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How To Invest In Tax Liens - A Beginner's Guide

Learning how to invest in Tax Liens is a strategy where the government files a claim against an individual's assets for non-payment of taxes. This can lead to above-average returns for private investors, but it is crucial for first-time buyers to understand regulations and potential traps.

William Willis
Jan 16, 20242803 Shares38397 Views
Learning how to invest in Tax Liensis a strategy where the government files a claim against an individual's assets for non-payment of taxes. This can lead to above-average returns for private investors, but it is crucial for first-time buyers to understand regulations and potential traps.
Property liens carry significant risk, making them not suitable for everyone. However, it offers exposure to real estate without owning property.
This guide provides an overview of tax lien investing, aiming to educate investors on the ins and outs of this investment opportunity. It is a valuable way to diversify holdings and make informed decisions.

What Is Tax Lien Investing?

When a property owner does not pay their tax bills, a claim known as a lien is placed on their asset. If a person or company does not pay their property taxes, a tax lien will be imposed on their property.
Repaying the obligation, including any penalties and interest, is usually the only way for a homeowner or landowner to get a property tax lien removed before it expires.
The initial entity that places property tax liens on taxpayers is the local government, which might be a town, city, or county. Tax lien certificates are becoming more popular, even though many governments still have the authority to collect the obligation themselves.
If you purchase one of these certificates, which are often sold at public auctions, you are essentially agreeing to pay the taxes that the municipality is due. You will also have to get the property owner to pay you back for that.
The municipality gets paid for the overdue taxes in full when they sell tax lien certificates to investors. Those investors, who are ready to take on some risk, get interest payments when the property owners pay off the obligation.
A couple is sitting in couch and working on laptop.
A couple is sitting in couch and working on laptop.

How Can I Invest In Tax Liens?

Like real estate, property tax liens can be bought and sold at auctions by investors. Investors can participate in the auctions in person or online and place bids on the premium they are willing to pay or the interest rate on the lien.
The lien is granted to the investor who pays the greatest premium or accepts the lowest interest rate. The rate of return that the successful bidder receives is reduced when buyers engage in bidding wars for a certain property.
Prior to purchasing a home with a tax lien, potential buyers should calculate the total cost of repairs and any other unforeseen expenses that may arise. Property owners may face additional legal challenges after purchasing these properties, such as evicting the present tenants with the assistance of a lawyer, property management, the police, or all three.
The first step for anyone looking to buy a tax lien is to choose if they want to put their lien on residential, commercial, undeveloped, or improved property. Next, they should get in touch with the office of the county or municipal treasurer to inquire about the next auction's schedule, location, and procedures.
If an investor wants to know whose property liens are going to be auctioned off and under what conditions, they can contact the treasurer's office. Any necessary pre-registration steps, acceptable payment methods, and other specifics will be laid out in these regulations.

How Does Tax Lien Investing Work?

Engaging in tax lien investing sets you on a unique path distinct from the conventional stock market or bond investments. This unconventional approach involves a process that necessitates a comprehensive understanding. Here's an exclusive breakdown of how tax lien investing operates:
  • Origination of Tax Lien Certificate by Local Municipality -Local governments levy property taxes to support various programs and services. When a property owner defaults on their property tax payment, a lien is imposed, leading to the creation of a tax lien certificate. This certificate comprises details like the outstanding tax amount, along with any accrued interest or penalties. If the property owner persists in non-payment, the government retains the right to foreclose on the property.
  • Auctioning of Tax Lien Certificate -In 28 states, governments have the authority to sell tax lien certificates to private investors as a means to expedite the recovery of their losses. This transaction typically occurs at a tax lien auction, where the certificate is awarded to the highest bidder.
  • Competitive Bidding by Investors -Investors partake in the auction process, offering bids based on either the cash value they are willing to pay for the certificate or the interest rate they are willing to accept. In the case of cash offers, the highest bid secures the certificate. Alternatively, for interest rates, the lowest bid emerges victorious. It's crucial to acknowledge that bidding wars can drive down the interest rate and consequently, the potential profit.
  • Transfer of Ownership to Winning Investor -The successful bidder in a tax lien auction assumes ownership of the tax lien certificate. This, however, doesn't confer ownership of the property. Instead, it grants the right to take possession of the property through foreclosure or receive payment when the homeowner settles their tax bill.
  • Immediate Payment of Owed Taxes by Investor -Upon winning a tax lien auction, the investor becomes immediately responsible for settling the outstanding tax bill, encompassing any interest or fees. Subsequently, the homeowner is allotted a specific timeframe before the redemption period deadline, during which they must make payment to the new investor to avert foreclosure.
  • Outcome: Repayment or Foreclosure -The acquisition of a tax lien certificate leads to two potential scenarios: either the homeowner fulfills their property tax obligations, resulting in the investor recovering their initial investment along with the agreed-upon interest rate; or the homeowner fails to meet their property tax obligations, allowing the investor to commence the foreclosure process. Depending on the state, there may be a foreclosure initiation deadline post-purchase, and failure to act within this timeframe may jeopardize the investor's right to collect their investment.
It's noteworthy that the situation rarely progresses to foreclosure, as the majority of homeowners settle their tax bills before reaching that stage. Understanding these intricacies is pivotal for individuals venturing into the distinctive realm of tax lien investing.

Disadvantages Of Investing In Property Tax Liens

Investors should conduct their due diligence before diving into the world of property tax liens, despite the fact that these assets can provide high-interest rates. In most cases, tax liens are not a good choice for inexperienced investors or those without a solid understanding of real estate.

Neglected Properties

Additionally, investors should familiarize themselves well with the property that the lien is actually attached to. This can give them a better chance of really getting their hands on the owner's cash. No matter how low the interest rate seems, it's probably not a good idea to purchase a rundown or deserted house in the middle of a poor neighborhood.
It is possible that the owner of the property is wholly unable or unwilling to pay the outstanding tax. Properties that have suffered environmental degradation as a result of things like chemical spills or the disposal of dangerous items are likewise not appealing.

Not A Passive Investment

Upon receiving their certificates, lien owners should be aware of their obligations. In most cases, there is a deadline by which they must provide written notice to the property owner of their purchase. If payment is still outstanding when the redemption period is almost over, they are also often obligated to issue a second letter of notification.

Expiration Of Tax Liens

Liens for unpaid taxes do not exist in perpetuity. As soon as the redemption term ends, many of them expire. The right to collect any outstanding sum from the debtor is lost the moment the lien is no longer valid. The lienholder may find additional liens on the property during foreclosure, making it very hard to secure the title.


Property liens have attracted the attention of several commercial entities, including banks and hedge funds. Consequently, they have successfully outbid their competitors and reduced yields.
Some private investors have given up trying to locate lucrative liens because of this. On the other hand, there are funds that put money into liens, which is a great method for new investors to get their feet wet with less of a risk.

Tips For Tax Lien Buyers

Homebuyers should also investigate all houses thoroughly. It is possible for the lien amount to exceed the property's current market value in certain situations.
Calculating the overdue tax lien's face amount divided by the property's market value is one way for investors to assess risk; a larger ratio indicates more risk. Further, the bidder may not be able to acquire the title of the land due to existing debts.
For each parcel of land in a certain county that has a tax lien, a unique number is put on it. Potential buyers can quickly and easily get information about these liens by searching for their number.
The county usually makes this process easy to accomplish online. Each number corresponds to a piece of information kept by the county: the address, owner's name, assessed value, legal description, and conditions of the property and any buildings on it.

How To Profit From A Lien

There are 2,500 different jurisdictions (counties, townships, and cities) where you can invest in tax liens. For information on the publication and public review dates of these taxes, investors should get in touch with the local tax revenue official.
There is a pre-sale advertising period for property tax sales, during which the owner, legal description, and amount of delinquent taxes are listed.
Any investor who buys a property tax lien must pay back the issuing town the entire principal amount without delay. Payments are made to the lien certificate holder and the issuer of the tax lien is responsible for collecting principal, interest, and penalties.
If the lien certificate is not on file, the issuer will also collect it. The sum plus interest, which differs from state to state but is usually 10% to 12%, must be repaid by the owner of the property to the investor.
Six months to three years is the typical duration of the repayment schedule. The investor can go ahead and foreclose on the property if the owner doesn't pay the lien by the due date.
A good alternative is to invest passively via an NTLA member institution. To become a member of the National Tax Lien Association (NTLA), which accounts for about 80% of the tax lien certificates sold, one must first pass a background check, pay dues, attend webinars open only to members, become certified as a tax lien professional, and network with other professionals in the field.

FAQs - How To Invest In Tax Liens

What Factors Should I Consider Before Investing In Tax Liens?

Before diving into tax lien investments, it's crucial to evaluate factors such as the property's location, the local real estate market, and the specific rules governing tax liens in that area. Understanding these elements can enhance your investment strategy.

Are There Risks Associated With Tax Lien Investing?

Yes, tax lien investing carries risks. One significant risk is the potential for property owners not to redeem the lien, leading to foreclosure. Additionally, market conditions and legal complexities can impact returns. Conduct thorough research to mitigate these risks.

How Do I Participate In A Tax Lien Auction?

To invest in tax liens, you typically participate in auctions held by local governments. Research the jurisdictions where auctions are conducted, understand the bidding process, and be prepared to compete with other investors to secure a tax lien certificate.

Can I Invest In Tax Liens With A Limited Budget?

Yes, tax lien investing is accessible to investors with varying budgets. Some tax liens may have lower entry costs, allowing individuals with limited funds to participate. Explore different options and find opportunities that align with your budget.

What Happens If The Property Owner Doesn't Repay The Tax Lien?

If the property owner fails to repay the tax lien, the investor may initiate foreclosure proceedings. This process can vary by jurisdiction, so it's essential to understand the local laws governing tax liens and the specific steps involved in foreclosure.

Final Thoughts

Understanding how to invest in Tax Liens can be a profitable option for experienced investors who have a thorough understanding of the real estate market.
However, unsophisticated investors may face potential risks, as they may end up with a property that is not redeemed by the owner and has no value.
This can result in the property becoming the investor's property. Other investment opportunities include buying a home in foreclosure or at auction. If interested, it is recommended to consult a real estate agent or financial adviser.
Tax lien investing involves due diligence, so it may be beneficial to invest passively through an institutional investor who is a member of the National Tax Lien Association (NTLA).
The NTLA can match up NTLA members with the right institutional investors, making the process easier for beginners. Despite the potential for generous returns, investors should be aware of the fine print, details, and rules.
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