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What Are Tax Liens And How Do I Make Money With Them?

The word “lien” can be a pretty nasty word to throw around. For most property owners, being told that they have a lien on their property is normally pretty bad news and a cause of some distress. But in the world of tax delinquent property investing, the word “lien” can mean big profits and great opportunities. 

When a property owner doesn’t pay their property taxes on time, many states in the US have a special arrangement to collect the money that they are owed: they place a lien on the property. A “lien”, as you probably know, puts certain restrictions on a property, and the holder of the lien has a financial stake in that piece of real estate. In some states, the tax collecting county or municipality will place a lien on the property for the amount of taxes owed. After a certain amount of time has passed (usually two or three years) if the taxes are still delinquent then the holder of the lien can initiate foreclosure proceedings and receive a deed to the property.

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But how does this arrangement present an opportunity for investors? Most counties and municipalities that use liens to collect delinquent property taxes will then turn around and offer the liens, called “tax lien certificates”, at public auction. Because the government is allowed to collect only the amount of taxes owed and not a penny more, the price of the lien is set at exactly what the property owner owes, plus a few transaction fees. The highest bidder then becomes the holder of the lien. What does that mean in practical terms? One of two things:

1) If the property owner chooses to pay off their delinquent taxes, then the holder of the lien (the investor) will receive his initial investment back PLUS a percentage (anywhere from 12-24% annually). And in some states, the homeowner will also have to pay the lienholder a certain penalty of 5% or more over and beyond the taxes and interest owed.

2) If the property owner chooses not to pay off their delinquent taxes, then the holder of the lien (the investor) has the legal right to foreclose on the property and request a deed from the county. If there is anyone living on the property (whether it’s the owners themselves or any tenants) the investor has the legal right to evict them.

Can you see the huge opportunities that investing in tax liens can give you? For simply purchasing the tax lien certificate from the county or municipality, either at public auction or private sale, by paying the taxes owed, the investor is guaranteed to make some sort of profit. The worst case scenario is if the owner pays off his taxes in time and then the investor will only receive back his initial investment plus a 12-24% return, depending on the area. But the best case scenario involves the investor foreclosing on the lien and receiving the deed to a property, one that he can refurbish and flip or sell as is, for a HUGE profit.

Tax liens are a win-win situation. The local government gets the money that it needs to keep functioning and the investor gets a nice return on any money he puts down. But if you play the game right, the returns can be substantial.

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