Playbook #005: Tax Liens
🖼️ The Big Picture
A Tax lien is a legal claim against a property by a city or county as a result of unpaid taxes. The government authority then creates a “tax lien certificate” for the amount owed plus any interest or penalties due, and auctions it off to investors.
When you buy a tax lien, you’re essentially paying the overdue taxes of the owner and saying you’ll take responsibility to collect them, for a fee. The owner of the property then has a certain amount of time to redeem the certificate by paying YOU the past due taxes and interest.
- If the owner pays you back (most do, because they want to keep their property), the lien is removed.
- If the owner doesn’t pay you back in the specified period of time, you get the home (by various methods depending on state)
- If there’s a loan on the property, the lender will most likely not allow this to happen, because they would lose their interest in their property. So they’ll try to outbid you at the initial auction for the tax lien, or most states allow lenders to redeem the certificate themselves if the property owner doesn’t do so.
Either way, you get your money back plus your guaranteed return. But you won’t get the home if there’s a loan on it.
NOTE: You may have heard that you can use tax liens to buy properties for pennies on the dollar. This is a separate strategy and requires more advanced real estate techniques since you’d be acquiring the asset to flip it or rent it. This CAPITALIZE issue focuses exclusively on investing in tax lien certificates for cash flow, since they’re easier to get into, and you don’t need a large investment.