Tax liens represent a unique way of making money from real estate.  There are two ways in which this type of investing works:  

1) Interest From Tax Lien. 

When an owner fails to pay his or her property taxes, the municipality issues a tax lien on that person’s property.  (Certain states allow the tax lien to become a first lien on the property.)  The municipality sells these liens at auctions. 

As an investor, you come in and bid on the tax lien certificate.  If you are successful, you receive a state-mandated yield from the lien or, in other words, interest at a fixed percentage rate.  You collect interest that the delinquent owner must pay to the municipality (or the owner’s foreclosing lender) in order to release the lien.  The interest rates vary by jurisdiction, but they are relatively high compared to the interest you can earn from certificates of deposit, bonds, money market accounts, etc.

2) Foreclosure on Tax Lien. 

This second method for making money off tax liens is much more lucrative.  If the owner fails to pay the taxes within the allotted time (depending on that jurisdiction’s statutory redemption period), you, the investor, can foreclose on the lien and end up owning the property.  The majority of these liens are, in fact, paid off in time, but some owners simply can’t come up with the money. 

In such cases, by foreclosing on a lien, you gain an enormous value because you obtain title to the property at a fraction of its market value.  Then you can turn around and sell the property at market value.

Obviously, this general overview is just the beginning.  I recommend (as with any type of investing) studying these concepts and knowing them well before jumping in. 

For example, certain creditors and, of course, the IRS can take priority over tax liens, so you need to know how to do thorough title searches and understand bankruptcy.  Inspections and surveys of the property are also vital to make sure you know what you’re getting with the property (e.g., a three-bedroom house on a solid foundation as opposed to a half-acre of land that is flooded). 

Here are a couple of books that might help:

-Complete Guide to Real Estate Tax Liens and Foreclosure Deeds: Learn in 7 Days-Investing Without Losing Series (Investing Without Losing)

-The Complete Guide to Investing in Real Estate Tax Liens & Deeds: How to Earn High Rates of Return – Safely

Once you learn and understand how tax liens work and the implications of the above issues, they are a great way to invest with small sums of money. 

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