Investing in property tax liens can be very profitable, but if you’re new to the tax lien arena, some background information is the best place to start. In its simplest form, a tax lien is a mechanism that guarantees that a lender will be paid for a debt by allotting a tax commitment on the debtors’ property. This then effectively prevents the property owner from raising further capital or financing secured against that property.
The most common type of tax lien is a mortgage lien - this is where the lien is secured against the property on which the debtor holds a mortgage. If the debtor - in this case the property owner - is unable to repay the taxes owed against his property he risks losing his property.
Here we are talking about property tax liens specifically, of which there are two main types; the particular lien and the general lien. A particular lien allows the investor (the person lending the money or providing the services to the owner) to claim access to the property (or the equity held within it). Liens are either legal (or federal) in nature - which means they are enforceable in a court of law - or equity liens which are bound by equity courts.
When you buy a tax liened property you need to be aware that you are not actually buying the property itself. What you are doing in effect is lending the property owner the money they need to pay back their tax arrears. The property owner is also agreeing to repay that loan, with an agreed amount of interest, within the already determined repayment period that was established when the tax lien certificate was sold.
You’ve probably already realised there are two main ways you make your money from buying property tax lien certificates in this way. If the debtor (the property owner in this case) is able to repay the loan in full within the allotted time period, your profit is the interest he has to pay on that loan.
If the owner is unable to pay the loan, you take possession of the property as the owner of the tax lien certificate secured against it. As the new owner you are able to manage the property as you see fit - renovate it, rent it, sell it etc.
So as a quick recap, s an owner of a tax lien certificate, you will either make a profit by way of the interest repaid on your loan to the property owner, or of the owner is unable to make the repayment, you take ownership of the property and make your profit from how you then manage that property.
There is a lot more information you need to be aware of, and a lot more knowledge required before you go off a buy your first property tax lien certificate, but in simple terms, it is a very realistic model to make money and invest in real estate.