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How to Invest in Tax Lien Properties


Investing in tax lien properties can be a lucrative venture for those looking to diversify their investment portfolios. When property owners fail to pay their taxes, the government can place a lien on the property. Investors can then purchase these liens at auction, effectively paying the outstanding taxes in exchange for the right to collect the debt, plus interest, from the property owner. This process often offers high returns, but it comes with risks, including the possibility of having to foreclose if the owner doesn’t pay up. Understanding local laws and conducting thorough due diligence are essential steps for anyone considering this investment strategy.

If you’re thinking about getting into real estate investing, consider working with a financial advisor.

What Are Tax Lien Properties?

Tax lien properties arise when property owners fail to pay their taxes, prompting the government to place a lien on the property. This lien acts as a legal claim against the property for the unpaid taxes. To recover the owed taxes, municipalities auction off these liens to investors. The winning bidders pay the outstanding taxes, gaining the right to collect this debt from the property owner, along with interest and penalties.

Investing in tax lien properties can be attractive due to the potential for high returns. The interest rates on these liens can be quite generous, sometimes reaching double digits, depending on state laws. However, just like any other type of investing this certainly is not without its own risks. If the property owner fails to repay the lien, the investor might have to foreclose on the property, which can be a complex and costly process.

Potential Risks of Tax Lien Investing

While tax lien investing can offer attractive returns, it is not without significant risks. One primary concern is the potential for the property owner to default. If the property owner fails to repay the lien plus interest, the investor may need to initiate foreclosure proceedings to recoup their investment. This process can be lengthy, costly and complex, often requiring legal expertise and additional financial resources.

Another risk involves the condition and market value of the property. Investors typically have limited information about the properties tied to the liens they purchase. If the property is in poor condition or located in a declining market, its value may be significantly lower than anticipated. This discrepancy can lead to financial losses, especially if the investor ends up owning a property that is difficult to sell or rent.

Additionally, tax lien laws vary significantly by state and locality, adding another layer of complexity. Investors must thoroughly understand the specific regulations and procedures in the area where they are purchasing liens. Missteps or misunderstandings in navigating these legal requirements can result in forfeiting the investment or incurring penalties.

You should also note that the competitive nature of tax lien auctions can drive up prices, sometimes beyond the point of profitability. Bidding wars can lead investors to overpay for liens, diminishing the potential returns. This risk underscores the importance of setting strict bidding limits and conducting thorough due diligence before participating in auctions.

Finally, investors may also face difficulties in recouping the investment if the property owner redeems the lien. In this case, the investor may only receive the statutory interest or penalty, which may not fully cover the initial investment and associated costs, especially if the redemption occurs quickly.

Ways to Invest in Tax Liens

An investor looking up tax lien properties.

Investing in tax liens requires careful research and a clear understanding of the process. If you’re interested in diversifying your portfolio with this strategy, here are six general ways to find tax lien properties and and invest in them:

  1. Public auctions: Most tax lien sales occur through public auctions conducted by local governments. These auctions can be held in person or online. Prospective investors should check the county or municipality’s website for auction schedules and procedures.
  2. Online tax lien sales platforms: Several platforms specialize in online tax lien sales, allowing investors to participate in auctions from anywhere.
  3. Purchasing directly from the municipality: In some cases, municipalities may offer unsold tax liens for direct purchase. Contacting the local tax collector’s office can provide information on available liens and the process for purchasing them directly.
  4. Tax lien certificates: Investors can also buy tax lien certificates from previous auctions that were not sold. These certificates are often available at a lower cost and can still yield high returns if the property owner redeems the lien.
  5. Working with a broker: Some brokers specialize in tax lien certificates and can offer guidance, access to exclusive auctions, and help with the due diligence process. This option can be beneficial for beginners who want expert assistance in navigating the complexities of tax lien investing.
  6. Real estate investment groups: Joining a real estate investment group can provide opportunities to invest in tax liens collectively. These groups pool resources to purchase liens, offering a way to participate with lower individual investment and shared risk.

Bottom Line

Investors calculating the value of their tax lien investments.

Investing in tax lien properties can be a lucrative addition to your investment strategy, offering the potential for high returns through interest and penalties. However, it requires a thorough understanding of the process, diligent research and a clear assessment of risks. By exploring various methods to find tax lien opportunities — such as public auctions, online platforms and direct purchases from municipalities — and by seeking professional advice, you can identify both risks and opprotunities.

Tips for Investing

  • A financial advisor can help you manage portfolio of investments. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • Curious how much the money you invest could potentially grow over time? Consider using our free investment calculator.

Photo credit: ©, © Sae Yang, ©