How Can Tax Lien Sales Increase Your ROI?

This is a post by MPFJ staff writer, Jeff. Jeff writes about Sustainable living and finances at his website, Sustainable Life Blog. Jeff really enjoys traveling with his wife as much as he can, to wherever he can.

There are a lot of investment options out there: stocks, bonds, p2p lending, and more.

Some people advocate a simple portfolio with a mix of socks and bonds that changes depending on your age, and others suggest keeping it ultra simple and investing in just 1 broad index fund.

Those are some of the more popular options, but they are not the only things out there that will help you get a decent return on your money. I’ve been looking into different ways to get a better return on investment (ROI) with low risk for the past few years and I think I’ve finally found a favorite: tax liens.


What is a tax lien?

Every year, property owners have to pay a tax on the property they own, at a rate set by the government. The rate varies by the use of the land (for instance farm land is taxed at a lower rate than land with an office building on it). As we know, the taxes are used for things like schools and roads. Most people who are still paying a mortgage do not need to worry about this tax, as it is paid out of the escrow account that a portion of their mortgage payment goes to every month. If you own your home outright though, you’re on the hook for paying your property tax.

When people forget to pay their property tax or they can’t afford it and don’t pay it, the government puts a lien on the property. This lien becomes first debt paid in the event of a sale of the property (if one were to occur).


How can this help my returns?

You’re probably thinking this is great but how does it help me? Well, the government needs money to do the things it wants to do over the course of a year, like inspect buildings and fix roads. They expect a certain amount of money from property taxes each year to do those things and when some people don’t pay, they won’t have enough money to do what they need to do for the next 12 months.

The government solves this shortfall by selling the tax liens to investors. The government also promises a certain rate of return to the investors for their troubles. Where I live (Wyoming) the rate is 15%, and in Colorado the rate is prime plus 9%. By doing this, the government gets their money to operate for the fiscal year, and the investors get a very healthy ROI.


How can I find tax lien sales?

Usually, each county will have their own sale of tax liens. For Wyoming they are usually in August or September. I’ve looked at some larger areas that will have the lien sales once a month. The easiest way to find out about when yours is would be to Google “your county tax lien sale”, or you can call the county assessor or county treasurer’s office.

The best part about these is that you don’t have to only buy them in your county! You can go to any counties sale and try to purchase them if you want to. I’ve been to sales in 3 different counties.


What are the downsides?

There are not many downsides to this. As my dad always says ” the wheels of the government turn slow but they grind just fine”. What he means by this is that the government always gets their money. What this means though is that you (as the investor) have downside protection.

In Wyoming, if you purchase a tax lien at a sale, they will notify you if the taxes are not paid the next year and give you the option to pay those as well. If you pay for 4 consecutive years, then you can begin legal proceedings to take ownership of the property. I have not gotten to this point yet, but I understand that it also takes time.


Bottom line for tax lien sales:

Where I live, you can get 15% interest for the years that you pay the lien if the property owner pays you back. If you pay for 4 consecutive years and are not paid back, you can begin proceedings to take control of the property.

I guess the ultimate downside is that you get stuck with a piece of property you don’t want, but in my mind that’s a small downside.

So, how about you all? Have you ever invested in a tax lien sale before? If so, how did you like it?

Share your experiences by commenting below! 

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