How To Make Money With Tax Lien Investing

June 3rd, 2009

Tax lien investing vs. tax deed investing

There have been numerous books written about tax lien investing and how it’s possible to earn solid returns from them (ranging anywhere from 6 percent to 50 percent), and one of the best known is Joel S. Moskowitz’s “The 16 Percent Solution”. There are also countless infomercials that promise to teach you all the secrets to making money with tax lien certificates and tax deeds, as long as you’re buying their program. The reality is that just like in every money-making venture, there’s a trade-off between risk and reward. But more importantly, it doesn’t make any sense to consider investing into anything that you don’t have a solid grasp of.

Properties across the country are subject to yearly property taxes, and it’s the responsibility of the owners of those properties to make sure that said taxes get paid. When a real estate owner fails to pay their property taxes, then the counties and/or municipalities where those properties are located simply sell those taxes to an investor. Property taxes play are an important source of tax revenue for counties and municipalities, so the government gets to collect its money immediately. The investor, on the other hand, buys a lien, which is secured by the property. It’s a good deal for them for two reasons. First of all, the return (interest rate) on tax lien certificates is usually pretty good. Secondly, a tax lien comes before most other liens, so there’s a very good chance that they won’t lose their money.

Some other states don’t sell tax liens collect delinquent taxes; instead they sell tax deeds. Contrary to the tax lien certificate, where your primary source of repayment is the interest you’ll earn, when you purchase a tax deed you’re actually buying the property itself. When it comes to how much you’re expected to pay, things vary considerably: some states just sell the property for back taxes plus applicable penalties, other states base their price on a certain percentage of the property’s assessed value and yet others simply sell the property at market value. As an investor, you want the best possible deal, and your best chance lies with the states where the properties are sold for back taxes plus applicable penalties, since this is one of your best shots at buying property at under market value.

How is the money actually made?

When you’re watching the infomercials or reading from sources that don’t give you the details, things tend to be presented in such a way that leads you to think that all you have to do is purchase, say, a tax lien certificate, and the county or municipality that you bought it from will send you regular payments at the quoted interest rate. Actually, it doesn’t happen that way and the county/municipality is pretty much out of the transaction once the lien is sold. The truth is that you don’t get one red cent until the property owner decides to redeem the lien. Now there’s a redemption period (varies per state) beyond which you’re legally allowed to foreclose on the property to get paid on your lien.

One other thing you need to know is that once the redemption period is over, you (as the lien holder) do NOT automatically get the deed to the property. As mentioned previously, you will be allowed to foreclose on the property, but in most states you will need a lawyer to do so and eventually get the deed to the property. In other states, the property will be sold in a tax deed sale, where it will be auctioned to the highest bidder. You can understand that there’s no guarantee that you will make a profit on the transaction. Not that it’s impossible, but you need to know that it’s not guaranteed.

Finally, tax lien investing is constantly being presented as an excellent way to buy properties for pennies on the dollar. It’s not that it’s not true; it’s just not an everyday thing. The higher the value of real estate in the state where the property is located, the higher the chance that the tax lien will redeem at some point during the foreclosure process. When that happens, you DO get paid, but you don’t get to own the property for pennies on the dollar. If your goal is to get your hands on properties for under market value, your best bet lies with tax deeds.

Tax lien investing is a way to get a high return on your money, but as you can see, not everything is as simple as it may sound. So you’re going to need to invest some time and familiarize yourself with the law and procedures for the county/municipality in which the property is located. If you’re serious in how to make money investing in tax liens, you’re going to have to put in time and effort in order to make it happen because it will require work and dedication, not to mention a bit of money. If you stick to it, though, there’s good potential for setting up a very lucrative business.