Tax liens may be imposed on a property for the purpose of collecting outstanding debt on the property. The lien usually allows the lien holder to obtain ownership interests in a house or other type of property. Tax liens are generally obtained through a public auction conducted by a local government body.

Depending on the circumstances, a tax lien may:

  • Allow the tax lien holder to collect unpaid taxes or penalty fees associated with the property
  • Lead to a foreclosure proceeding, with the tax lien holder obtaining title to the property
  • Lead to a tax deed sale, with the lien holder obtaining first bid rights on the property

Tax liens are usually purchased by investors, real estate companies, and various financial institutions.

What Is a Tax Lien Purchase?

In general, tax liens are applied to a piece of real estate property. Thus, a tax lien purchase usually refers to instances where outstanding property tax debt has led to a foreclosure on the home. In such cases, the tax lien may lead to purchasing the entire home. That is, an investor who holds a tax lien may ultimately become the owner of the home, especially if the court grants them a quitclaim deed to the home.

Tax lien purchases can often be inviting to investors, who may obtain favorable tax rates and interest rates on the house. Tax lien investments typically yield a higher rate of return than other types of real estate investments. Also, a tax lien usually has priority even over mortgages regarding the type of debt the property owner needs to repay immediately.

How Does Tax Lien Investing Work?

Tax lien investing is different from traditional stock market or bond investing. Read on to understand more about how tax lien investing works:

  • Local Municipalities Create a Tax Lien Certificate: Local governments charge property taxes to help fund government programs and services. When a homeowner fails to pay their property tax bill, the local government can place a lien on the property and create a tax lien certificate. This certificate includes information about the amount of tax due along with any interest or penalties due. If the homeowner doesn’t pay their bill after a tax lien certificate is placed on the property, then the government has the right to foreclose on the property.
  • The Tax Lien Certificate Gets Put Up for Auction: To find tax lien investing opportunities, you can contact your local tax revenue office for information on local tax lien auctions and what’s required to participate. Not all states allow for the sale of tax lien certificates.
  • Investors Bid on the Tax Lien Certificate: Bids at auctions may be based on cash amounts or interest rates. In the case of cash offers, the tax lien certificate is sold to the highest bidder. In the case of interest rate auctions, the tax lien certificate is sold to the lowest bidder.
  • The Winning Investor Takes the Property: The winning bidder of a tax lien auction takes ownership of the tax lien certificate, but this doesn’t necessarily give them ownership of the property.
  • Repayment or Foreclosure: When a tax lien certificate is purchased, two potential outcomes exist: either the homeowner will pay the property taxes, or they won’t. If the homeowner does pay the property taxes, then tax lien investors make back their initial investment in addition to the interest rate bid at auction. If the homeowner does not pay their property taxes, then tax lien certificate owners have the right to begin the foreclosure process.
    • Depending on the state, there may be an expiration date, which requires foreclosure to be initiated within a certain amount of time after the tax lien was bought. If you live in a state with a tax lien certificate expiration date, make sure to take action in order to avoid losing your right to collect your investment.

What are the Benefits and Risks of Tax Lien Investing?

Consider carefully thinking about the risks involved before beginning a tax lien investment. While some investors may be rewarded for their investment, others may get caught up in the complicated set of rules and loopholes, resulting in big losses.

The following are some of the common benefits and risks associated with tax lien investing:

  • Tax liens may not always result in high yields. From a profit standpoint, investors make most of their money based on the tax lien’s interest rate. Interest rates may vary and typically depend on the jurisdiction or state. Profits don’t always amount to high yields.
  • Tax liens come with an expiration date. Suppose property owners fail to pay the taxes owed on the property by the end of the redemption period. In that case, a lienholder can initiate the foreclosure process to take full ownership of the property. However, this rarely happens. Liens are typically first in line for repayment – even before mortgages. Even so, tax liens have an expiration date. A lienholder’s right to foreclose on a property or collect their investment expires when the lien does.
  • Tax lien investments require lots of research. Investors who are considering investing in a tax lien should do their homework. Avoid properties with environmental damage. Understand what you’re buying, what the property is, and the neighborhood value.

Can a Tax Lien Purchase Be Disputed?

Legal disputes over tax lien purchases can arise for a number of different reasons. For instance, there may be disputes over the sales contract terms, the price, or the parties eligible for purchasing the property.

Another issue occurs when the government body has issued the tax lien certificate in error. For example, a wrong reading of tax documents may result in a tax lien being imposed, when in fact, it shouldn’t have been. In such cases, it may be possible for the property owner to appeal or challenge the government’s conclusions.

How Do I Start Purchasing Tax Liens?

If you’re considering investing in tax liens, first decide what type of property you want to bid on. Once you’ve decided to participate in a tax lien auction, contact your local tax revenue office for information about upcoming auctions and property liens up for bid.

Make sure to research each property thoroughly. Understand the property value and current state of each property. Research all of the payment requirements and deadlines before you make a purchase. Lastly, fully investigate the foreclosure process in your state.

Do I Need a Lawyer for Assistance with a Tax Lien Purchase?

Tax lien purchases can sometimes involve multiple parties, including the property owner, various investors, and government representatives. You may wish to hire a qualified real estate lawyer in your area if you need help with a tax lien purchase. Your lawyer can provide you with legal guidance and representation to protect your interests during the proceedings. Also, your attorney can assist you in the event that you need to file a lawsuit over a tax lien dispute.

Our database of real estate lawyers is broad and comprehensive. If you’re interested in hiring an excellent attorney in your area, use the link here. LegalMatch’s services can help you narrow down your search for a lawyer by allowing you to choose the issues involved in your case. There is no fee to present your case. The lawyers presented will be from your area, and our service is 100% confidential.