Why Invest in Tax Liens?

There are several different types of tax lien investments. Each State has different tax laws about how to recover back taxes. Some will seize and sell the property deed outright, auctioning it off beginning at the cost of the back taxes. Some sell certificates that allow payments with high interest and some sell the property with the owners retaining the right to 'redeem' their home by full payment of the back taxes to the certificate owner. Default on all of these result in the property being auctioned off and the tax lien investors being paid off. The IRS will sell a tax certificate at a high interest rate to investors.

Tax Lien Certificate States
  • Alabama
  • Arizona
  • Colorado
  • Florida
  • Illinois
  • Indiana
  • Iowa
  • Kentucky
  • Louisiana
  • Maryland
  • Mississippi
  • Missouri
  • Montana
  • Nebraska
  • Nevada
  • New Jersey
  • New York
  • Ohio
  • Oklahoma
  • South Carolina
  • South Dakota
  • Vermont
  • Washington, D.C.
  • West Virginia
  • Wyoming

For investors, buying tax liens puts your money to work at a higher rate of interest (example might be 11%) than you can receive from banks and many stock investiments and they are secured by the value of the property. Tax liens are usually the 'first' in line for payment, even above the mortgage on the property if the property has to be sold to satisfy the liens. However, the investor does have to pay cash up front to secure the lien. Additionally, they have to pay county and perhaps state fees when buying the lien. The tax lien investment is fairly safe since the amount owed in taxes is usually such a small percentage of the total property value, and since the tax lien investor is first in line to be paid. In the case of default, the property can be sold and the investment recovered.

Buying Tax Liens as certificates is a way to let your money work for you. You are investing the cash into a secured, high interest vehicle in the 'first position' for repayment. Many investors prefer this type of investment to a tax deed sale, as the tax deeds are usually more expensive and are sold in an auction. The tax deeds are often bid up closer to market value and are therefore more expensive then buying certificates. Additionally, when buying tax deeds it would be wise to research the properties for other liens since these would be transfered with the property to the new owner.

Other states than those listed to the right settle tax liens by Tax Deed Sales and Redeemable Deed Sales. These are different types of investments, with their own regulations, risks and rewards. They are usually more competetive (auctions) and the buy in price is higher. Legal advice is usually a good idea and researching the properties you are interested in is highly recommended (for condition and other liens).

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