Tax Lien Basics - How It Works

If you're lucky enough to have some extra money in your bank account and you're interested in investing that money to make a strong return, then there are a number of options you can consider. You could invest in stocks, but that's risky these days. Stock markets worldwide are fluctuating widely during this extended recession, so your profit potential is dicey at best. However, federal, state, and local governments offer a way to invest your money with a high rate of return while simultaneously helping increase governmental revenue. This is a real estate investment known as buying tax liens.

In modern society, all property owners must pay property taxes on their real estate, which make up a large amount of the tax revenue that governments are able to bring in to provide services for their constituents. If a property owner fails to pay their taxes, regardless of a reason, then tax liens are usually sold at auction to willing buyers. The buyer, when purchasing the lien, is paying the government the total amount of outstanding taxes plus fees. This bolsters the revenue of the local government. Since the purchaser of the lien has taken the responsibility of paying the taxes, the property owner is then legally bound to repay the buyer for the amount of taxes owed, plus interest (the rate is set by local government) that will surely increase the return from the investment to the buyer. Some areas have higher interest rates than others, but regardless of the rate, it can be a great return on your investment. 

There are numerous benefits to buying tax liens. First of all, it is a direct investment of support in your government by ensuring that tax bills get paid. The revenue they bring in through selling the lien can immediately be allocated to provide funding for any number of governmental services, including critical ones like police, fire departments, maintenance departments, or other services. If a government is running a fiscal deficit, then this increased revenue will enable them to still provide services while working to pay back the deficit. As an investor, buying a lien is a guaranteed way to make money because the interest rate (which can be as high as 20 or 30 or even 50%) must be paid by the delinquent property owner. The owner is legally bound to repay the investor the amount of past due taxes, fees & interest to redeem their property. The high rate of interest makes investing in tax liens an attractive investment. 
There are other benefits to investing in tax liens as well. If the property owner fails to pay the lien holder within a specified amount of time, the lien holder may begin foreclosure proceedings, and down the road flip the property for a profit. 

Finally, it will provide you with a sense of civic pride, knowing that your investment helped your government in a time of need.