How to Make Money on Tax Lien Properties

Property tax liens can be a low-risk investment.

When a homeowner does not pay property taxes, the debt can be purchased from the municipality by the public. Purchasing a tax lien is typically a low-risk investment that relies on property turnover to realize a profit.

Things You'll Need

• Capital
• Tax-lien auction registration

Instructions

1. Acquire capital through personal finances or borrowing. If you do not have on-hand capital to purchase a tax lien, you will need to borrow it. Property tax liens can vary in amount, as they are often based on the value of the property itself. Consider the value of the property when setting aside or borrowing the necessary funds to purchase a tax lien. All tax liens must be paid in full at auction. It is also wise to consider the time you can wait for a return on your investment. You make money on a tax lien only when the property is sold. Your tax lien must be removed or paid for in order for the property to transfer ownership.

2. Conduct a property search and inspection. Tax liens are public record. Contacting your local municipality or doing an online search will often reveal the property's tax status. Before going to auction and bidding on a tax lien, it is prudent to inspect or survey the property. Purchasing a tax lien on a property with problems (flooding or crime) can reduce interest in the property. This not only reduces the value of the property, but it can also cause you to wait longer before seeing a return.

3. Attend a tax-lien auction. Tax auctions are usually held at predetermined dates. You can contact your local municipality for further information. The tax lien will be auctioned off as a tax-lien certificate or tax deed. Tax liens are discounted below the actual amount owed in taxes by the homeowner or bank. Payment is expected at the time of the auctioned sale.

4. Purchase your tax lien. Once you own the tax-lien certificate, you must wait for the property to sell or transfer to a new owner. When this happens, your lien must be removed through payment.

Tips & Warnings

• There is one caveat in cases of property bankruptcy. If the bankruptcy involves the original owner of the property, creditors and the Internal Revenue Service (IRS) may take priority of payment over a tax-lien holder.

References

• SaveWealth: Tax liens and real estates