Tax Lien Investing: A Guide to the Basics

Aug 12, 2018 Property News

Tax Lien Investing: A Guide to the Basics

If you’re looking for a great way to acquire investment properties for cheap or just to make a good return on investment with minimal risk, tax lien investing is one great way that you can do so. Buying tax liens gives you a priority claim on a piece of property over almost every other debtor and can provide you with returns in excess of 18%! It’s not for everyone and there are still some risks involved in the entire process and you need to research properties, but by and large you can get a great return on your money.

Tax Lien Investing Basics
Essentially a lien is any right to a property that someone has. There are numerous type of liens, legal liens, mortgage liens, and personal liens to name a few. Tax liens are rights to a property based on unpaid taxes.
If someone hasn’t paid their taxes for more than a year, the local government places a lien on their property and then sells the lien to investors. The local government needs money to fund its daily operations, so it will sell the lien to investors for to the highest bidder and then keep the spread on the legal limit for the interest on the property. Tax lien sales are done differently from state to state, but essentially the goal is the same.

How You Profit
Essentially, you can profit in two ways from investing in tax lien certificates. The first and most common way is that the lien is paid back in full and you get the keep the principal that you paid plus the interest rate that was agreed on at the time of purchase.
But even if the taxes aren’t paid off you can profit. If the taxes aren’t paid off in the time frame on the tax lien certificate, you can start foreclosure proceedings on the property. This allows you to take control of the entire property and you can even get full rights to a valueable property for a minimum amount on the certificate. This makes it a great method for people buying investment properties, but for this to happen you have to get a little lucky.

Tax Lien Investing

Advantages to Investing in Tax Liens

There are several advantages to participating in tax lien sales. Some of the biggest are:
• High interest rates and the opportunity to maybe foreclose
• Priority over all other liens (except other tax liens)
• Enforcement rights, but the local government usually still handles the actual enforcement

Risks of Tax Lien Investing
However, there are still some risks to putting your money in tax liens that you need to be aware of before you take the plunge. The biggest risk that you face is from the property itself not being worth the amount of money that you need to cover the actual lien. However, there are several ways that you can mitigate this risk. First, if you are completely unaware, consult with a local real estate agent. You can also look at home values that have been published by local governments. A visual inspection of the property and the neighborhood should be high on your agenda as well. While you can’t get a very close look at all the buildings, make sure that the property is in visually good shape and that it is in at least a fairly good neighborhood.

Especially when you are just starting out, the best property investment strategies will involves only buying tax lien certificates that are much lower than the appraised property value on properties that are in visually good condition

The other big risk in tax liens is having to compete with other liens from state and federal taxes in addition to your local taxes. When you’re looking for properties, have the deed to the home investigated before you go to place a bid. If you find that there are federal and state tax agencies with liens on the property already, stay away because the foreclosure hearings might get too tricky.
Preparing for a Tax Lien Sale

Tax Lien Investing

Every state or county does their tax lien sales a little bit differently, so make sure that you find out the different rules to the auctions before you show up to bid on properties. Also attempt to find out:
• When and were the sale will be taking place
• A list of the properties being auctioned
• Rules of the sales
• If there are any unsold certificates from the last sale
• What is the interest rate and how is it calculated?

A Final Piece of Advice
Finally, when you’re starting to invest in tax liens, remember that while they tend to be safer investments, they are by no means risk free. Don’t put all of your money into them or into one tax lien in a certain neighborhood. Instead, try to spread out your risk a little bit over several properties and use tax liens as a good part of your overall investment strategy. If you do this you’ll be well on your way to a successful career in tax lien investing!