How Do I Invest in a Tax Lien?

Tax liens allow investors to profit when homeowners are late on their property tax payments.

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A county government creates a tax lien when a homeowner is unable to pay his property taxes. Instead of waiting for a late tax payment, the county might choose to forgo the interest and penalties due and sell the lien to a private investor, in exchange for cash in hand. Tax liens are attractive to investors because they have a guaranteed interest rate on an investment that is secured by real estate. If the homeowner does not pay, the lien holder may foreclose on the property.

Step 1

Learn about your county's procedures for selling tax liens. The redemption periods and interest rates can vary by location, as these are controlled by state laws. Check the county website for a list of available tax liens and the upcoming sale dates. If your county does not post this information online, contact your county recorder's office for details.

Step 2

Narrow down your list of potential liens to those in neighborhoods you know or are able to thoroughly research. This will make it easier to assess the risk of purchasing a lien for a property. Contact the tax assessor's office to request a detailed history on each property. You might have to pay a small fee for copies.

Step 3

Examine the property's physical condition, including that of any buildings or other structures. If you have time, walk around the neighborhood and look at parks, schools and libraries. These are often an indication of a neighborhood's financial stability.

Step 4

Attend the sale and bid on the liens you have decided to purchase. Depending on the rules in your county, you might have to preregister several days before the sale.

Step 5

Make payment for your lien if you won the auction. You usually must pay for the lien in full as soon as the bidding ends. However, some counties allow you to pay later if you arrange that before the sale. Make sure you have an approved method of payment before attending the sale. You might be required to pay in cash or with a cashier's check instead of using a credit card or a personal check.