Tax Lien Investing: Which States Have the Highest Return

I frequently get e-mails asking me which states have the highest return for tax liens. Here are the three states that have the highest interest rates on tax lien certificates. They're probably not the states that you have heard about because except for just one county, these states do not have tax sales online:

Texas
Texas is actually not tax lien state, but a redeemable deed state. The nice thing about purchasing a redeemable deed though, is that you get a penalty when the deed redeems, not an annualized interest rate as you do with liens. This means that it doesn't matter when the deed redeems, you get the full penalty, not a fraction thereof. And in Texas the penalty is 25% in the first 6 months, 50% in the first year. So if the deed redeems in the first 6 months you get 25% on your money and if it redeems in the first year you get 50% on your money.

The redemption period in Texas is only 6 months for non-homesteaded and non-agricultural properties. So if you only get the 25% on those type of properties and then you receive ownership of the property. That is another nice thing about redeemable deeds in this state; you are considered the owner of the property as soon as the redemption period is over and you do not have to go through foreclosure procedures. You will have to clear the title, but that is something that you would have to do with any tax foreclosed property anyway.

Unlike some of the other redeemable deed states, in Texas you actually receive the deed at the sale and must record it with the county clerk. Once the deed is recorded the redemption period starts. You are considered the owner of the property and can take possession of the property, but you won't be able to get clear title until the redemption period is over. Also you'll want to be careful about renting or renovating the property since the previous owner still has redemption rights until the end of the redemption period.

Illinois
In Illinois the interest rate is 18% but unlike other states that have an annual maximum interest rate of 18%, in Illinois the rate is not per annum, It's more like a 6 month penalty rate, so your annualized interest rate in Illinois is 36%. The redemption period is 3 years.

Counties in Illinois may have 2 types of tax sales. At the annual tax sale the interest rate is bid down and the tax lien is awarded to the investor with the lowest bid. Some counties will also have a "scavenger" sale of items that did not sell in previous tax sales. The bidding for this sale is different than in the first tax sale. Instead of the interest rate being bid down the certificate is sold to the highest bidder for cash, and it may be sold for less than the original delinquent tax amount.

Iowa
In Iowa the interest rate 24% per annum. This rate is not bid down at the tax sale. But the down to that is that the percentage ownership in the property should the lien not be redeemed is bid down at the tax sale. It is the investor willing to take the smallest percentage in the property that wins the tax lien. So though the annual rate is high in Iowa, there may not be as much incentive for the owner to redeem the lien, since he doesn't lose the property entirely if he or she doesn't redeem the lien.