others. Now, assuming that property owners can't pay their property taxes, that means less money for the county to fund these important facilities. The individual counties are therefore very keen that the tax debt is paid sooner or later. Tax Liens buy debtors more time, allowing them to pay their tax debt 95 to 99% of the time after all.
As the property taxes in the USA are very high, this means a big financial burden for many citizens every year. Accordingly, it's not surprising that many property owners can't always pay this amount on time. As an investor you support the property owners, because you buy them more time to pay the debts.
What happens after an investor advances tax debt for a property owner?
From the time the Tax Lien is assessed on the property by the County, the redemption period begins to run.
In each state, the repayment period may vary. In the Distr. Columbia this is only half a year, whereas in Wyoming the period is set at a full 4 years. The owner can then pay off the tax debt in this time period. The sooner he pays, the lower the interest (or penalty). The later he pays, the more interest is added on top of the tax debt. According to this, it's best financially for the property owner to pay off his tax debt as early as possible. For the investor, on the other hand, the return is highest if the debtor does not pay until the end of the term.
=> The later you are paid as an investor, the higher your earnings on the Tax Lien investment, because you get more interest on your invested amount. Looking at your bottom line, you'll wish the debtor wouldn't pay until the end of the term.
Let's make some examples.
State of Arizona
| Object type | Single-family home |
| Property tax 2020 | Owner does not pay |
| 2021 February, Tax Lien | 1.800 US$ |
| Redemption period | 3 years |
| Annual interest | 16% |
In the state of Arizona, in February 2021, a tax lien (for 2020 tax liability) worth 1.800 US$ auctioned. The debtor has a redemption period of 3 years. In Arizona the annual interest rate is 16.
In February 2021 you will acquire this Tax Lien certificate. Provided the borrower pays at the end of the repayment period, you will get back your investment amount + interest for 3 years.
Your Tax Lien Investment:
Investment duration 3 years
| Your investment | 1.800 US$ |
| Positive interest | 864 US$ |
| Your payment in February 2024 | 2.US$664 |
1.US$ 800
Annual interest: 16%
Its payment after 3 years, in February 2024: 1.800 US$ + 3×16% interest = 2.664 US$
Positive interest rate: 864 US$
State of Iowa
| Object type | Single-family home |
| Property tax 2020 | Owner does not pay |
| 2021 June, Tax Lien | 2.000 US$ |
| Repayment period | 1 year 9 months |
| Annual interest | 24% |
In the state of Iowa, in June 2021, a tax lien (for tax liability in 2020) worth 2.000 US$ auctioned off. In Iowa the redemption period is 1 year and 9 months. The interest rate is 24% per year.
In June 2021 you buy this Tax Lien certificate. The debtor pays on time.
Your Tax Lien Investment:
Investment duration 1 year 9 months
| Your investment | 2.000 US$ |
| Positive interest | 840 US$ |
| Its disbursement in March 2023 | 2.840 US$ |
2.US$ 000
Annual interest: 24
Your payout after 21 months: 2.000 US$ + 42% interest = 2.840 US$
Positive interest rate: 840 US$
State of Illinois
| Object type | Single-family home |
| Property tax 2020 | Owner does not pay |
| 2021 March, Tax Lien | 2.200 US$ |
| Repayment period | 2 to 3 years |
| Annual interest | 36% (18% per half year) |
In Illinois, in March 2021, a Tax Lien (for 2020 tax liability) worth 2.200 US$ auctioned. Online auctions take place here every month. The repayment period is 2 to 3 years. The penalty interest rates are a whopping 36% per year, 18% per half year.
In March 2021 you acquire the Tax Lien certificate. The debtor pays after 2 ½ years.
Your Tax Lien Investment:
Investment duration 2 ½ years
| Your investment | 2.200 US$ |
| Positive interest rate | 1.980 US$ |
| Your payment in September 2023 | 4.180 US$ |
2.200 US$
Annual interest: 36% (18% per half year)
Your payment in September 2023: 2.200 US$ + 2×36% + 18% = 4.180 US$
Positive interest rate: 1.980 US$
Would you like to see more detailed examples of the calculation of tax lien returns? You are welcome to have a look at our article "Tax Lien Yield Calculation".
But what if the debtor does not pay the amount despite the repayment deadline?
If the property owner does not pay the tax debt, it is important for you to record the end of the redemption period in a calendar. you then have the possibility to apply for the Foreclosure. The debtor is then given a further, final deadline to pay his tax debt after all.
What are the consequences for the debtor if he does not pay even within this last deadline?
The owner of the land is then threatened with compulsory expropriation, i.e. the loss of his land with real estate.
And what does it mean for you, if the owner does not pay his debts also within the last term? then loses your deposited sum?
On the contrary, with repossession you have the opportunity to become the owner of the property. You could then, with a small investment, become the owner of a property (for example, with a beautiful garden and a high quality property) at a fraction of the actual property value!
As an investor, you can find out what you need to know about the repayment periods, how a foreclosure works and what this means for your investment in our Tax Lien Investor Coaching package. If you would like to know more about profitable tax lien investment, I look forward to welcoming you to the webinar.