Tax Lien Investing 101

What is a tax lien? Tax liens occur when a property owner has not paid local taxes on a property. The local government will issue a lien against the property that states that it can’t be sold and ownership cannot be transferred until the owed amount has been paid in full.

How do you make money on someone else’s tax lien? It’s called a tax lien sale. An auction is held by the public authority who sells the property in order to settle the tax lien. The winning bidder is purchasing the right to own the property if the original property owner doesn’t repay the tax debt to the winning bidder.

There are 3 kinds of liens that may be placed on property:

1. Judicial liens (also called “judgments”): Come from lawsuits by a creditor.

2. Statutory liens: Typically tax liens, either from the IRS, state taxes, and property tax.

3. Consensual lien: Missed mortgage payments.

What is the Tax Lien Process?

First, the home owner does not pay their local property taxes. So the local government makes a lien against the property, which prohibits the sale or transfer of the property until the tax debt is paid in full. After that, the local government offers a tax lien at auction to cover the unpaid taxes.

You attend the auction and bid. Be sure to research before bidding; thoroughly inspect the property and do a lien and title search. The lowest interest bid or most favorable fixed interest goes to the highest bidder. Next, you’ll have to wait and see. If the property owners don’t pay the lien, action is taken. In some states, the owner of the tax lien certificate needs to apply for and then gets, the property deed. In others, there is an auction for the property. You bid on the unpaid lien plus the interest due to you as the certificate owner.

In some states, the investor can bid MORE than the actual amount of the lien, which brings the effective interest rate down.  In other states, the process is done by a lottery system, which means you get the statutory rate.

As with any investment, do your research and due diligence on the properties you are bidding on.  You investing in tax liens for a return on investment, not to get the property.  Most often, if you end up with a property, its one you don’t want!


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About the Author Attorney William Bronchick

Attorney William ("Bill") Bronchick, host of Legalwiz.com, has authored six best-selling books and is sought nationwide for his 25+ years of real estate and legal knowledge. He has been interviewed by numerous media outlets, such as CNBC, TIME Magazine, USA Today, Investor Business Daily, Forbes, and the LA Times, to name a few. William Bronchick is the co-founder and past President of the Colorado Association of Real Estate Investors and the Executive Director and founder of the College of American Real Estate Investors. Click on the "About" link above for more information on William Bronchick.

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