Homeowners who fall behind on paying their taxes often find themselves with a tax lien—a legal claim against the homeowner’s assets—on their property. A tax lien is a considerable burden as it prevents the house from being sold or refinanced. The only way to remove a lien is to pay the taxes in full and wait for the federal or state government to remove the lien. Though liens are adverse for a homeowner, they can be a source of income for an investor who is savvy with state laws and willing to take a little risk.
Not every state handles tax liens the same way. Some make it easy to invest in a tax lien, while others have rules and regulations that favor the homeowner. We combed through the regulations and compiled a quick list of the best states to buy a tax lien.
This is one of the best states to shop for a tax lien. A Louisiana tax lien has a guaranteed penalty of 5% and an annual return starting at 12%. The auction process depends on the parish (county), but all auctions use the buy-down method of bidding. In these auctions, investors bid by lowering the interest rate. The investor who wins the Louisiana tax lien is the one willing to accept the lowest interest rate.
Even if the interest rate is bid down to 1%, investors still get 6% interest as the 5% penalty is added to the winning interest rate. There is some risk to the investor, as homeowners have three years to pay off the Louisiana tax lien before the tax lien holder can claim the property.
Mississippi tax liens may not have the most favorable auction policies, but its 18% interest rate and 2-year waiting period are attractive to investors. Unlike other states that bid-down on the interest rate, Mississippi tax liens are auctioned off by the amount of the lien. Investors bid upwards with the Mississippi tax lien going to the bidder who is willing to pay the most towards the back taxes. If an investor bids more than the amount of the Mississippi tax lien, they risk losing that extra money.
One significant benefit to Mississippi is its relatively short two-year grace period that allows homeowners to pay their tax bills and keep their house. Investors also earn 18 % interest on the lien.
Iowa is another state with a unique way of selling tax liens. Instead of bidding down the interest rate, investors bid down on the ownership of the property. The investor who is willing to accept the lowest percentage of ownership wins. If you can score a property with majority ownership, you can collect 24% interest on the lien and choose to foreclose on the house in 2 years if the taxes and interest are not paid in full.
Florida is known for its luxurious, costly beachfront property. One severe financial blow to a homeowner and this coastal property may end up on auction because of delinquent taxes. The interest rate on tax liens is 18%, but the bid-down auction bidding may drive this percentage down. Investors don’t have to wait too long to find out if the investment was fruitful; homeowners only have two years to pay the delinquent taxes and interest. If they fail to pay, an investor could obtain a beachside house and then flip it for a significant profit.
Investing in tax liens in these top states may be a way to diversify and add to your portfolio. Be sure to stay updated on auction times, since they vary by state.