The last thing any real estate or note investor wants is to have a tax foreclosure on the their hands. A tax foreclosure could potentially wipe out the hard earned money &/or equity you have in a property investment, mortgage note investment, or even a personal residence, vacation home or an inherited property.

In the short video below, I discuss how property tax foreclosures affect mortgage note investing, how we can check for unpaid taxes during the due diligence prior to investing in a mortgage note and how we can make sure our borrower pays the taxes once we own the note.

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Note investing can be an excellent way to generate passive income and diversify your investment portfolio. However, it’s important to be aware of potential hazards to ensure that your investment is protected. One of the most critical hazards to look out for is whether the borrower is paying their property taxes.

In most cases, when you invest in a note, you become the lender and hold a lien against a property’s title. As the lender, you become responsible for the payment of property taxes on the property if the borrower fails to do so. Failure to pay property taxes can result in a tax lien being placed on the property. This tax lien can take precedence over your lien resulting in you losing your investment or ending up with less than you bargained for.

It’s essential to do your homework to ensure you are investing in a property with a borrower who is up-to-date on their taxes. Before investing, you should get a copy of the borrower’s tax bill and payment history for the property. This information should give you insight into the borrower’s payment habits, potential delinquencies or liens, and any upcoming deadlines.

If you’re not comfortable reviewing the tax information yourself, consider hiring a property management company, an attorney, or an independent third-party service to review the information on your behalf.

Another way to protect your investment is to include a mortgage clause in your loan agreement. A mortgage clause stipulates that the borrower is responsible for taxes and insurance on the property. As the holder of the lien, you have the right to monitor the payment of the borrower’s taxes and insurance and pay it on their behalf if they don’t.

In conclusion, note investing can be a lucrative investment strategy, but it’s important to be aware of the hazards and protect your investment. Ensuring that the borrower is paying their property taxes is a critical step in mitigating risk in note investing. Make sure you review the borrower’s tax bill, payment history, and include a mortgage clause in the loan agreement to ensure that you are protected. Remember, prevention is always better than cure, so be careful while investing, and your investment will grow.