Tax lien investment is somewhat peculiar to the United States; how to buy tax sale liens becomes a complicated subject as local municipalities derive increasingly more income from the administration of property taxes. In a period of slow economic growth, it is often the case, that property owners are struggling to meet their financial obligations, and municipalities too are scrambling for funds to supplement their public expenditure. This provides a unique opportunity to purchase tax liens and provide government with the outstanding taxes, provide the delinquent tax payer with a redemption period to satisfy the tax debt, and also receive an attractive interest rate return on their investment.

Only the Purchaser Takes the Risk
It is often claimed that investment in tax liens offers outrageous rates of return. However, these allegations are usually made by those seeking to profit merely from the investor’s involvement and not risk that is undertaken. They include brokers, agents and information providers.

Certainly, buying IRS tax liens may prove to be an attractive investment, but returns in developed markets such as the United States, inherently carry less risk than emerging markets, and so to achieve a sound basis for the investment, comparative analysis of the alternative investments available needs to be undertaken before learning how to buy tax liens.

Tax liens offer the holder powerful legal rights, which are in direct relation to property. This of itself offers security beyond that of an ordinary secured loan.
However, a number of variables and contradictory realities will seek to confound the industrious lien investor seeking the path to financial success.

A tax lien is an in rem obligation, an obligation against a thing attaches to the real property of the delinquent tax payer, and when purchased, entitles the holder the right to collect the outstanding tax, along with interest, fees, and costs incurred. In the event of an inability to satisfy the debt on the part of a debtor, the holder of a tax lien against property has the right to foreclose on the property, so tax lien investing is one method of buying a tax lien home.

Other Creditor’s Claims on the Property
However, there are differences between the administrative processes of Federal tax liens and that of the numerous State and county tax liens,and the constitutional requirement for due’s process of the law must be observed to enable fluid execution of the lien purchaser’s rights.

To satisfy this criteria, the prospective purchaser of a tax lien must perform due diligence in gaining a thorough understanding of the procedural and legal ramifications of the particular jurisdiction involved. The requirement of notice is foremost in the eyes of the law, and often proves to be a successful obstacle to lien holders seeking to foreclose on a property, purely due to the fact that other lien holders, such as a mortgagee, were deprived of notice that the lien was placed on the property.

So, it is prudent for the prospective purchaser to inquire after other lien holders in regard to a property, and factor their existence into any inclination to purchase the tax lien over that particular property.

As tax liens are sold by taxing authorities for the sole purpose of revenue raising,to buy tax liens is to provide the outstanding tax debt and inherit the rights originally held by the taxation authority.
Part of how to purchase tax liens is that the purchase price of the lien needs to be carefully analyzed with respect to the interest received, and including all fees and other costs. Further, the contingency of foreclosure needs to be considered, as this becomes a serious consideration when the debt remains outstanding after expiry of the applicable redemption period.

Occasionally the holder of a lien is able to acquire title to a property, the value of which far exceeds the purchase price of the lien, however exposure to the property market is incurred upon a foreclosure, and so the purchaser needs to have a solid understanding of the property market and monitor its movements. To foreclose on a worthless property, with further expense required, may indeed erode any return on the investment.

References:

Levich, Richard Emerging Market Capital Flows 1998 Springer Publishing