Tax Lien Investing Explained

Tax lien investing explained: Tax lien investing is an indirect way of real estate investing. Rather than buying properties, you’re buying tax lien certificates with the hope of a return later. In this article, we’re laying out everything you need to know about tax lien investing, including the pros and cons and how to get started.

What Is A Tax Lien?
A tax lien is a legal claim against a property that occurs when the property’s owner fails to pay government-owed taxes. Tax liens are placed by the city or county in which the property is located, and act as a legal claim to the property for the unpaid amount. Properties with a tax lien on them can’t be sold or refinanced until the taxes are paid and the lien is removed.

After a tax lien is placed on a property, the local government issues a tax lien certificate that details the amount owed. These certificates are then auctioned off to investors. The amount that a tax lien might sell for depends on the specifics of the property.

Tax Liens Vs. Mortgage Liens
It’s important to clarify that tax liens are different from mortgage liens. A mortgage lien gives your lender a claim to your property until you pay back your mortgage loan. A tax lien, on the other hand, gives the government or owner of the tax lien certificate claim to the property.

How Does Tax Lien Investing Work?
Tax lien investing is a type of real estate investing where individuals purchase tax lien certificates. These certificates are created when local governments place liens on people’s property due to unpaid taxes. There are 28 states that currently allow for the sale of tax lien certificates. Since there are approximately $21 billion of delinquent property taxes each year, it’s a booming business.

Wondering how to invest in tax liens? Tax lien investing is quite different from the traditional stock market or bond investing, so it’s important to understand what you’re getting yourself into.

1. The Local Municipality Creates A Tax Lien Certificate
Local governments charge property taxes to help fund government programs and services. If a homeowner fails to pay their property tax bill, the local government places a lien and creates a tax lien certificate. This certificate includes information such as the amount of tax due, as well as any interest or penalties.

If the property owner still doesn’t pay their tax bill (with interest), then the government has the right to foreclose on the home.

2. The Tax Lien Certificate Is Put Up For Auction
In 28 states, the government can sell tax lien certificates to private investors, which allows them to recoup their losses more quickly. This sale usually happens at a tax lien auction, where the certificate goes to the best bidder.

3. Investors Bid On The Tax Lien Certificate
Depending on the auction, bids may be based on either the cash amount someone is willing to pay for the certificate or the interest rate they’re willing to accept. In the case of cash offers, a certificate goes to the highest bidder. In the case of interest rate, it goes to the lowest bidder.

Keep in mind that the lower the interest rate you bid on a tax lien certificate, the lower the profit you could potentially receive. Bidding wars on tax liens can drive the interest rate – and therefore the profit – down.

4. Winning Investor Takes Control Of The Property
The winning bidder of a tax lien auction takes ownership of the tax lien certificate. This doesn’t technically give them ownership of the property. But it gives them the right to take ownership of the property through foreclosure or be paid back when the homeowner eventually pays their tax bill.

5. Investor Pays The Amount Of Taxes Owed
When you win a tax lien auction, you’re immediately responsible for paying the tax bill, including any interest or fees owed. Then, the homeowner has a certain period of time before the redemption period deadline, by which time they must pay the new investor or risk foreclosure.

6. Repayment Or Foreclosure
When you purchase a tax lien certificate, there are two potential outcomes: either the homeowner will pay their property taxes, or they won’t. If the homeowner pays their property taxes, then you make back your initial investment, plus the interest rate you bid at the auction.

If the homeowner doesn’t pay their property taxes, then you have the right to begin the foreclosure process. Depending on the state, there may be an expiration date, which requires you to initiate foreclosure within a certain amount of time after buying the tax lien. If you fail to take action, you may lose your right to collect your investment.

It’s important to note that it’s quite rare for the situation to get that far. The majority of homeowners pay their tax bills before the foreclosure process begins.

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By: Invest with Wesley
Title: Tax Lien Investing Explained
Sourced From: www.youtube.com/watch?v=n7l4w1FaXS4



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