Regulations for a Tax Lien Investment Fund

by Dennis Hartman

Investors need to learn a number of things about the opportunities they pursue, including the degree of risk involved, the possible gains and the cost of investing. Outside regulations that affect an investment market are significant because they control the decisions investors can make. The few regulations on tax lien funds deserve consideration for their effect on investors.

Definition

Tax lien funds are investment products that contain unpaid property tax debts. When property owners, including businesses and individual homeowners, can't pay their property tax bills, the agency that assess property taxes places a lien on the property. Before selling the property or to avoid an eventual eviction, the property owner must pay this lien, which increases in price over time because of interest and late fees. Investors who buy tax lien funds pay lump sums for the rights to collect these back taxes in place of the government agencies that placed the liens.

Regulators

In most cases, individual counties place tax liens. However, states oversee tax lien funds and regulate the investment process. Although state laws are always changing, as of 2011 about 30 states had policies in place to sell tax lien funds to investors. In states where tax lien funds are permissible, counties auction off liens. Fund managers buy these liens and resell them to individual investors. Some states use in-person auctions; others allow online, anonymous auctions that are largely unregulated and allow anyone to participate.

Terms

Each state has its own terms for how tax lien funds operate. One of the key regulations that affects investors is how long liens last, and how much they charge in interest and fees. These directly control how much money investors stand to receive, and how quickly. For example, in Illinois tax liens last two years, but farmland has a lower interest rate than residential and commercial property, meaning farmland liens pay less to investors. Arizona's tax lien redemption period -- the amount of time property owners have to pay -- is three years, with a 16 percent interest rate that is higher than that of most states.

Outcome Policies

Regulations also control what happens to tax lien investment funds when the liens they contain expire. Besides setting the duration of the lien, state regulations govern the eviction process that lien holders can begin once liens expire. Evicting property owners and selling the property at auction is subject to state and county regulations, and it might require notifying the property owner and posting a notice of sale. Investors who buy into tax lien funds should know how the fund manager processes evictions, and how long the process will take before resulting in payment, as well as any fees associated with the process if property owners don't pay their liens before expiration.

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