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Tax lien investing is a type of investment that is widely misunderstood or alternatively completely unheard of by most people.  While in the past it was necessary to make an excursion down to a city or county’s tax clerk’s office to buy a tax lien, today it is possible to buy tax liens online from a multitude of states, counties, and districts.

What is a tax lien sale?

When a property owner falls behind on paying taxes, the government agency that holds jurisdiction over the property will place a lien on the property for the amount of the delinquent taxes and all applicable interest and fees.  This lien can sometimes also be applied to the property owner’s bank accounts or wages in order to recover the delinquent tax payments.  The government, however, either wants or needs the money as soon as possible.  Subsequently, they will put these tax liens up for sale to individuals or businesses.  In return for getting their money up front, the government agency will offer a guaranteed rate of interest to prospective investors.  This is where you come in.

How to efficiently invest in tax liens

In the United States, for example, every state, and some counties within individual states, offers a different rate of interest to tax lien investors.  Some states guarantee 1% per month, other states 2% per month, and other states variable rates depending on bids and other factors.  These are great returns for relatively low risk (most tax liens are eventually paid back; a tax lien that is not paid back can end up in the transfer of the property to the holder of the tax lien), though you have to consider that a bankruptcy can potentially discharge a tax lien, particularly if it is an individual investor rather than a government that holds it.

Because many states allow bidding on tax liens, and this bidding can be fiercely competitive, while other states offer guaranteed returns and no-bid tax lien sales, the key to getting a good return is doing some basic research.  Bidding on a tax lien sale is similar to bidding on a government contract:  the tax lien goes to the investor who is willing to accept the lowest rate of interest.  It is up to you to find tax lien sales that offer a good return or otherwise avoid fierce bidding competition.  Because tax lien investing is a relatively sparse marketplace, it is sometimes easier than you’d imagine to find great returns.

The risks of tax lien investing

Investing in tax lien certificates does involve you taking on some risk when putting your money down.  The risks and rewards associated with tax liens are fairly unique.  For example, it is sometimes beneficial for a tax lien you buy to default, as you will receive deed to the property associated with the tax lien.  However, if there are environmental risks or separate liens associated with the property, they will also transfer to your name and could cost far in excess of the property’s value.  If it’s at all possible, you should attempt to do some rudimentary research into the properties on which you are buying tax liens.  It is also possible for a tax lien to be discharged in bankruptcy, though this is quite a rare occurrence.  Specifically, if the property owner wishes to keep his property, he will be forced to pay off the tax lien before he is able to re-affirm his mortgage.

Tax lien certificate investing can be quite lucrative as long as you are willing to do some rudimentary research.  Note that it can take months for a tax lien you buy to be paid off and these instruments are very difficult to sell on any kind of secondary market.  Only invest money you can afford to have tied up for some time.

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