Investing in Property Tax Liens

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Investing in Property Tax Liens

Property tax liens are an investing niche that many investors miss. A tax lien is a legal claim made against the assets of a person or corporation that fails to pay government taxes. A lien, in general, acts as security for an obligation, such as a loan, such as a mortgage. If the obligation is not met, the creditor has the right to confiscate the assets.

However, these claims on collateral may be swapped and transferred among private investors looking for an alternate way to achieve above-average profits. In certain situations, this one-of-a-kind chance may give savvy investors with great rates of return.

Property liens may also be risky, so first-time purchasers must grasp the restrictions and possible problems associated with this sort of asset. This page addresses tax liens, how to invest in them, and the benefits and drawbacks of using this form of investment vehicle.

Key Takeaways

  • Atax lienis a claim the government makes on a property when the owner fails to pay the property taxes.
  • Liens are sold in auctions, which may result in bidding wars.
  • If you need to foreclose, additional liens on the property may prevent you from obtaining ownership.
  • If you purchase the home, you may face unexpected costs such as repairs or perhaps evicting the present inhabitants.
  • Property lien funds are another way to invest indirectly.

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What Is a Tax Lien?

A tax lien is a legal claim made against the property of a person or corporation that fails to pay government taxes. When a landowner or homeowner fails to pay their property taxes, the city or county where the property is situated has the ability to put a lien on the property. The lien is a legal claim on the property for the unpaid sum. A lien on property cannot be sold or refinanced until the taxes are paid and the lien is erased.

When a lien is issued, the municipality creates a tax lien certificate that indicates the amount owing on the property, plus any interest or penalties payable. These certificates are then sold at auction to the highest bidder. Tax liens may be purchased by investors for as low as a few hundred dollars if the property is modest. However, the bulk of them are far more expensive.

Investors may acquire property tax liens from municipalities, enabling them to collect payments with interest from the property owner as the new lien owner. In certain situations, they may be able to foreclose and obtain ownership of the property.

Tax Liens by the Numbers

First, let’s look at rising property tax values. Property prices in King County, Washington, grew by 9% between 2021 and 2022. As a consequence, property taxes totaled $6.79 billion in 2022, an increase of about $200 million over the previous year. Over 95% of Texas residential homes gained in value by at least 20% in 2022 in certain areas. Governments are levying an increasing number of property taxes. In 2021, an extra $328 billion in property taxes are expected to be imposed throughout the United States.

For a variety of reasons, determining national property tax lien figures is challenging. Property taxes are not governed by a single organization; county assessors evaluate your property and county treasurers collect it. Furthermore, although aggregated reports exist, they need considerable data aggregation, which may be out of date by the time all information is compiled.

Having said that, the National Tax Lien Association estimates that the US produces around $21 billion in overdue property taxes each year. It is also estimated that each year, between $4 billion and $6 billion are placed for sale to the private sector.

According to private studies, the tax delinquency rate in the United States has been falling over the last decade. According to CoreLogic, 6.3% of taxpayers were behind on their property taxes in 2021, although this fell to 5.9% in 2022. Mississippi, Delaware, and Virginia had the greatest property tax delinquencies, while North Dakota, Minnesota, and Wisconsin had the lowest.

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How Can I Invest in Tax Liens?

Property tax liens may be purchased by investors in the same manner that real properties can be bought and sold at auctions. The auctions take place in person or online, and investors may bid down the interest rate on the lien or bid up the premium they would pay for it. The lien is assigned to the investor who accepts the lowest interest rate or pays the greatest premium. Buyers often engage in bidding wars over a single property, lowering the successful buyer’s rate of return.

Buyers of tax-lien properties should be informed of the cost of repairs, as well as any other hidden fees that they may be required to pay if they accept possession of the property. Those who own these homes may subsequently have to deal with unpleasant responsibilities such as evicting the present inhabitants, which may need the use of an expensive property manager or an attorney.

Anyone interested in obtaining a tax lien should first decide whether they want to hold a lien on residential, commercial, undeveloped land, or property with improvements. They may then call the treasurer’s office in their city or county to find out when, where, and how the next auction will be place. The treasurer’s office may direct the investor to where he or she can get a list of propertyliens slated for auction, as well as the guidelines governing the sale. These guidelines will include any preregistration requirements, approved payment methods, and other essential information.

Tips for Tax Lien Buyers

Buyers must also do due diligence on available homes. The current worth of the property may be less than the amount of the lien in certain situations. Investors might assess risk by dividing the face amount of the unpaid tax lien by the property’s market value; larger ratio estimates imply more risk. Furthermore, other liens on the land may exist, preventing the bidder from acquiring possession.

Every piece of real estate having a tax lien in a specific county is allocated a number within its respective parcel. Buyers may search for these liens by number to acquire information about them from the county, which is commonly done online. The county contains the property location, the owner’s name, the assessed value of the property, the legal description, and a breakdown of the state of the property and any buildings on the grounds for each number.

Don’t invest in tax liens expecting to gain a physical property out of it; around 98% of homeowners redeem the property before the foreclosure process begins.

How to Profit From a Lien

Investors looking for tax lien investment possibilities may contact their local tax revenue authority who is in charge of collecting property taxes. There are presently 2,500 jurisdictions that offer public tax debt, including cities, townships, and counties.

While not every state allows for the public sale of overdue property taxes, if the state does, investors should be free to select when and where these taxes are disclosed for public examination. Property tax sales must be publicized for a certain length of time before the sale. The owner of the property, the legal description, and the amount of unpaid taxes to be auctioned are often included in the adverts.

Investors who buy property tax liens are usually compelled to pay back the entire amount of the lien to the issuing municipality right away. With the exception of two states, the tax lien issuer collects the principle, interest, and any penalties; pays the lien certificate holder; and collects the lien certificate if it is not on file. The property owner is required to return the investor the full amount of the lien plus interest, which varies by state but is normally between 10% and 12%. In rare cases, the investor’s premium for the lien may be added to the amount that is returned.

The payback period typically ranges from six months to three years. In most circumstances, the owner is able to pay off the lien completely. If the owner fails to pay the debt by the date, the investor, like the municipality, has the ability to foreclose on the property, albeit this occurs extremely seldom.

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Investing Passively Through an Institutional Investor

Because tax lien investment takes extensive study and due diligence, it may be worthwhile to consider investing passively via an institutional investor who is a member of the NTLA. NTLA members purchase around 80% of tax lien certificates.

Applicants must complete a background screening procedure to establish conformity with the NTLA Code of Ethics in order to gain membership via NTLA. Members must also pay membership dues, which vary depending on membership type. Members may attend member-only webinars, receive a Certified Tax Lien Professional certification, and network with other industry professionals via the association’s online directory.

Disadvantages of Investing in Property Tax Liens

Although property tax liens may provide high rates of return, investors should do their research before entering this market. Tax liens are often not suitable for first-time investors or those with limited expertise or understanding of real estate.

Investors should avoid purchasing liens on properties that have suffered environmental harm, such as one where a gas station discharged toxic waste.

Neglected Properties

Investors must also get intimately acquainted with the real property on which the lien has been imposed. This might assist them in ensuring that they will be able to collect the money from the owner. Regardless of the offered interest rate, a damaged or abandoned home in the center of a slum community is generally not a wise deal. The property owner may be unable or unwilling to pay the owing tax. Properties with any kind of environmental degradation, such as chemical or hazardous substance contamination, are typically undesirable.

Not a Passive Investment

After receiving their certificates, lien owners must understand their duties. They must usually inform the property owner in writing of their acquisition within a certain length of time. If payment has not been paid in full by the end of the redemption period, they are normally compelled to send them a second letter of notice.

Tax Liens Can Expire

Tax liens are not indefinite tools. Many have an expiry date after the redemption period has ended. When a lien expires, the lienholder is no longer able to collect any outstanding debt. If the property falls into foreclosure, the lienholder may find additional liens on the property, making obtaining the title hard.


Property liens have piqued the attention of many commercial entities, including banks and hedge funds. As a consequence, they have been able to outbid the competitors and push yields down. Individual investors have found it more difficult to identify lucrative liens as a consequence, and some have given up. However, several funds that invest in liens are now accessible, and this might be a useful method for a rookie investor to get into this field with a lesser degree of risk.

What Does It Mean If You Have a Tax Lien?

A tax lien indicates that the government has filed a legal claim on your property because you disregarded or failed to pay a tax bill. A property tax lien means that you have either forgotten or failed to pay the property taxes owed to the city or county where your property is situated. When this occurs, your city or county may lay a lien on the property.

How Does a Tax Lien Sale Work?

Tax lien sales are permitted in 29 states, plus Washington, DC, the Virgin Islands, and Puerto Rico. Every state conducts tax lien sales in a somewhat different manner.

There is usually a waiting time once a property owner fails to pay their taxes. Some states wait a few months, while others wait years, before a tax collector steps in. The delinquent taxes are then auctioned off during a tax lien sale. This may happen both online and in person. The lien against the property is sometimes awarded to the highest bidder. Other auctions provide the lien to the investor who accepts the lowest interest rate. Tax collectors utilize the proceeds from the auction to make up for unpaid past taxes. The homeowner pays the investor their overdue property taxes plus interest after the lien has been transferred to the investment (or else they will face foreclosure on their property).

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Where Can I Find Tax Liens for Sale?

To learn more about purchasing tax liens, contact your county’s tax collector directly. Some counties will also post information about the procedure on their website, as well as instructions on how to register as a bidder.

When counties publish auctions on their websites, they will provide information on the properties up for sale, the day the auction will take place, and the minimum bid. This list will help you choose which properties are of interest to you based on their location, property type, size, and minimum bid.

What Happens to a Mortgage in a Tax Lien Sale?

When a property is sold, the lien remains with it. Prior to 2017, tax liens remained on the credit record of the prior owner. However, beginning in 2017, all three credit bureaus enacted adjustments that no longer reflected civil judgments. All tax liens have been erased from all credit reports by April 2018.

Property tax lien foreclosures occur when governments foreclose properties in their jurisdictions for the delinquent property taxes owed on them. Property tax liens are superior to other liens so their foreclosure eliminates other liens, including a mortgage lien. Homeowners with delinquent taxes typically also have outstanding mortgage debt. After purchasing a tax-foreclosed property, if you discover that there is a mortgage lien on it, it should be removed by the county in which you bought it. The county will release the lien based on the tax sale closing documentation. In the event that this does not work, you can also contact the lien holder to have it removed.

In every state, after the sale of a tax lien, there is a redemption period (although the length of time varies depending on the state) where the owner of the property can try to redeem their property by paying their delinquent property taxes. However, even if the owner is paying their property taxes, if they fail to make their mortgage payments during this time, the mortgage holder can foreclose on the home.

Are IRS Tax Liens Public Record?

If a legalclaim is madeagainst your property in order to satisfy a tax debt, the IRS will file a Notice of Federal Tax Lien. This is a public document and serves as an alert to other creditors that the IRS is asserting a secured claim against your assets. Credit reporting agencies may find the notice and include it in your credit report.

The Bottom Line

Property tax liens can be a viable investment alternative for experienced investors familiar with the real estate market. Those who know what they are doing and take the time to research the properties upon which they buy liens can generate substantial profits over time. However, the potential risks render this arena inappropriate for unsophisticated investors.

Without the proper research and understanding of the real estate market, an investor could easily end up with a property that doesn’t get redeemed by the owner (in the form of them paying their taxes to you with interest) and that has no value. That low-value property will then ultimately end up as the property of the investor.

For those interested in investing in real estate, buying tax liens is just one option. Buying a home in foreclosure or buying a home at an auction can also be valuable investment opportunities. If you are still interested in property tax liens, it is recommended that you consult your real estate agent or financial adviser.

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