The purchase of real estate tax liens offers annual returns far in excess of stock market investing, and the investor is given a chance to take title to the underlying real estate if the tax lien is not paid on time. When a real estate owner fails to pay his property taxes, the county government issues a tax lien against the property. The owner is then given a statutory redemption period of one to three years (depending on state property law) in which to pay off the tax lien, including unpaid taxes, penalties and interest. Some county governments, unwilling to administer debt repayment themselves, auction tax liens to private investors for unusually high interest rates.
Tax lien sales are held throughout the United States, and it is becoming increasingly common for tax lien sales to be held online. A tax lien is a debt, not a deed. The winning bidder becomes the creditor of the real estate property owner, and the owner must make payments to him. If the tax lien is not paid within the statutory redemption period, the holder of the tax lien may foreclose on the property and either take title to the real estate or sell it to a third party. The Internet is filled with online subscriber databases that provide details of tax lien sales from coast to coast. One you have subscribed to such a database, you can begin searching for tax lien sales in your area or in areas with distressed real estate markets. As soon as you have found tax lien sales that interest you, you should contact the county governments that administer the tax deed sales that interest you for further details such as registration and bidding rules.
Since tax lien sales are offered in nearly every state, you should take into account several factors when determining which tax lien sales to participate in. The first factor is convenience. Narrow your options to tax lien sales that are being held near your residence, or those that offer online participation. The second factor is the interest rate, because some jurisdictions are more generous than others (in many cases it is possible to secure interest rates well in excess of 20% per year). Many jurisdictions offer tax liens to the bidder that offers to accept the lowest interest rate. A third factor is the length of the statutory redemption period, because that is what determines how long you will probably have to wait to receive full payment Furthermore, the shorter the statutory redemption period, the less likely the property owner will be able to pay off the lien, increasing the chances that you will end up owning the property. Other factors include the amount of the minimum bid amount and the amount of any security deposit.
It is possible for a tax lien investor to gain title to real estate by waiting for the property owner to default on the tax lien upon the expiration of the statutory redemption period. Nevertheless, it is unwise to invest in tax liens for the primary purpose of eventually taking title to property, because owners almost always pay off their liens before the statutory deadline. If you are primarily interested in taking title to real estate, you should search for tax deed sales rather than tax lien sales. Tax deed sales occur when county governments that hold tax liens foreclose on a property at the end of the statutory redemption period.
Tax lien investing offers the advantages of unusually high interest rates, secure collateral, and online purchasing. The beauty of this investment strategy (other than the ability to consistently beat the stock market) is that investment opportunities are plentiful during economic downturns. This reality makes tax lien investing the ideal way to hedge your investment portfolio against the uncertainties of the business cycle.