How does this work? Well, unlike a stock market purchase, when an investor purchases a tax lien certificate he does not need to worry about sudden changes in the market. Rather, the investor becomes a lien holder with very strong legal rights. The investor will either:
- Earn a fixed and stated return on the amount invested in buying the certificate, or
- May foreclose and take title to the real estate backing the certificate.
The real challenge to investing in tax lien certificate comes when trying to avoid the various state deadlines and hidden traps which can hinder the inexperienced investor. Tax certificates usually have a maturity date of 2 years after April 1st of the year of issuance of the certificate; and, can only be enforced within 7 years from the date of issuance.
For Example: Paul J. Homeowner, who lives in Miami, Florida, doesn’t pay his property tax. Florida will send Paul a notice to pay the taxes or the state authorizes the county, in this case Miami-Dade County, to transfer the taxes owed on a property by selling a tax certificate to an investor. To get money quickly, many governments sell their liens, which they hold on real estate, to investors. The local government issues a tax lien certificate, giving private investors the senior lien on real property.
The government does virtually all the work for the investor, becoming, in effect, the investor’s bank. If the property owner pays the government the outstanding taxes due before the certificate reaches maturity, the government will send the investor the initial investment along with all outstanding interest due. On the contrary, if the property owner does not pay his/her taxes, the investor will have hit the lottery. The government will transfer to the investor the deed to the underlying property, free-and-clear. Tax Certificates are senior to all other mortgages and liens (including Federal tax liens). This means that the investor could take a property with an investment of approximately 8% of the value of the property (real estate taxes in Florida being constitutionally limited to 2% per year, thus giving a monetary exposure to the investor of 4% to 6% plus approximately 2% of administrative costs considering 2 to 3 years to acquiring the title).
The sale of tax certificates by the Tax Collector is required by state law to be conducted beginning on or before June 1 for the preceding year of delinquent real estate taxes. Delinquent taxes must be advertised for three consecutive weeks in a local newspaper. At the sale, bidding begins at an 18% interest rate and is bid down until the certificate is sold to the lowest bidder. When a tax certificate is redeemed and the interest earned on the face amount turns out to be less than 5%, a mandatory charge of 5% interest is due. Tax certificates are dated as of the first day of the year of the tax certificate sale and expire after seven years.
The certificate’s face amount consists of the sum of the following: unpaid real estate taxes, charge for delinquency (3% on the unpaid tax amount for April and May), Tax Collector’s commission (5% of the unpaid tax amount), June interest (1.5%), advertising and cost of sale- related charges.
It is important to remember the element of risk involved in the purchase of tax liens. Properties under the control of the Federal Deposit Insurance Corporation (FDIC) and Drug Enforcement Administration (DEA) may give those agencies priority over tax certificates and, thus, the investor could possibly result in the loss of an investor investment.
In addition, if the owner of a property for which a tax certificate has been issued and purchased by an investor becomes involved in a bankruptcy, it is the certificate holder’s responsibility to seek legal counsel to protect their investment. During bankruptcy proceedings the court may order the collection stayed until such time as the court enters a final order. While the bankruptcy court generally upholds the validity of the tax certificate, in many cases the court may allow partial payments over time and may reduce the interest rate payable to the certificate holder.
Además, si el propietario de un inmueble para el que un certificado de impuestos ha sido emitido y adquirido por un inversionista se ve envuelto en una bancarrota, es responsabilidad del titular del certificado de buscar asistencia legal para proteger su inversión
Individual certificates issued are transferable by endorsement at any time before they are redeemed or a tax deed is executed. A tax certificate transfer form may be obtained from the Tax Collector’s office. The assignment must be returned and recorded with the Tax Collector’s office. There is a fee of $2.25 for each transfer.
Any tax certificate can be cancelled if errors, omissions or double assessments are made. An error in assessment results in a change in the face amount of the certificate. In the event an error is discovered, the tax certificate may be cancelled or corrected by the authority of the Department of Revenue. In this case, the corrected portion or the cancellation shall earn interest at the rate of 8% per year, simple interest, or the rate of interest bid at the certificate sale, whichever is less. The interest is calculated from the date the certificate was purchased until the date the refund is ordered.
The issuance of a tax certificate on a parcel does not entitle the buyer to the property. The holder of a tax certificate may not directly, through an agent, or otherwise initiate contact with the owner of property upon which he or she holds a tax certificate to encourage or demand payment until two years have elapsed since April 1 of the year of issuance of the tax certificate. The redemption of a tax certificate can only take place at the Tax Collector’s Office.
At any time after two years have elapsed since April 1 of the year of issuance of the certificate and before the expiration of the seven years from the date of issue, the individual certificate holder may submit a tax deed application to the Tax Collector. Any certificate holder making application for a tax deed, shall pay the Tax Collector an application fee, a title search fee and all amounts required for redemption or purchase of all other outstanding tax certificates, interest, omitted taxes, and delinquent taxes relating to the real estate. A parcel assessed as homestead property on the current tax roll will have the amount equal to one-half of the current assessed value added to the opening bid. The tax deed is publicly auctioned by the Clerk of the Court and issued to the highest bidder. Pursuant to Florida Statutes 197.502 and 197.542, the tax deed applicant will be required to pay the one-half of the current assessed value added to the opening bid. The tax deed is publicly auctioned by the Clerk of the Court and issued to the highest bidder. Pursuant to Florida Statutes 197.502 and 197.542, the tax deed applicant will be required to pay the one-half assessed value on homestead property if there are no other bids in or to retain the tax deed.
Cav. Piero Salussolia , Esq.
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