Are Sewer Liens Good Investments?

Sewers might look unattractive but high-interest sewer liens attract investors.

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Sewer liens are held by local governments against private property. Like property tax liens, sewer liens are secured first liens against the property. The lien stays with the property even if the owner sells it. Sewer liens also pay the maximum statutory interest rate, which can be 18 percent or higher. The combination of a secured first lien plus a high interest rate can make sewer liens an ironically inviting investment.

How Sewer Liens Work

When municipal and local governments perform sewer system maintenance or install new sewer lines, the property owner is charged for the work. The amount is billed separately from the owner’s property tax bill. The property owner has a specific amount of time to pay the sewer charge before the deadline. If the sewer charge is not paid timely, the tax collector places the property on the tax delinquency rolls. The tax collector issues a sewer lien against the property to secure the overdue amount.

Interest Rate

Sewer lien interest rates are governed by state statute. Some states pay the maximum interest rate as soon as the tax lien is issued. Other states have a minimum dollar amount the lien must reach before the maximum interest is paid. For example, sewer liens in New Jersey have two different interest rates. The state pays 8 percent fixed interest on sewer liens that are less than $1,500. Sewer liens start earning the maximum 18 percent interest when the lien amount is $1,500 or more.

Sewer Lien Sale

Based on state law, tax collectors must sell their sewer liens at a public auction. Sewer liens are sold alongside property tax liens. The auction works on a reverse bidding system, starting at the maximum statutory rate. For example, the opening bid would start at 18 percent, and then drop down one-fourth of a percent until the bidding stops. If your final bid is 10 percent and there is no more bidding, your sewer lien earns 10 percent interest until it is redeemed by the property owner or you start foreclosure proceedings.

Property Ownership Through Foreclosure

You can foreclose on a property after you buy the sewer lien. In some states, the county tax collector holds a public auction where the highest bidder gets the property. Other states keep the foreclosure private between you and the property owner. States with rights of redemption give owners additional time to pay the lien before transferring ownership to you. Other states give you property ownership as soon as the bidding ends and you pay the lien amount, plus costs and fees. In that case, you end up buying a property for the price of a sewer lien.