The Truth About Tax Liens

Investing in tax liens might expose your portfolio to real estate even if you don’t own any property. However, the procedure may be complicated, and inexperienced investors risk losing money. Investing in a tax lien certificate might be dangerous; here’s what you need to know.

What exactly are tax liens?

When property taxes are not paid, a local or municipal government may place a tax lien on the property. In most cases, the notification comes before harsher steps, such as a tax levy, in which the IRS or local authority can confiscate property.

The following is how tax lien investment works:

Assume a municipality files a tax lien to a property owner behind on their taxes. In that situation, they issue a tax lien certificate, which specifies the amount of taxes owed and interest and penalties.

Municipalities can then sell the certificates to private investors to recoup unpaid taxes. For the right to collect money, plus interest, from the property owners, these investors take care of the tax burden.

Unpaid real estate tax liens can be transferred to the private sector in 28 states, according to the National Tax Lien Association.

The procedure is as follows:

1. An auction is arranged for investors to acquire the tax lien.

Municipalities control how the auction procedure for tax lien investors operates. Before investing, potential investors should become acquainted with the local environment, according to the National Tax Lien Association. For more information about unpaid taxes in your area, contact your local tax collector.

Online and live auctions are available. Investors that offer the lowest interest rate often win auctions, a process is known as “bidding down the interest rate.” Municipalities determine a maximum interest rate, and the auction is won by the lowest bidder who is less than that rate. However, keep in mind that earnings diminish when interest rates fall.

Other winning bids are given to those who pay the most in cash over the lien amount.

2. The winning bidder pays the amount and manages the foreclosure procedure

The winning bidder is responsible for paying the whole tax obligation, including outstanding debt, interest, and penalties. The investor must then wait for the property owners to repay their total sum.

Homeowners often have a one to three-year redemption period before paying their taxes plus interest. On the other hand, the tax lien investor will initiate the foreclosure process if the homeowner fails to refund the tax obligation, allowing them to take over the property.

You must also understand your duties if you win a lien at auction. According to Joanne Musa, owner of, tax lien investors in Illinois must notify property owners within four months that they possess liens and have the authority to foreclose if they do not repay. Before the redemption time expires, you must write a second letter to the property owners.

Tax lien investing: advantages and disadvantages

Experts advise carefully assessing the dangers before investing in tax liens. In the worst-case scenario, complex laws and loopholes might result in significant losses for some investors.

1. Tax liens can provide a more significant return but not always

The tax lien interest rate is what most investors rely on to generate money. Rates differ depending on the state and jurisdiction. According to the National Tax Lien Association, Arizona has a statutory interest rate of 16 percent, Florida has an interest rate of 18 percent, and Alabama has a rate of 12 percent.

Profits may not necessarily equate to high returns throughout the bidding process. According to Brad Westover of the National Tax Lien Association, tax liens are typically sold at auction for between 3% and 7% of their face value.

2. Tax liens have an expiry date.

If a property owner fails to pay their property taxes by the end of the redemption term, the lienholder may commence foreclosure procedures to seize possession of the property. Foreclosures are uncommon: tax payments are typically completed before redemption. The tax lien is generally the first debt to be repaid; these liens are paid before the mortgage.

Nonetheless, tax liens have an expiration date, and with it, the lienholder’s the right to foreclose on the property or recoup their investment.

When you purchase a lien on a property, you may wish to pay taxes in subsequent years so that no one else may buy a lien and claim possession.

3. When investing in tax liens, thorough research is required.

Individuals should conduct their research before investing in tax liens. It is recommended that you avoid properties that cause environmental damage, such as when a gas station dumps dangerous waste, because you would own the property if it went into foreclosure.

Furthermore, investors should investigate the property and any liens against it, as well as previous tax sales and comparable property values. If the property has other liens, getting the title may be more difficult in the case of foreclosure.

In conclusion

Tax lien investment requires so much due diligence that you might want to consider investing passively through an investor member of the National Tax Lien Association. For a newbie, this may make the procedure easier to manage.

Investing in tax liens can yield a high return, but keep in mind the tiny print, intricacies, and laws.