Basic Investing Insights

The Basics of Tax Lien Investing

Rachel Seidensticker
Sign-up to receive an Unprecedented Report of sale results data nationwide.
Thank you! Your submission has been received!
Oops! Something went wrong while submitting the form.
Check out Tax Sale Insiders for the latest industry news and insights.

Earn Steady, High-Interest Returns with Low-Cost Tax Lien Investing 

Tax lien investing is a lesser-known and more accessible way to profit from a niche market that is open to virtually anyone in the USA. You can start with a very low amount of investment capital, earn money in a predictable and reliable way, and find tax lien investment opportunities almost anywhere.  This is a general overview of the tax lien investment process. If you want a detailed explanation of all the tax sale investment opportunities, check out our Investing Basics video series.

What is a Property Lien?

You may be familiar with liens such as mechanic liens. They are legal instruments that protect contractors, for example, when the homeowner fails to pay them as agreed. Here’s a common example: 

A roofing contractor may do work that goes unpaid, but they can register a lien against the homeowner’s property. That does not give the roofer any ownership rights over the property. But it does help ensure that they must get paid before the property can be sold and transferred to the buyer. If the homeowner wants to take out a loan and use the home as collateral – like a home improvement loan, for instance – they will also need to first repay that contractor to get the lien removed. In that way, property liens provide leverage. 

While there are some exceptions based on local state rules, this is how liens typically work.

What’s a Property Tax Lien?

Local governments charge homeowners property tax, which is then used by the municipality to pay for the public services it provides. Without that revenue, the municipality would not have the money in its budget for basic services like trash pickup and repairing water mains. These taxes can also fund the fire department or other essential agencies. So when a homeowner fails to pay their property tax bill, it essentially harms all residents and taxpayers. That’s why tax-collecting local governments will use a lien against the property in basically the same way that the roofer in the previous example did. That motivates the homeowner to pay their overdue taxes and any related fees, penalties, and interest payments. If the homeowner still doesn’t comply, the government has the legal right to settle the delinquent tax by selling it to private 3rd parties to recoup their losses.

Investing in a Property Tax Lien Certificate

In most states across America, the government can sell tax lien certificates to private investors like yourself. This certificate is a legal document that gives the holder of that certificate the right to fees, penalties, and interest payments. In other words, they assume the debt owed by the taxpayer, and in exchange they own the property lien that the government first created and owned. But in order to purchase this tax certificate, the investor bids against other investors to buy it at a sale. The money raised in that sale is used to pay the government what they are owed, up front. 

Then the homeowner is obliged to pay the investor whatever they originally owed the government. In that way, the government gets the money earmarked for its budget without continuing to wait, and the investor gets the opportunity to collect not just a repayment of the money it paid on behalf of the homeowner, but also any additional interest or other associated fees. This is where the profit incentive for the investor comes into play because interest rates on tax liens are generally much higher than other interest rates you may earn by investing your cash in instruments like Certificates of Deposit or even Treasury Bills.

The Basics of Tax Lien Investing

The winning bidder at a tax lien auction assumes ownership of the tax lien certificate. As with other liens, this does not convey to them any rights of ownership of the property. As soon as they win the auction, the bidder must immediately pay the delinquent tax bill and any interest, fees, or penalties. But that gives the government its budget funds, and also gives the homeowner an opportunity to stay in their home and gradually repay the lien – which the investor now owns. How much time they have to repay the lien varies from state to state, but is usually at least a year or more. That can save a homeowner from potential foreclosure, and also earns the investor a handsome profit from the interest that is paid by the homeowner during that repayment grace period – which is technically known as the redemption period. Once the redemption period is complete, the lien plus interest must be paid in full.

For example, an investor may buy a tax lien certificate in the amount of $1,000 – the amount the homeowner owes in property tax. The redemption period may be 1 year, and let’s say the interest rate is 20%. The investor has a chance to earn 20% interest just for holding the lien until it’s repaid. To learn some finer details of how tax liens work, check our our Investing Basics videos.

What if the Homeowner Still Doesn’t Pay the Lien?

There may be instances where the homeowner still doesn’t pay off the lien by the end of the redemption period, but then the investor has the right to foreclose on the property in order to recoup their losses. In that case, their initial $1,000 investment might make them the legal and rightful owner of that property. In that way, the right to foreclosure provides additional protection from loss for the investor.

Due Diligence Research is Critical

There are different rules and timelines around this tax lien investment, depending on the location of the property and what local or state laws require. Each property may also have other liens against it, and those lienholders may have priority, which dictates which lien gets repaid first in the event of a foreclosure. The condition of the property will also vary – often considerably – from one home to the next. In order to invest wisely and manage your risks, it is very important to do your research in a diligent and complete manner and never assume that each state is the same. 

Where and How to Find the Best Investments

You’ll also want to conduct comprehensive research to determine which tax lien investments offer the greatest potential for making a profit. Tax lien certificate investments can be very lucrative – and you could potentially invest all across the USA, for multiple streams of steady high-interest income. But to guard against any pitfalls, you need to do your homework and, if possible, get guidance and resources from an experienced tax lien investor with a proven track record of success. Helping both new and inexperienced investors, as well as seasoned pros, is the purpose of Tax Sale Resources – which is the decades-long preeminent leader in training, solutions, data and information about tax liens, and other ongoing support.  Contact us at support@taxsaleresources.com for more information or check out our Research Platform! If you are still learning and need more information about tax sale investment opportunities, check out our Investing Basics videos.

Author - Rachel Seidensticker
Rachel Seidensticker
Chief Operations Officer
In the Tax Sale Industry Since 2010
Rachel is responsible for managing and overseeing the daily operations of Tax Sale Resources, which produces data for approximately 8,000 nationwide tax sales yearly. She started in the tax sale industry originally as an investor but decided to change course and team up with her brother (Brian Seidensticker) to build Tax Sale Resources quickly thereafter.

Featured Articles

Looking for which sales have the best returns?

Sign-up to receive an unprecedented report of sale results data nationwide.
Benefit Check
Sale Sizes
Benefit Check
Winning Bid Details
Benefit Check
Details by Property Type
Thank you! Your submission has been received!
Oops! Something went wrong while submitting the form.