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Understanding Tax Liens: A Guide to Investing in Property Debts

December 21, 2023 | Aliza Aviles


Curious about alternative investments with a real estate twist? Tax lien investing might pique your interest. You buy claims on properties with unpaid taxes, potentially earning hefty returns and even owning the land. But is it a golden path or a hidden pothole? This blog unravels the secrets, guiding you through the process, tips, and pros and cons of tax lien investing, so you can decide if this path leads to financial freedom or a bumpy ride. Buckle up, savvy investor, and let's explore this intriguing investment niche.


A tax lien is a legal claim placed on a property when the owner fails to pay taxes owed to the government. This lien is placed by the city or county that the property resides in. The lien serves as protection for the government’s interest in the property, which includes real estate and financial assets. Property with a lien attached cannot be sold or refinanced until the debt is paid off.


A tax lien certificate is issued by the municipality which reflects the amount due, plus any interest due. These certificates are then auctioned off to investors. But how does this all work?



How tax lien investing works.


Municipalities sell these tax liens to investors that pay the tax bill in exchange for the right to collect the money due, plus interest, from the property owners responsible for the lien.



  1. Placing the bid

Investors must bid for the tax lien certificate and how that works depends on the municipality. Auctions like these are legal in 28 states and allow the government to recover their losses quickly. Depending on what kind of auction it is, bids may be based on either the amount of cash someone is willing to spend for the certificate or the interest rate they’re willing to take on. If it’s a cash offer, the certificate goes to the highest bidder. If it’s the interest rate, it goes to the lowest bidder.


However, if you bid on a lower interest rate, your profit will be affected, and you’ll receive a lower profit.



  1. Winning the auction

Once you’ve won the auction, the tax lien becomes your responsibility, and you must pay all fees owed. Then the homeowner must pay you before a specific deadline or else they risk foreclosure on their property.



  1. Payment or foreclosure

When you buy out the debt, one of two things will happen: either the homeowner will pay their dues, or they won’t. If the property owner pays, you’ll make back your investment and then some depending on the interest rate you bid on during the auction. If they don’t, then you can begin the foreclosure process.



How to Get Started:


  • Do your research:
    • Understand the different types of tax liens available: There are two main types of tax liens: general tax liens and special assessment liens. General tax liens are liens placed on a property for unpaid property taxes. Special assessment liens are liens placed on a property for unpaid special assessments, such as for street paving or sewer installation.
    • Research the market conditions for tax lien investing: The tax lien market can vary depending on the location. Some areas may have a high volume of tax liens available, while others may have a limited supply. It is important to understand the market conditions before investing.
    • Consider your own risk tolerance and investment goals: Tax lien investing can be a risky investment. It is important to understand the risks involved before investing.


  • Reach out to your local tax revenue office:

    • Obtain information about upcoming tax lien auctions: Tax lien auctions are typically held by the local tax revenue office. The office will usually publish a list of properties that will be up for auction and the minimum bid amount.
    • Understand the rules and regulations governing tax lien sales in your area: The rules and regulations governing tax lien sales can vary from state to state. It is important to understand the rules and regulations before participating in a tax lien auction.
    • Build relationships with tax officials and other investors: Building relationships with tax officials and other investors can be helpful in getting started with tax lien investing. Tax officials can provide information about upcoming auctions and the rules and regulations governing tax lien sales. Other investors can provide insights into the market and tips for investing.


Buyer Tips:


  • Do your due diligence on each property:

    • Research the property's tax history and liens: It is important to research the property's tax history to understand how long the taxes have been unpaid and whether there are any other liens on the property.
    • Review the property's title and deed: The title and deed will show who owns the property and whether there are any restrictions on the property.
    • Inspect the property to assess its condition and potential value: It is important to inspect the property to assess its condition and potential value. This will help you determine whether the property is a good investment.
    • Estimate the costs of redemption, foreclosure, and property management: If you win the auction, you will be responsible for paying the back taxes, interest, and penalties. You may also need to foreclose on the property if the owner does not redeem it. It is important to estimate the costs of redemption, foreclosure, and property management before investing.


Here are some additional tips for tax lien investing:


  • Start small: When you are first starting out, it is a good idea to start small. This will help you learn the ropes and minimize your risk.
  • Be patient: Tax lien investing can be a long-term investment. It may take several years to see a return on your investment.
  • Diversify your portfolio: Don't put all your eggs in one basket. Diversify your portfolio by investing in a variety of tax liens.
  • Seek professional advice: If you are new to tax lien investing, it is a good idea to seek professional advice from a financial advisor or attorney.


How to profit


  1. Buy Tax Liens at a Discount:
    • Aim to purchase tax liens at a significant discount to the property's market value. This increases your potential profit margin if you acquire the property.
    • Research the property's market value and estimate the potential costs of foreclosure and property management to ensure a profitable purchase.

  2. Earn Interest on Unpaid Taxes:
    • Most tax liens accrue interest at high rates, often exceeding 10% per year. This can be a significant source of income, even if you don't end up acquiring the property.
    • Be aware of redemption periods and interest accrual calculations to maximize your interest income.

  3. Acquire the Property through Foreclosure:
    • If the owner fails to redeem the tax lien within the redemption period, you have the right to foreclose on the property.
    • This allows you to acquire the property at a significantly discounted price, potentially exceeding your initial investment and accrued interest.
    • Understand foreclosure procedures and be prepared to manage the property or sell it for profit.


Tax lien investing can be a profitable investment, but it is important to do your research and understand the risks involved before investing. By following the tips above, you can increase your chances of success.