Modern Investment Options: The Lowdown on Property Tax Liens

If you’re looking for the next big investment, it might just be property tax liens. What’s a property tax lien? Well, if you’ve ever had the unfortunate opportunity …

If you’re looking for the next big investment, it might just be property tax liens. What’s a property tax lien? Well, if you’ve ever had the unfortunate opportunity to meet with the local revenue department about failing to pay your property taxes, you know all too well that it can take away your property using one of these liens. A lien is the actual legal claim against the property for the unpaid amount that is owed on it.

Liens from the government typically take “1st position,” meaning that the local revenue department is the first creditor to be paid before all other creditors. But, if you’re an investor, you can invest in these liens, and make some money from the situation.

How To Invest In Tax Liens

When an individual fails to pay his or her property tax, the local government (the municipality) files a tax lien and can either pursue collection action or can auction off the lien. Auctions are beneficial for the government, because it raises revenues that it otherwise wouldn’t be able to collect in a cost-efficient manner prescribed by law.

It’s an opportunity for investors because, while the government may not find it attractive to collect, you might. Auctions can be held in a physical setting or online, and investors either bid down on the interest rate on the lien or they bid the premium for the lien up.

The investor who is willing to pay the highest premium, or lowest interest rate, gets the lien. From there, if you win, it’s time to collect on your property. The liens in these auctions can pay anywhere from 3 to 5 percent up to 30 percent or more.

If you paid a premium for the lien, you can add this to the amount you collect from the homeowner. Many investors find this to be an attractive way to bid on a lien, since bidding the interest rate down only decreases the profit potential, while bidding up the premium increases risk, but does not decrease the intrinsic value of the lien.

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Repayment of the lien, by the homeowner, is generally done on a schedule that lasts from six months to three years. Occasionally, repayment schedules may be different, but this is the typical scheduling.

How To Make Money

You make money when the homeowner repays the lien either in part or in full. If the homeowner repays the lien in monthly installments, you may not realize a profit until the last payment has been received.

Because the investment is a lien, you have special legal and equitable rights in the property. If the homeowner fails to make payment, you can foreclose on the house and sell it to try to recoup your losses.

But, it’s not always easy sailing. You must notify the property owner in writing after you’ve purchased the lien and you must also send a notification to them near the end of the payment period if the payment has not been paid in full.

The Risks

Like all investments, tax liens have risks. According to tax lien specialist Ted Thomas, investors should first learn all about tax lien investing from a professional who has a solid track record before they attempt their first lien.

Liens sometimes come with additional hassles, like second liens from banks and other lenders, which might make collecting the money impossible if the home goes into foreclosure. Also, if a home is situated in a bad neighborhood, the property may not be a good investment, regardless of the interest rate on the lien.

Sometimes, liens are put up for sale for a reason – there’s no practical way to collect from the homeowner. Other times, banks and hedge funds come rushing into the marketplace and outbid all other investors, driving down yields (or driving up premiums) so that the investment is no longer very attractive.

Finally, some people find tax lien investing to be unethical or morally suspect, since you’re essentially taking over as the debtor for the government. If the person can’t or won’t pay, you may have to force them out of the home. Some investors just don’t feel comfortable with this kind of potential scenario.

You have to be very knowledgeable about real estate before you invest in this arena, and you should have connections with banks and real estate agents that can help you either take out a mortgage on the home or sell it if you must foreclose on it and need the money out of the house immediately.


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