How to Invest in Tax Liens

Knowing how to invest in tax liens can help your portfolio have a healthier return than other investment products, including stocks and bonds.

Most tax liens originate because of local city or county property taxes that have gone unpaid.

The lien is issued as a first priority creditor so that if the property sells, the tax gets paid.

That's nice for a long-term payment strategy, but local governments need money right now.

Many will sell the tax lien that has been issued to investors who will then take on the responsibility to collect the amount.

Tax liens are often purchased on a percentage of the dollar.

If you have a 80% purchase price, then you'd pay $800 for a $1,000 tax lien.

Is the Investment Into Tax Liens Safe?

Although tax liens are a relatively safe investment, they aren't usually a good short-term investment.

Once a tax lien is issued, the home's owner doesn't really have much motivation to pay off the lien until they try to sell the property.

It will just sit until something needs to be done about it. Tax lien investors can initiate collection procedures, but receiving payments is somewhat rare.

There's also a precedent that has been set recently regarding tax liens that may make investors have a lower priority.

There have been bankruptcy judgments issued where the tax lien that was purchased by an investor and a bankruptcy order wiped them away, leaving the investor holding nothing afterward.

Investors are also subject to the administrative issues of local governments.

A local government can say that they sold the tax lien in error and all they have to do is refund the investor's investment plus fair interest.

When interest rates are below 1% and a tax lien has been held for 5 years, that's a terrible return – especially when a paid tax lien can bring a return of above 20%.

95% of Tax Lien Certificates Are Going To Redeem

The good news is that you don't need to have a lot of money to invest into tax lien certificates.

The bad news is that you need to be proactive in your efforts at collecting the cash.

Those efforts do eventually pay off in one of two ways.

You will either get the full debt that you purchased and earn a direct return or you'll be able to foreclose on the property after a certain amount of time and take physical possession of it.

Tax lien certificates are issued for any properties.

Homes, unimproved properties, and even commercial locations are all investment opportunities.

The goal isn't to take possession of a property, however, because the foreclosure process can be lengthy.

Homeowners can fight the process every step of the way and they can often pay off the lien at any time, negating the foreclosure and sticking you with the filing fees.

Look for tax liens that are affordable, but are also properties with which you'll want to work in the future.

If you foreclose and take possession, then the tax responsibilities suddenly become yours.


You Can Sell Properties At Auction

Tax laws do prevent former homeowners that were foreclosed upon from bidding at auction on their own properties.

That's good news for tax lien investors, but an auction is a risky bit of business.

There's no guarantee that the property will sell for market value.

You may not receive any interest in the property whatsoever.

This means the goal is to find properties that are worth more than what is owed on them.

If you have a high debt amount that must be cleared from a property sale, then the potential for profit is greatly reduced.

Some bidding systems can affect the amount of equity that a certificate holder has.

Others affect how much interest is going to be returned.

If there are competitive bids, the investor willing to take the lowest interest rate and/or equity is going to be awarded with the deed.

Sometimes a premium bid is offered instead.

If there are $2,500 in delinquent taxes, an investor might bid $3,000 and then be allowed to charge the maximum amount of interest on the delinquency to recoup their investment.

Knowing how to invest in tax liens ultimately means knowing what each local county's procedures happen to be.

Look for value purchases in the unlikely event of a foreclosure, clear out as many administrative errors as possible before spending money, and you'll be able to achieve a good average return.

Posted on Mar 24, 2015


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