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What is Tax Lien Investing?

By Jeremy Laukkonen
Updated May 17, 2024
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Tax lien investing is the act of purchasing a tax liability from a county or other governing body with the expectation of a return. In the United States, tax lien sales are one of the ways that counties can recoup money that is owed by property owners. Property owners are typically given a period of time to pay off the back taxes that they owe, at which point the liens will be offered for sale. After someone purchases a tax lien, the associated property owner becomes indebted to that person instead of to the county. It is possible to make money from tax lien investing if the property owner pays back the lien with interest or defaults and the property is subsequently sold.

In the United States, there are two common methods that counties can use to recoup property taxes. One method involves the outright seizure and sale of the property in question. The other is the sale of the associated lien. This second method typically involves an auction where individuals can bid on the right to assume the lien and to eventually collect on it. These auctions were traditionally physical in nature, though many counties have moved them online to reach a wider audience of potential investors.

The process of purchasing a tax lien at auction can vary between counties. Some counties allow the investors to bid on each lien, based on the rate of return they are willing to accept. In some cases an investor can even accept an interest rate of zero, though this is not very common. Other counties allow the investors to bid based on how much of a premium they will pay above and beyond the amount that is actually owed on the lien. Most other areas use some form of ordered or randomized process.

Since tax lien investing involves the expectation of a reasonable rate of return, there are usually two ways that money can be made from this process. The first way involves the property owner eventually paying off his taxes. In addition to the amount owed on the lien, the owner will typically be required to pay interest. If a premium was paid at auction, some counties also require that amount be paid back as well.

The other way to make a profit in tax lien investing is if the property owner defaults. If the allowable term for repayment expires, the investor can typically foreclose on the property and obtain a quitclaim deed. At that point the investor may be free to do anything with the property, which includes the right to sell it for a profit.

There are also a number of potential issues associated with tax lien investing. If the investor fails to take action on the lien at the proper time, it will typically be discharged with no payments rendered. The investor can also be left with nothing if a property owner declared bankruptcy, since the court may reduce the interest rate or nullify the lien altogether.

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