Sunday, October 22, 2006

Tax Lien Investing: Are You Making This Critical Error?

Recently I got a question from someone who was looking into getting involved in tax lien investing in the state of Indiana. She was surprised at the amount of money being paid for tax lien certificates and was wondering if it was worth it. It seems like the people that she was getting involved in tax lien investing with were making some of the typical mistakes that new investors make. They were buying liens on “junk property” and she could not see the benefit to this. Also she witnessed institutional buyers bidding large premiums for tax liens and couldn’t understand how they are making a profit on their investment.

The reason for her confusion has to do with the type of bidding method used (premium or “over-bid”) in Indiana and the Indiana state laws that govern the tax lien investing process. What she witnessed in Indiana is extreme competition due to favorable state laws for tax lien investing. In Indiana there is a hefty penalty (10 – 15%) on the certificate amount and you do get interest on the premium or “over-bid” amount if the lien is redeemed. You also get interest (10% per annum) on any subsequent taxes paid as well. The redemption periods vary from county to county, but are short - from only four months to one year. And all you have to do to foreclose is petition the court for the deed to the property. Everything has to be done in a timely manner however, or you could loose your claim on the property.

When most new investors go to these sales and see the large over-bids paid for tax liens, they assume that the companies and investors that are paying these large amounts are doing so in hopes to foreclose on the property. While occasionally that might be true, whenever you see banks doing this there is usually another reason for it. Banks do not want to be in the property management business, they want to invest their money at higher returns than then they can get by lending it out, and they wish to diversify their investments. The reason why they are paying so much for these tax liens is because it is worth it – they are making good profits on their investment.

Because they have the ability to let large amounts of money sit in an investment, institutional buyers can bid large amounts on properties that they think will redeem. And because they have done their due diligence on these properties, they know that even if the property doesn’t redeem they will be able to sell it and make a hefty profit. The danger for new investors is that they see these institutional lien buyers and other seasoned investors paying large premiums for tax liens and they start paying large premiums for tax lien certificates on properties that they did not check out. Maybe they heard about tax lien investing from a real estate guru who touted tax lien investing as being totally risk free and “government guaranteed.” What they need to realize is that no one guarantees that you will get paid on a tax lien certificate and that the only thing guaranteeing the lien is the property. Therefore the property better be worth more than what you paid for the lien. And because you will have other expenses involved in your investment and you will have to pay subsequent taxes, the property should be worth a few times what you paid for the tax lien certificate.

If you are considering tax lien investing you might want to read all of the articles on the article page of at, and the rest of the articles on this blog. Here you will find a wealth of free information about how to due diligence for tax lien investing and how to determine if tax lien investing is right for you. If you want more detailed information about how to start investing in tax lien certificates and tax deeds you may want to take a look at my step-by-step audio course at

For more information about tax lien investing you can also send an e-mail to

Happy and Prosperous Investing,

Joanne Musa

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