Tax Lien Investing, An Underutilized Investment Tool
The goal of an investor is to seek new opportunities while evaluating risks vs. rewards. Many stock market investors are happy with a safe return of 10-15%. Investing in tax liens and tax certificates is a less familiar strategy. Although it’s less popular and not fully understood, tax liens can preform just as well or better than stock investments. Another advantage of tax lien investing is that you have a more pre-determined return without having to second guess the market.
In many jurisdictions, real estate tax lien investors see returns between 10-25%. As with any other investment, the key to tax lien investing is to fully understand the strategy and know as much about the property as possible.
What is a Tax Lien?
When a property fails to pay the real estate taxes, the city or county in which the property is located has the authority to place a lien on the property. A lien is a legal claim against the property for the amount of unpaid taxes.
When a lien is issued, a tax lien certificate is created by the municipality that reflects the amount owed on the property, plus any additional interest or penalties due. These certificates are then auctioned off to the highest bidding tax lien.
Tax liens are assigned by county. However, the guidelines regarding tax liens vary with each state. There can be some variance regarding the redemption period and the bidding process.
There are two ways to profit from tax lien investing. First, the most common way is profiting from interest payments and the 2nd is taking ownership of the property.
Rates of Return
Here’s an example of Rates of return.
| State | Sale Type | Interest Rate | Redemption |
|---|---|---|---|
| Delaware | Deed (hybrid) | 15% penalty | 60 days |
| D.C. | Lien | 18% per annum | 6 months* |
| Florida | Lien | 18% per annum, 5% minimum | 2 years |
| Georgia | Deed (hybrid) | 20% penalty | 1 year** |
| Lousiana | Deed (hybrid) | 12% per annum + 5% penalty | 3 years |
| Maryland | Lien | 6% to 24% (varies by county) | After 6 months* |
| Pennsylvania | Deed (hybrid) | 10% per annum* | Possibly 1 year* |
| South Carolina | Lien | 8% or 12% per annum | 1 year |
* varies
** not self-executing
Lien vs. Deed vs. Hybrid States
Each state has a process for enforcing payment of property taxes. About half of the states are tax “lien” states, while the other half are considered tax “deed” states.
In a deed state, the county is not selling a lien on the property for failing to pay property taxes. Instead, the the county is actually auctioning the property itself to pay the taxes.
A “hybrid” state is technically a deed state. However, it operates like and has much in common with a lien state. It has aspects of both systems.
All states fall into one of these categories:
- Lien states
- Deed states
- Hybrid states
State by state:
| Lien | Deed | Hybrid |
|---|---|---|
| Alabama | Alaska | Connecticut |
| Arizona | Arkansas | Delaware |
| Colorado | California | Georgia |
| District of Columbia | Idaho | Hawaii |
| Florida | Kansas | Louisiana |
| Illinois | Maine | Massachusetts |
| Indiana | Michigan | Pennsylvania*** |
| Iowa | Minnesota | Rhode Island |
| Kentucky | Nevada | Tennessee |
| Maryland | New Hampshire | Texas |
| Mississippi | New Mexico | |
| Missouri | New York** | |
| Montana | North Carolina | |
| Nebraska | Ohio* | |
| New Jersey | Oregon | |
| North Dakota | Pennsylvania*** | |
| Ohio* | Utah | |
| Oklahoma | Virginia | |
| South Carolina | Washington | |
| South Dakota | Wisconsin | |
| Vermont | ||
| West Virginia | ||
| Wyoming |
* Ohio is historically a deed state however, counties with populations over 200,000 are also allowed to conduct tax lien sales.
** New York City is also allowed to conduct tax lien sales.
*** Pennsylvania counties may operate under the hybrid system where the property is improved and has been legally occupied 90 days prior to the sale.
Lien States
- The investor only has a lien on the property and does not have any other rights in, or title to, the property.
- The investor receive a statutory interest rate until the property tax is received.
- The property owner has a statutory redemption period within which he or she must pay the tax bill.
Deed States
- The investor actually requires title to the property.
- No interest rate or redemption period is involved since the investor receive the property itself.
Hybrid States
- The investor actually acquires title to the property, subject go the prior owner’s right to redeem and get the property back.
- Should the prior owner redeem (ie; pay the tax bill plus interest, penalties, and costs), the investor will receive an interest or penalty payment on his or her investment.
- The prior owner has a specified redemption period (six months to 3 years) to redeem the property and reacquire title.
Who Should Invest In Tax Liens?
Property tax liens can be a viable investment option for investors familiar with the real estate market. Investors that fully research properties prior to buying liens can generate substantial profits.
