Tax Lien Investing 101: The 4 Things You Need To Know

There are 4 things that you need to know about the state/county that you are investing in before you purchase a tax lien. Those 4 things are:

1. The default interest rate
2. The bidding procedure
3. The length of the redemption period
4. The expiration or life of the lien

Default Interest Rate
The default interest rate is the interest that the county charges the delinquent tax payer when they fail to pay their taxes on time and it’s what the investor will get on the lien amount if the interest rate is not bid down at the tax sale, which brings us to the importance of the second thing on our list, the bidding procedure.

Bidding Procedure
Each state has its own method of bidding. In some states the interest rate is bid down and in other states the price of the lien is bid up – this is known as premium bid, or overbid. One state (New Jersey) actually does both, the interest rate can be bid down to 0% and then premium is bid on tax liens. Both of these methods have the effect of lowering the interest rate that the investor receives on the tax lien. In some state neither of these methods of bidding are used, but the ownership interest in the property, should the lien not redeem and the investor foreclose on the property, is bid down. And in other states a random selection or round robin process is used instead of bidding. As you can imagine it’s very important to know what you are bidding and how low in interest or high in price you are willing to bid.

Length Of The Redemption Period
The redemption period is how long the owner of the property has to redeem the tax lien before the tax lien holder can bar the right to redeem and foreclose on the property, or in the case of Florida, apply for the property to be sold in a deed sale to satisfy the lien. It’s important to know how long the redemption period is, so that you know when you can foreclose on a property that doesn’t redeem. Some states only give you a certain amount of time to do this before the lien expires, which brings us to number 4 on our list, the expiration period.

Expiration Or Life Of The Lien
Tax liens do have expiration periods, after which they will expire worthless and you could lose your investment. Tax liens states differ greatly in their expiration periods or life of the tax lien. States with short redemption times tend to have shorter expiration periods than states with longer redemption periods. And some states have certain requirements that the investor must follow before the expiration of the lien in order to receive a deed to the property. So you can see that it’s very important to pay attention to the expiration period in the state in which you’re investing.