Information on Investing in Tax Liens

Tax lien investing is a type of investment that many people are unfamiliar with, but it provides an opportunity to bring in low-risk returns for a minimal investment. Tax lien investment involves buying tax lien certificates from county governments in order to help them meet a budget deficit.

Function

• The reason county governments sell tax lien certificates is so that they can raise the money that they need to run the county. A county government has a certain amount of money that it plans on receiving from property taxes. This money can be used for schools, roads and other important things for the county. When people neglect to pay their property taxes, this creates a budget deficit. The county then sells these tax liens to private investors to raise the money it needs.

Purchase

• Investors can generally purchase these tax liens from county governments through an auction format. After the county collects its taxes for the year, it determines how many liens it will have to create. Then it sells these tax lien certificates in the auction. The county government starts the bidding at a particular interest rate. Bidders can then bid down the interest rate depending on how low they are willing to go.

Benefits

• The benefit of investing in tax lien certificates is that you can earn a high rate of interest that is essentially guaranteed by the county government. The county government requires taxpayers to pay for the taxes that they owe and the amount of interest that is agreed upon by the county and the investor. If homeowners do not pay their taxes, the investor could foreclose on the property. This allows the investor to get a piece of property for a very small investment.

Risks

• Although this type of investment has a great deal of potential, it also comes with some risks. There is a chance that an investor could purchase a property that has no real value. If the property is in disrepair and there is not a resale market, the investor could potentially lose his investment. There is also a risk that the property that the investor purchases has a federal tax lien against it or some other encumbrance.

Considerations

• If you plan on getting involved in tax lien investing, you have to bring cash with you to the auction in most counties. As soon as you win the bid on an auction, you have to put up the cash to buy the tax lien certificate immediately. If the county does not require you to pay it in full immediately, it may give you 24 hours to come up with the money.