Why Tax Liens Are Profitable

efore we get into the specifics of tax lien investing, it is important for you to understand how and why this process works. Many people automatically assume that an investment opportunity that promotes itself as being quick and easy is a scam. Tax liens however are a product of the federal government and are not only 100% legal, but the interests of the investors are protected by each state they purchase from.

When you invest in tax liens, the process by which you profit is very similar to the process used by banks when lending money. It comes down to simple interest. You purchase a tax lien by paying the back taxes and all other applicable fees currently owed by the property owner. This gives the county the money they need to continue with operations while offering regular citizens the opportunity to turn a quick profit and giving home owners an extended opportunity to pay their debts prior to foreclosure. It’s a win-win situation.

The interest you can charge varies from state to state and may be as little as 10% or as much as 50% . The best part is that you do not even have to impose the interest yourself. Once you purchase the lien, the county will raise the interest to the agreed amount and will collect the final sum for you. You will never have to communicate with the property owner.

In the event that the property owner does not pay all back taxes plus interest due within the previously determined redemption period, your lien gives you first right for claiming the property via foreclosure. As the first lien holder, that means that your entitlement to the property comes ahead of all other liens (including mortgage lenders and other debt collection services). In most states, when you foreclose on a tax lien you are given the property title free and clear.

In a worst case scenario, the property owner whose lien you have purchased will pay within a couple months, meaning a small return on your profits because of the low amount of interest accrued. Usually however the property owners take full advantage of the redemption period and do not pay until foreclosure is nearly pending. In a best case situation, the property owner will not pay at all, and you can foreclose on the property for little more than the cost of one year of its real estate taxes.