A “lien” refers to a form of debt secured by property. If you have a mortgage, for instance, then the bank has a lien on your property, because you owe them money, and their security for that loan is your house.
A “tax lien” is a specific form of lien where the government puts a lien on property because of back taxes owed. A lien, including a tax lien, means the property owner does not own the property “free and clear” and is not able to sell it. If the taxes are not paid up, the government has the right to foreclose on the property, just as any mortgage holder could if the owner were not making good on a debt.
Sometimes the government sells the rights it holds under a tax lien to a private party in a public auction. These tax lien auctions were traditionally held in person, but now are often held online.
In exchange for paying a lump sum to the government for the tax lien, the purchaser gets that back plus interest as the property owner pays their tax debt to the purchaser instead of to the government. Or if the property owner does not pay, the purchaser can foreclose and get the property itself.
For those with the liquidity to pay the lump sum up front, purchasing tax liens is seen by some as an appealing investment, as it is not uncommon to be paid 14% or 16% or 18% interest on one’s money. Plus tax liens take precedence over other liens, making it a fairly safe investment.
Most people don’t buy tax liens with the expectation of foreclosing on and acquiring all these properties, as the overwhelming majority of tax liens are paid up and not foreclosed on. The appeal is more the high interest rates.
For specifics on where to find these tax lien sales, a useful site is www.tax-lien-certificates.com.
Certainly you don’t want to jump into investing in tax liens without doing a lot of research first. Though the investments can be quite profitable, there are some factors that often trip people up.
For one thing, the laws and regulations surrounding tax liens vary from state to state, and tend to be unusually complicated, even for property law. Property purchased with government-insured financing such as Federal Housing Administration (FHA) loans come under their own special rules. Each state has their own statute or redemption governing how a property owner can avoid foreclosure. If the property is forfeited, the tax lien holder doesn’t get the property automatically, but has to then go through the foreclosure process, which also varies. So it can all get quite arcane for most investors.
There’s also the problem that often the most desirable tax liens are scooped up by major institutional investors that have the resources to fully research these matters and cherry pick the best opportunities.
Tax liens may still be worth looking into if you’re searching for a promising investment, but tread lightly until you really know what you’re doing.