Investing in Tax Lien Certificates and Tax Deeds

Posted by Amanda on January 12, 2011

Last week I sat down with my husband Paul after reading Rich Dad, Poor Dad. My mind was racing with ideas, as I am sure yours were if you have read the book, and I decided to delve into these ideas by first looking at the topic of tax lien certificates.

Admittedly when I sat down to talk about this with Paul, I knew hardly anything about them, except that they could bring in 16% interest (a far cry from the 0.02%-2.5% savings accounts are earning now), and they are issued because of homeowners that have not paid their property taxes. Paul was intrigued as well, and we decided to research this investing option. Below is what we learned.

Tax Deed Vs. Tax Lien States

People own property, and become delinquent on their property taxes. State and local governments depend upon these taxes to fund programs, and so they have come up with ways to satisfy this budget leak and collect on their taxes.

About half of states are Tax Deed states, and the other half are Tax Lien States, which refer to the method the government uses to collect delinquent taxes. In Tax Deed states governments actually sell the deed to the property at auction to investors in order to recoup their costs. In a Tax Lien state, the government sells a Tax Lien Certificate, and pays the investor interest until the tax lien certificate is redeemed. Of course there are a few hybrid states, such as Texas and Georgia that sell the property at a tax deed sale, yet allow the owner a redemption period to pay off the lien and reclaim the property. And New York, Florida, and Ohio have both tax liens and tax deed sales.

What a Tax Lien Certificate Is

According to Wikipedia, a Tax Lien is a lien imposed by law upon a property to secure the payment of taxes. While a tax lien may be imposed for delinquent taxes owed on real property or personal property, or as a result of failure to pay income taxes or other taxes (generally referred to as an IRS lien), for this article we are concerned with just the real estate property taxes.

When a property owner becomes delinquent on his/her taxes, a tax lien certificate is issued by state governments in the amount of the taxes due, any interest due, plus any additional costs, and is sold to investors in order for the government to recoup its costs. As an owner of the tax lien certificate, you own a note on the property for a specified redemption period, and earn interest for each month the note remains outstanding. At the end of the redemption period if the taxes are not paid to the investor, then the investor has the right to initiate a tax lien sale and tax lien foreclosure proceedings.

How to Purchase a Tax Lien Certificate

In tax lien states, the delinquent taxes, accrued interest, and costs associated with the sale is put into a lien certificate and sold at public auction to investors. Auctions can be either in person, or over the internet, such as on eBay. Actual procedures vary from state to state, and may be conducted at a courthouse, or a private law firm. It is best to research online for your state and county to find out how to conduct a lien search, or if you want to speak with someone in person, call your county tax office. Also, be aware that payment is often necessary at the auction, in cash, or within two days. Check out this article on some tips for the auction process.

How Long is the Investment Period

Redemption periods, or the time period the owner has to pay their taxes, can be from 120 days to 3 years, depending upon which state you purchase them from and if the lien results in a tax foreclosure. Each tax lien certificate has a redemption period that the investor must wait before he/she can contact the homeowners.

How Much Can You Earn

tax lien certificates have a fixed rate of return, which could be anywhere between 16%-50%, again depending upon which state you purchase them from.

There are a couple of scenarios that would equal different payout amounts to you. Let’s say the property owner pays the government the outstanding taxes due before the certificate reaches maturity (and before the redemption period is up). When this occurs, then the government will send you your initial investment along with all outstanding interest due.

If the owner does not pay his/her tax obligation, then the government will give you the deed to the property. That’s right; you will have purchased a home for a ridiculously low cost. In some cases you will have to initiate foreclosure proceedings (once again, check with the state that you are purchasing them from), but either way you will own this property.

Risks Involved

Purchasing a tax lien certificate is secured by the real estate property, which means that there are two major risks involved that, with a bit of research, can be mitigated. First off, research the property’s title and make sure it is free and clear (other than the property taxes owed on it). This will ensure that if the property is sold to recoup the costs, you are first in line to receive the proceeds.

Secondly, make sure the owners are not in bankruptcy. If so, then you could fall third to the IRS and creditors before you see your money from your certificate, or from acquiring the deed to the property.

Finally, please be aware that tax lien certificates are not a liquid investment; your money is tied up until the property owner pays up, or you get the deed to the property and sell it.

Have you ever bought a tax lien certificate?

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Comments to Investing in Tax Lien Certificates and Tax Deeds

  1. I researched tax lien investing in the middle of last year when I was also looking at buying a foreclosed property… risk is much larger than reward right now, is the problem, with people going bankrupt and the possible problems with the land title system created by the banks’ robo-signing and MERS.

    Another problem is that a lot of property owners who’ve gone delinquent have been delinquent on their property taxes for several years, which means that the people who’ve been lien investing for years are already ahead of you loading up on claims on the best properties.

    There’s nothing wrong with learning how your state does tax lien sales and title/personal record research though. Mine (Florida) has a very slick online setup for bidding and chain of title research. It’s always good to know how stuff works even if it’s not immediately useful!


  2. Amanda,

    I’ve invested full time in tax deeds & liens for about 12 years now. The following is a very general overview of tax deeds in particular.

    Anyone contemplating these type of investments should have a basic understanding of real estate law and title research. Not only will you be researching the real property’s past owners and liens, but you will be double checking to make sure the State conducted the tax foreclosure according to the established procedures. For example: all interested parties need to have received (or served) proper notice of the foreclosure and the legal description needs to be complete and correct. You will more than likely be defending your deed in court against the previous owner or the bank of the previous owner. Regardless, one has to complete a quiet title action once it is time to sell the property with a general warranty deed and title insurance(after the required redemption/contest periods – varies for each state). Investors are sometimes shocked when they are sued by a previous owner contesting a sale. If a tax foreclosure is ever overturned in a court of law, your purchased price is returned. However, your other expenses (legal fees, title work, improvements, investment of time) are not reimbursed.

    That being said, one can make a lot of money buying and selling real estate purchased at a tax foreclosure sale. It’s just not a passive investment.

    Gene C.

    Gene C.

    • Hello Gene C.,

      That is great to know that your money can be reimbursed by not your other expenses should a tax foreclosure be overturned. Thank you for your information.

      Amanda L Grossman

    • Couldn’t you also consider buying tax liens on a property that’s already been foreclosed on by the bank. From my own research, banks don’t seem to be any more eager to pay property taxes than the people they’re ousting. If the bank has a halfway competant foreclosure department (many do not!!!!!) then they’ve already done all the hard work of quieting the title from liens that may have affected the original homeowner.

      Bank bankruptcy may be slightly less likely than personal bankruptcy as well. And the chance that you get your investment bank plus interest is higher since the bank is REALLY motivated to sell the house and MUST pay off the tax lien before doing so. Lower payoff than getting the actual property, but lower risk as well. Possibly.


      • Hello TaJ,

        Interesting idea. I am not sure if it works that way, but it does seem to have less risk involved (like you said, the bank would probably have done a lot of the legwork at that point). Thanks for your comment!

        Amanda L Grossman

  3. This is interesting. I had never considered investing in someone else’s lack of ability to pay their taxes. This seems like the type of thing where you could lose your shirt if you don’t know what you’re doing, or make a killing if you understand how the market works.

    Jane Sanders

    • Hello Jane!

      I agree that you need to do your research first. Thanks for the comment.

      Amanda L Grossman

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    Rick Spencer

  5. Wow! A very informative piece about an investment option I have never heard of. I think for me personally, this might have too much risk, however, it is a very cool idea!

    Any idea to earn a little more interest than the 1% currently being earned on money market mutual funds is to do microloans. I have one right now that is earning 3%…Food for thought.

    Jacob @ My Personal Finance Journey

  6. Amanda…nice post! I wandered into your blog off of facebook and I’m glad I did.

    I’ve been interested in tax liens for years and did not know about the certificates.

    The certificates would allow for a more informative and controlled investment during the waiting period to elapse. Worse case scenario (excluding a bankruptcy case) would be that you get paid in full before the time elapsed if the homeowner paid off the tax.

    As one of the prior readers pointed out that the forclosure banks do not do their due dilligence either and with all the forclosures out there presently, that would be an interesting research project!

    Thanks for the info! I will be keeping tabs on your blog!

    Deidre @ TransFormX

  7. Hi Amanda,
    I would second Gene C. and emphasize that the experience of buying tax liens varies WIDELY depending not only on the state, but on the local judges as well. I have had a couple of experiences with tax liens and neither one panned out – here are some things I noticed.
    1) If there is any error in the highly technical (at least in my state) procedure that you must use to serve notice on the previous owner, then all of your interest goes bye-bye. Even if you have held the lien for years and spent thousands of dollars on legal fees.
    2) Some areas will not give a deed unless you own three consecutive years of taxes. You could end up holding a “lien” that never gets paid off.
    3) The court may regard you as the “moneyed investor” and the previous owner as the “poor little guy” and try to do anything in its power to deny you the interest.
    4) Even if you do get the property, you will often have to invest additional cash to fix it up and get it sold – and properties are not selling right now.
    5) Do the math – Even if you are looking at a large property bill like 5K, 16% is only $800. After your costs for the auction, serving process, etc., there’s not much left – and that’s even before going to court if you have to. Also consider the value of your time – you will be spending several hours.
    6) Pay close attention to Gene’s comments. A tax lien sale is different from a tax foreclosure sale (at least in my state). In a tax forclosure sale, you walk out with the deed and then put money in the house to fix it up and then sell it. That seems to be where Gene is making his money – not in the alleged 16%.
    7) You do know that the 16% is just the opening bid, right? That is, if someone bids to pay the lien and only take 15% interest, then the lien goes to them – and the rate gets auctioned down to 0% often. In that case, people just want to try and foreclose on the house, fix it up, and sell it.
    8) Are you interested in fixing up and selling foreclosures? I think that’s what Gene is referring to when he emphasizes that this is not a passive investment.
    9) I was all excited about investing in tax liens after readin Joel Moskowitz’s book “The 16% Solution”;sr=8-1
    but it did not pan out.

    Good luck if you decide to go this route!

    Managing Partner

    • Hello Managing Partner!

      Thank you so much for all of the great comments and for sharing your experience. This definitely gives us much to think about.

      Amanda L Grossman

  8. if i purchasein a a hybrid state can i get title ins soi can sell proprty istead of holding it?

    Edward tagg

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