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One investment that fits very well into your Self-Directed IRA are tax lien certificates. They are reasonably simple to understand and with a modest amount of research you can purchase certificates that will provide you with safety and a very attractive rate of return. Approximately half of the states are tax deed states, which means the actual property is auctioned off at a county place of location, and half of the states are tax lien states, meaning you can purchase and become holder of a tax-lien certificate.

A tax lien is a lien on a property for not paying taxes. Every year owners of real estate have a financial obligation to pay taxes on their real estate. If they are not paid, the county government will either auction a tax lien certificate or it can be purchased over the counter for the property. The winning bidder is in essence paying the taxes on behalf of the real estate owner and receives a tax lien certificate as proof of purchase. By paying these taxes, you are also helping the county as this money is used for roads, education, fire, and police. The benefit to you is you hold first position lien on the property above all other lien holders.

As the owner of the certificate, you can expect one of two possible outcomes. One, the owner will redeem his property by paying you, the lien holder, all the back taxes plus interest and fees, or two, if the owner does not pay you, since you are in first position on the lien, the bank holding the mortgage then has the option to pay you or relinquish the land or home to you as payment for the back taxes. Due process of foreclosure is required.

After purchasing the tax lien certificate, you wait for the redemption period if the state has one, which is typically one year (some state are more and some are less), or until the property owner pays the back property taxes owed. If the property owner decides to pay their tax obligation, he or she must pay a visit to the county tax collectors office where they will repay what you paid to acquire that tax lien certificate plus a pre-determined amount of interest. The interest rate is subject to state requirements. The county government will contact you, ask you to return the certificate, and upon receipt of the certificate, the county will generate a check in the amount you paid to acquire the tax lien certificate plus interest.

This can be a very safe and lucrative investment. Your interaction is with the county not the homeowner and your investment is backed by real estate or land. Tax Liens fit very nicely inside your Self-Directed IRA. As with any investment, be sure to do all of your research. You want to learn all you can about the property. It is imperative to do a proper title and bankruptcy search on the property. A certificate holder does not have priority over creditors and the Internal Revenue Service in a bankruptcy situation. This could eliminate the value of your tax lien certificate. Once you have checked out the financial and title situation of the property, you or someone on your behalf, should visit the property. There is a potential risk in purchasing a property, note or tax lien certificate sight unseen. Know what you are buying and how much you are willing to pay for it.

Look at each scenario and decide what your strategy would be if that scenario came to pass. Could you make money if you had to foreclose? Would you want to own the property? What would you do with the property if you did have to foreclose? Is the property going to need repairs?

There are tremendous opportunities with tax lien certificates. Be cautious, be smart, and find tax lien certificates that will enhance your portfolio.


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