Tax Lien Investing Guide

By PropertyClub Team
Sep 8th 2023
While tax lien investing can be very profitable, it also carries substantial risk. Novice investors must understand the legalities and potential pitfalls when they decide to explore this investment strategy.

hash-markWhat Is a Property Tax Lien?

A property tax lien is a claim filed by a county or municipality against a person or business owing taxes on their property. The lien specifically attaches to the property. All counties maintain some sort of list and proper documentation related to tax liens for their jurisdiction’s delinquent properties. Any property that has a tax lien against it cannot be sold, transferred, or refinanced until the owner satisfies the delinquent taxes, and the property tax lien is removed. 

hash-markWhat Is Tax Lien Investing?

Tax lien investing is an investment strategy in which investors purchase property tax lien certificates with the intent of collecting payments plus interest from the property owner. Tax lien certificates are created by a municipality to detail the taxes owed on the property and any interest or penalties due. Subsequently, the tax lien certificate is auctioned off to the highest bidder at a tax auction. Investors can purchase tax liens for as little as a few hundred dollars. Realistically, the cost is usually over a thousand dollars.  

Property tax liens are similarly purchased the same way actual properties are bought and sold at auctions. Depending on the municipality, an auction can be held at a physical location or online. Tax liens are typically auctioned off six months to a year after the property owner becomes delinquent. The prospective investor who is willing to pay the highest premium receives the tax lien. 

hash-markHow To Invest In Tax Liens

  1. Consider What Type of Property You Want to Buy
  2. Contact Your County Office For Auction Information
  3. Research Available Properties
  4. Attend the Tax Lien Auction and Bid
  5. Pay Back the Debt On the Tax Lien
  6. Collect Payments From the Property Owner

1. Consider What Type Of Property You Want to Buy

Before you start investing in tax liens, you need to consider which type of property liens you want to buy. Specifically, the investor should consider whether they want a residential, commercial, or land tax lien. 

2. Contact Your County Office For Auction Information

After making this decision, the potential investor can contact the local county’s office and find out the next auction’s details. Additionally, the office should be able to tell the investor about any rules and procedures for the auction, such as methods of payment and bidding structure.  

3. Research Available Properties

Once the investor has a plan and all the pertinent information, the buyer should consider conducting due diligence on the available properties. Most experts advise dividing the amount of delinquent taxes by the market value of the property. If the ratio is over 4%, the buyer should probably avoid investing in that property and tax lien. 

4. Attend the Tax Lien Auction and Bid

If you find properties that interest you, you'll need to attend the auction so that you can bid. Tax lien auctions are straightforward, and the highest bidder will win the tax lien. In many counties you can also attend the auction virtually and make bids online. 

5. Pay Back the Debt On the Tax Lien

After winning a tax lien auction, the investor will need to pay the debt on the lien to the issuing municipality. In most states you'll have to make this payment immediately. Afterwards you'll be able to collect the tax lien certificate and start collecting money plus interest from the property owner. 

6. Collect Payments From the Property Owner

Once you hold the tax lien, the property owner will be required to make monthly payments to you for the debt plus interest. They'll typically have between 6 months to a 3 years to pay you back plus interest. You can expect to collect around an annual interest rate of 10-12% in most states. If the owner doesn't make the scheduled payments, you will start the foreclosure process, so that you can force the sale of the house so that the owner repays you. 

hash-markHow To Earn Money Through Tax Liens?

So, how exactly do you earn money by purchasing tax liens? First, it’s important to note that tax liens are more common on properties that have already been paid off and do not have a mortgage lien on them. Specifically, if a property owner has defaulted on their payment, the mortgage lender will more than likely start the pre-foreclosure process. If the mortgage company does not pay the taxes, more than likely, a tax lien will be issued for the property. You can purchase the liens at an auction sale. You will earn a profit on the tax lien when the property owner pays the accrued interest and fees to satisfy the lien. 

If a property owner fails to satisfy the tax lien during the redemption, all mortgage liens and other liabilities on the house will be extinguished, and the title of the property will be clear and free for the purchaser of the property tax lien.

During the redemption period, which is defined by state laws, the property owner can satisfy the tax lien. The investor will earn money through the interest and penalties accumulated on the lien until it is satisfied. To be considered completely satisfied, the property owner must pay all the principal, interest, and penalties accrued on the property tax lien. Interest can range anywhere from 5% to 36%, depending on the state. Moreover, if the investor paid a premium for the property tax lien, this property tax lien may be added to the repaid amount in some instances. 

The repayment or redemption period usually lasts anywhere from six months to three years, depending on state laws. However, in most cases, the property owner can (and will) pay the lien in full before the redemption period expires. 

If the property owner cannot satisfy the tax lien before the redemption period expires, you will now become the property owner. As such, you should be prepared to either sell the property “as is” or make renovations and sell the property or rent it out. Overall, it’s essential to be ready for the possibility that the property owner will not satisfy the tax lien. 

hash-markTax Lien Investing Pros

1. Tax Liens Are High Yield Investments

The biggest advantage of investing in tax liens is that they are typically high-yield investments. You can make anywhere from 10% to over 20% or more on your investment with tax liens, depending on the location of the property as each state sets limits for how much interest can be charged. 

2. Tax Liens Investing is Safe

Another benefit of tax lien investing is how safe it is because your investment is secured by the property. Additionally, tax liens have priority over other liens or debts the property owner may have. You even have priority over mortgages. So if the seller has to sell, your tax lien plus interest will be paid off first. 

hash-markTax Lien Investing Cons

1. Tax Lien Investing Requires Experience

In general, investing in property tax liens should not be conducted by novice investors or those with little to no experience in this area of real estate investing. Mainly investors should be very familiar with how tax lien investing works to ensure that they can collect their money back from the property. 

2. Some Properties Are Risky Investments

Sometimes, you can lose money when investing in tax liens. For example, an abandoned or dilapidated property, located in the middle of a crime-ridden neighborhood, is probably not a good investment regardless of the interest rate or the rate of return. Likewise, properties with known or suspected environmental issues, such as chemical deposits or other hazardous materials, are, in general, not suitable investments either. 

3. You Need To Be Familiar With the Law

Lien owners should probably understand their legal responsibilities after they receive their lien certificates to avoid common legal missteps. Typically, there is some sort of legal requirement that the lien owner notifies the property owner in writing about the acquisition. Specifically, the lien owner must inform the property owner of the amount of time that they have to satisfy the tax lien. Additionally, there is typically a second or final notification required to be sent to the property owners, explaining that their redemption period is about to end, and that payment must be paid before the expiration date. 

hash-markReal Estate Investing Through Auctions

Purchasing distressed tax property at auctions can, in most cases, be a steal for investors. However, savvy investors should check out the property locations to ensure that the land is worth it. For example, what good is it to buy a property that routinely floods? As this would not be a smart investment. Additionally, investors should remember that they should have cash on hand when bidding at properties at an auction as most auctions require the investors to put a down payment or pay the full amount of the property within a short period. In other words, this is not the type of investment that you can get into without having liquid capital readily available. 

hash-markSetting Up Your Own Real Estate and Property Tax Lien Investing Business

You can always start up your own real estate investment business, provided that you have enough resources and capital. Additionally, if you have enough expertise on the state regulations on tax liens in your location, you can actually begin buying property tax liens rather quickly. Among the most important things to do is to examine the property liens that you’ll be purchasing. Physical examination is required, but given that it can be so time-consuming, you should limit your searches to someplace you can drive to.

In recent years, tax lien investing has gained immense popularity. This was mostly spearheaded by the 2008 real estate crash, where we saw many homes being foreclosed upon due to both past-due mortgages and tax liens. These events encouraged investors to learn more about this niche in real estate investment. 

Although profiting in tax liens can be a slow process, it is still a very hidden investment sector and real estate. In general, by investing in tax liens, your capital will go towards something profitable and realize some type of return over a certain amount of time. However, only when you learn the fundamental principles of investing in tax liens, you will then generate substantial profits. 

hash-markShould You Invest in Tax Lien Certificates?

Investing in tax lien certificates in distressed properties is a solid investment opportunity for most investors. However, investors will have to conduct due diligence to determine whether this is a good deal. For example, the investor should check and see whether the property owner is on the verge of bankruptcy. Because in that event, the IRS and the bankruptcy trustee could potentially override the property tax lien. With that being said, if this sounds like something you are interested in, you should probably work towards getting more knowledge about the industry, which can be done through a mentor or your own primary research of property laws and ordinances in your municipality.

hash-markTax Lien Investing Bottom Line

Investing and property tax liens can be an excellent venture for an experienced investor within the real estate market. Those investors who have experience and take the time to conduct proper due diligence can generate substantial profits. However, given the unique risks involved in this type of real estate venture, it is probably not appropriate for inexperienced investors.