How to Invest in Tax Liens?
What are tax liens? Tax liens occur when a property owner has not paid local taxes on a property. The local government will issue a lien against the property that states that it can’t be sold, and ownership cannot be transferred until the owed amount has been paid in full.
How do you make money on someone else’s tax liens? It’s called a tax lien sale. An auction is held by the public authority who sells the property in order to settle the tax lien. The winning bidder is purchasing the right to own the property if the original property owner doesn’t repay the tax debt to the winning bidder.
There are 3 kinds of liens that may be placed on property:
- Judicial liens (also called “judgments”): Come from lawsuits by a creditor.
- Statutory liens: Typically, tax liens, either from the IRS, state taxes, and property tax.
- Consensual lien: Missed mortgage payments.
What is the Tax Lien Process?
First, the homeowner does not pay their local property taxes. So, the local government makes a lien against the property, which prohibits the sale or transfer of the property until the tax debt is paid in full. After that, the local government offers a tax lien at auction to cover the unpaid taxes. You attend the auction and bid. Be sure to research before bidding; thoroughly inspect the property and do a lien and title search. The lowest interest bid or most favorable fixed interest goes to the highest bidder. Next, you’ll have to wait and see. If the property owners don’t pay the lien, the action is taken. In some states, the owner of the tax lien certificate needs to apply for and then gets, the property deed. In others, there is an auction for the property. You bid on the unpaid lien plus the interest due to you as the certificate owner.
States with Tax Lien Certificates
| Alabama 12% | Montana 10% |
| Arizona 16% | Nebraska 14% |
| Colorado 9% above Fed Res Rate | New York 14% |
| Connecticut 18% | New Hampshire 18% |
| District of Columbia varies | New Jersey 18% |
| Florida 18% | North Carolina 12% |
| Illinois 18% | North Dakota 12% |
| Indiana 10-25% | Puerto Rico varies |
| Iowa 24% | Rhode Island 12% |
| Kentucky 12% | South Carolina 8% |
| Louisiana 5% and up | South Dakota 12% |
| Maryland 12-24% | Tennessee 10% |
| Massachusetts 18% | Vermont 12% |
| Michigan 15-50% | West Virginia 12% |
| Mississippi 17% | Wyoming 18% |
| Missouri 10% |
To illustrate two successful lien certificate investments, review the following scenarios:
Example 1:
A real estate investor purchased a tax lien certificate on a commercial property for $12,000. The property owners were unknown, and all of the required notices were sent out but there was no redemption. The certificate holder acquired the property which was appraised at over $365,000. The return on investment for this real estate investor was over 30 times his initial investment!
Example 2:
Mississippi pays lien certificate holders 17% interest. After 20 years, a $2,000 certificate would have grown to more than $30,000 with earnings that are tax-deferred.