Private Tax Liens And The Purchaser Of A Tax Lien

In an economic downturn, if people are unable to pay their mortgages, they are usually unable to pay their taxes. The inevitable result is that debts are accrued and it is a case of which creditor, either the mortgagee or the taxation authority, will recoup the debt first. This provides a small window of opportunity for the purchaser of a tax lien to satisfy the debt and receive the right of recovery along with a handsome interest rate penalty, and a contingent right of foreclosure should the debt remain outstanding. Herein lays the potential for a windfall.

Income Tax and Property Tax
Governments use personal income taxation to influence the various sectors of the economy.
While it should be fair and in proportion to both the individual’s ability to pay and the benefit derived from the government, taxation influences the working spending and saving patterns of an individual.

Property tax is predominantly a local tax, and taxation is used by a government or government authority to fund public expenditure that is of communal benefit to the community. Almost 90% of local municipal revenue comes from property taxes.

No Mercy
Due to the pressure of the recent US mortgage crisis and economic recession, property owners have often found themselves unable to pay their taxes. The paying of tax is a legal obligation owed to the government or delegated authority such as a municipal council, and when these budgets for public expenditure are in shortfall, measures are implemented to recoup the lost income and maintain public funding.

If left unattended to, the shortfall in public funding causes a massive drain on public revenue to such an extent that the local neighborhoods deteriorate, as schools, hospitals, roads and health services fall into disrepair. As the problem escalates, the value of properties decline and it may even be the case that the taxes owed by a property owner are worth more than the property itself.
To avoid this mayhem, tax authorities vigilantly resort to the age old custom of selling the right to collect taxes to a third party.Accordingly, a lien is placed upon the property and along with the right to collect unpaid taxes; the right to a set interest rate penalty is also transferred to the third party.

Therefore the purchaser of the lien has an attractive return on their investment along with the added benefit of foreclosure if due process is followed and the tax debt remains unpaid.
If this indeed is the case, the purchaser of a tax lien is able to acquire the ownership of a property, and depending on the total investment, has the potential to receive an attractive return.

Observing due process of law, often the purchaser of a private tax lien is contested for acquisition of the property by other lien holders such as a mortgagee over the property. However, in recent times, sub-prime loans have been increasingly popular, and these mortgagees who invariably do not utilize an automatic tax payment facility such as an escrow account for the financed property, have found that they are able to securitize bad debts into bundles, and on-sell them to other investors. This often leads to the inability to identify who exactly owns the mortgage not for a given property, and so the purchaser of a tax lien who institutes proceeding to foreclose on a property is able to receive title to the property unchallenged.

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