Tax Lien Details

Tax Lien Details

In a special blog post a few weeks back, I shared the basics of investing in Tax Deeds and the post proved to be popular with my readers. So today let me take a moment to share some information about Tax liens and how you can make smart investments with them.

All properties have property taxes attached to them – but unlike other kinds of taxes (like those charges by the IRS, for example) IRS taxes are in rem, which means they remain on the THING and not on the PERSON. This opens up some unique abilities, including the county’s right to eventually seize delinquent piece of real estate.

In states where counties need money quickly to keep running, they will place liens on properties that are overdue on their taxes and sell those liens to investors at public auction. The liens themselves do not convey any legal rights to the bearer – only an interest. Liens are not liquid assets because they cannot be cashed out at any time – the bearer only receives money once the property owner pays their taxes or once the property is foreclosed on – in which case the lienholder can get a clean title to the property.

Why are tax liens great investments? One of two things can happen:

  • You can get paid 12-36% on your initial investment if the owner redeems (pays the taxes they owe)
  • You can get a title to the real estate (if the owner fails to redeem)

So how can you go about making a smart investment? First off, decide what you are going for – interest or title. Then follow the steps below:

  1. Get the list of liens to be auctioned at an upcoming county tax sale
  2. Filter down the list according to amount of delinquent taxes, location of the property, zoning, and your budget
  3. Get aerial pictures of the parcels in question
  4. Conduct a mini-title search, looking for mortgages or IRS liens
  5. Drive by (or get someone else to drive by) the property to verify your expectations
  6. Prepare a final list and prioritize it
  7. Attend the auction and bid – and don’t get auction fever

Auctions are conducted in one of two ways – bidding down the interest you will collect the first year, or bidding up the purchase price. You will have to renew the lien each tax year, but as the bearer you will get priority and the full interest rate (without attending the auction).

The last step of investing in tax liens is waiting – you won’t get you money back for anywhere from 1 to 3 or more years. While profitable, tax liens are not meant to make you quick money and remember that you cannot cash out your lien if you feel like it.

Tax liens are a great investment IF you do your homework before bidding.


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