Tax Lien

10 Replies

Can someone explain what exactly a Tax Lien is and how they work, or even the Pros and Cons of using them.

There can be multiple types of tax liens, like IRS liens. Generally most of the time people speak of tax liens here they are referring to Property tax liens. 

When someone goes behind on their taxes, in many states, the county or city, sells a lien against the property. Essentially they are selling the right to become the tax collector. The tax lien holder collects any interest and penalties. Ultimately if the owner does not pay back the taxes (redeem), then the tax lien holder can foreclose and take the property. In that situation mortgages and other liens are wiped out.

It sounds like a win win, either you get high interest or you get a property free and clear. Well it is not quite that easy. They are sold at auctions and the auctions can be very competitive. There are many details that vary from state to state and if you don't know the specific rules it can cost you big time.

Thank you Mr. Carey,
Where could I go to, to learn more about Tax Liens.

There is a lot of great information here on bigger pockets. Read through the forums. Try and find information specific to your state. As Ned said each state can be a little different from another. Try and go to your local auction and observe and talk with other people that are buying tax liens. Offer to buy someone lunch after the auction and pick their brain. There are also books on amazon you can buy. They tend to not be state specific so you will still want to know what is different about your state. 

Thanks for your great advice Mr. Underwood. I really appreciate it.

@Jovan Dinnall I think @John Underwood covered it well. I would add that most county websites have information on their tax sales although it can be hard to find. You can set up a "Keyword Alert" here on BP for tax lien or tax sale and you will get notified anytime someone mentions it in a post. That is how I found your post. 

A property tax lien is a certificate that is placed against delinquent taxes so that a county may collect their revenue and continue doing what they do with property tax money which includes schools, fire departments, parks, libraries, etc. The list goes on. 

In most counties and most states, every year if property taxes are delinquent the county sells the delinquent taxes considered as tax lien certificates.  This does not mean you are purchasing the property but an interest in the property as a delinquent tax certificate holder. 

Once you have purchased a tax lien certificate you are invested with that property which accrues interest at the rate per annum at which you purchased the delinquent taxes.  You may purchase a tax lien with the full rate of interest, no competition, if you purchase the certificate after the auction or over the counter.  Otherwise, you may take less if you have to bid against another to acquire the tax lien. IE: bid down on the percentage of interest.  If the redemption period has past and you have not received redemption you can initiate foreclosure on the property.  Redemption periods vary. There are foreclosure rules and laws that apply, each state and possibly county, if you are in MD, may vary.

Over half of the United States sell tax deeds instead of tax liens.  Tax deeds have 5 or less years of delinquent taxes and are sold as properties of ownership.  You acquire the property if you are the winning bidder which often is the highest bid.  There are different types of bidding in the US.

There are a handful of states that sell what is called redeemable deeds or tax deeds which act like a lien and have a redemption period.  The price for deeds is higher and redeemable deeds will also have a higher price, as you are purchasing the deed, with a redemption period.  Texas is a redeemable deed state and has an interest penalty of 25% with a 6 month redemption period, exception being a homestead exempted property.  There is much to learn about tax liens and tax deeds.  This is the very short version.  :)

Originally posted by @Jovan Dinnall :

Thank you Mr. Carey,
Where could I go to, to learn more about Tax Liens.

 Jovan checkout the book "The 16% Solution"

It is a GREAT introduction to tax liens and gives you some steps to move forward with. Robert Kiyosaki actually references the book at the end of RichDad PoorDad.

Hope it helps!


Thanks, For all of this valuable information. @Nicholas Junker   your right Robert does mention that book i'm going to look into it.

I live in Arizona where property tax liens pay up to 16%. Until 4 or 5 years ago a beginner like you or me could get 16% per year. Sadly, books like "The  16% solution" brought tax lien investing to the headlines nationwide. Big money institutions were buying down interest rates nationwide on property tax liens. As a result in Maricopa County where Phoenix, Az is located, the interest rate has been bid down to 1% on all but the worst properties. I have searched dozens of web sites and a dozen books. Buying out-of-state tax liens didn't interest me because I would have to buy them without due diligence or the state required you to purchase them in person. You live in Florida and there is a lot of information on Florida tax liens available.  For myself, I found a company that offers to purchase and manage all of my tax lien investments in a state that offers very, very high yields. They even take care of aquiring the homes if the tax lien certificate goes into default. They will fix it up and sell it or rent it. Whatever you prefer. They find buyers or renters.  I have wanted to invest with them for over two years but I am retired and don't have the $25,000 minimum investment. My son had the money to invest and is doing very well. I myself am thinking of joining an investment club and getting together the $25,000 from a group of investors. The investment is approved for self directed IRAs.

Good luck with your research.

It's a great business, but make sure to learn before you spend.  There are a lot of nuances.  Another great book to check out would be "Zero Risk Real Estate" by Chip Cummings.  Lots of good info, and he has some links to resources as well.  16% book is good too...

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