What Is a Tax Lien Auction and Should You Participate?

23 August 2025

If you're looking for a unique way to invest in real estate without actually buying a property, tax lien auctions might have caught your attention. These auctions can offer high returns, but they also come with risks. So, should you jump in or stay on the sidelines? Let's break it down.

What Is a Tax Lien Auction?

A tax lien auction is a public sale where investors can buy tax liens on properties whose owners have failed to pay property taxes. When a homeowner doesn't pay their property taxes, the government places a lien on the property. To recover those unpaid taxes quickly, they auction off the lien to investors.

By purchasing a tax lien, you're essentially lending money to the property owner (without their consent) to cover their tax debt. In return, the homeowner is required to pay back the amount plus interest. If they don't, you might even get to own the property for a fraction of its market value. Sounds intriguing, right?

How Does a Tax Lien Auction Work?

Tax lien auctions follow a straightforward process, but they vary depending on state laws. Here's how it generally works:

1. The Government Puts a Lien on Delinquent Properties

When property owners fail to pay their taxes, the local government places a lien against their property. This means they cannot sell or refinance it until the taxes are paid.

2. The Lien Gets Auctioned Off to Investors

Counties hold tax lien auctions (either online or in person) where investors can bid on these liens. The investor who offers the lowest interest rate the homeowner must pay usually wins the lien.

3. Investor Pays the Taxes on Behalf of the Homeowner

Once you win a tax lien at auction, you pay the government the outstanding property tax on behalf of the homeowner. In return, the homeowner must pay you back the full amount plus interest.

4. The Homeowner Redeems or Defaults

The homeowner gets a set period (known as the redemption period) to pay back the tax debt plus interest. If they pay it off, you earn a solid return. But if they don’t, you may have the right to foreclose and take ownership of the property.

Pros of Participating in Tax Lien Auctions

Like any investment, tax lien auctions have their advantages. Here’s why investors get excited about them.

1. High Return on Investment (ROI)

One of the biggest perks of tax lien investing is the opportunity for high returns. Depending on the state, interest rates can range anywhere from 8% to 36%. That's much better than most savings accounts or even the stock market.

2. You’re Investing in a Secured Asset

Unlike stocks or crypto, tax liens are tied to real property. If the homeowner defaults, you could potentially end up with the property at a steep discount. Worst case, you collect interest on your investment.

3. It’s a Passive Investment

Once you purchase the lien, there isn’t much to do except wait for the homeowner to repay their debt with interest. It’s a great hands-off way to invest in real estate—no fixing toilets or chasing tenants for rent.

4. Low Entry Cost

Unlike buying an entire property, you don’t need hundreds of thousands of dollars. Many tax liens start at a few hundred dollars, making it a more accessible real estate investment.

Cons of Tax Lien Auctions

Of course, tax lien auctions aren’t all sunshine and rainbows. There are risks you should be aware of.

1. Homeowner Might Never Pay Up

If the property owner continues to ignore their tax debt, you may need to foreclose on the property. That means hiring legal help and dealing with a potentially lengthy court process.

2. Property Condition Is Unknown

If you do end up foreclosing, you could inherit a property that’s in terrible shape. Imagine getting a house that’s been abandoned for years—not exactly a dream scenario.

3. Some Liens Have Additional Claims

Just because you hold the tax lien doesn’t mean you’re first in line for repayment. Mortgages, HOA liens, or mechanic’s liens might take precedence, which could complicate your investment.

4. Strict Legal Rules

Every state has different laws regarding tax liens. Some have long redemption periods, while others allow tax lien holders to foreclose more quickly. If you don’t understand the legal landscape, you could end up stuck in a bad investment.

How to Participate in a Tax Lien Auction

If you’re still interested, here’s how to get started with tax lien investing.

1. Research Tax Lien Laws in Your State

Not all states sell tax liens, and the rules vary widely. Check your local county website or contact the tax collector’s office to understand the process.

2. Find Upcoming Tax Lien Auctions

Most counties publish auction dates online. Some are conducted in-person at the courthouse, while others are held online.

3. Perform Due Diligence

Before bidding, research the property associated with the lien. Here’s what you should check:
- Property Value – Make sure it’s worth more than the lien.
- Condition – Drive by, if possible, to see if it’s abandoned or in bad shape.
- Existing Liens – Check if there are other claims on the property.

4. Register and Bid

Many auctions require pre-registration and a deposit. During the auction, you’ll usually bid based on the interest rate you’re willing to accept. The lowest bidder (who is willing to accept the lowest interest rate) wins the lien.

5. Earn Interest or Foreclose

If the homeowner redeems the lien, you get your initial investment back with interest. If they don’t, you may have the option to foreclose and take ownership of the property.

Should You Participate in a Tax Lien Auction?

Tax lien investing isn’t for everyone. If you’re looking for a relatively low-cost, high-return investment, it could be a great opportunity. But if you’re not willing to do your homework, navigate legal hurdles, and take on potential risks, this might not be your best bet.

Who Should Consider Tax Lien Investing?

✅ Investors looking for passive income.
✅ Those willing to research and understand legal complexities.
✅ Individuals with some capital to invest but not enough to buy full properties.

Who Should Avoid It?

❌ People who need quick returns.
❌ Those who don’t want to deal with legal issues.
❌ Investors unwilling to risk foreclosure and property ownership.

If you’re serious about tax lien investing, start small, educate yourself, and don’t invest money you can’t afford to lose. Like any investment, the key to success is knowledge and patience.

Final Thoughts

Tax lien auctions can be a profitable and unique way to invest in real estate without actually buying a property. However, they come with risks—from homeowner defaults to legal red tape. Understanding how they work and doing your due diligence is key to making money in this space.

So, is a tax lien auction right for you? That depends on your risk tolerance, research skills, and long-term investment goals. If you’re willing to put in the effort, it could be a rewarding way to grow your wealth.