Tax Liens: Making it Work!

By Jordan Sheppherd


If you’ve read the “Tax Liens: Overview” article, you have a good sense of what a tax lien is and isn’t. Below, we discuss some of the ins and outs of tax lien investing. So although the highly publicized return rates of 12-25% are unlikely, you can, with a little forethought and research, earn a higher interest rate than that CD you have stuck in a major bank at 1.2% a year.

According to an article by Forbes,“Individual investors typically earn 4% to 7% a year, and 99% of sold liens are redeemed by the property owners, says National Tax Lien Association, Executive Director Brad Westover.”

Before you buy though, it helps to do a little homework first.


If you plan to make an investment in tax lien certificates, it is crucial that you are familiar with the area you are investing in. Tax lien interest rates, rules and requirements vary not only from state to state but from county to county. Some states allow additional penalties to be tacked onto the tax bill. Texas, for instance, does not hold a tax lien certificate sale but rather a tax foreclosure sale (tax deed sale).  Since each jurisdiction differs, your best resource for familiarizing yourself with your area is to contact the local county tax office. This will also be important in case the property winds up under your ownership due to foreclosure.


Because tax liens are not liquid or readily transferrable to cash (unless you choose to sell them to a third party), they are best suited for those investors who have fair to large amounts of cash on hand as well as the ability to sit on their investments. Once a tax lien certificate is acquired, the investment will most likely not see a return until at least a year or more down the road. Additional funds may be required to buy subsequent liens for the property as new liens have first priority and you will want to protect your investment. If you are looking for an investment that will leave your funds easily accessible and available in the next two years, tax liens are likely not a good strategy for you.


It is important to consider that you could end up with real estate on your hands due to foreclosure. If you end up with a property you don’t want (most tax liens do not end in foreclosure; approximately 1% according to Forbes), you can try to sell the lien to another investor.  Otherwise, owning the property can incur additional costs for the foreclosure process. While some properties may be desirable (some investors hedge their bets by “buying” property in this way), it is a good idea to make sure that property is worth owning. Make sure to stay away from ugly properties such as those with poor or no access, irregular shapes or other unwanted features. Their owner is likely not paying their taxes because they don’t want it either!


If possible, review the property you are considering in person and be aware of the true market value. Don’t rely on Google Earth or other technology to verify that the property is desirable.  Most property taxes are approximately 3% of the property value.  


Tax liens are sold by bidding at auction. The interest rate decreases with each bid, so a good understanding of the other bidders will help to increase your success. Banks and tax lien buying firms will usually be the largest competitors. Take advantage of their knowledge and expertise and learn all that you can from them.


For an investor who is serious about using their cash, an attorney who is familiar with real estate and tax liens is a valuable resource.  Gaining information regarding clear titles and specific tax lien regulations in your area is money well spent.

As you can see, tax lien investing is a strategy that takes time, research, patience and capital. However, the rewards of a return of an average of 5% or better make it a worthwhile possibility.

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