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Thread: Tax Lien Certificates - How they work

how do tax lien certificates work

Tax Lien Certificates - How they work

How they work – Property taxes are levied by the county governments of U.S. states. When these taxes are not paid on time, it hurts the finances of local governments. To ensure this valuable revenue stream is uninterrupted, many county governments offer private investors an opportunity to pay these delinquent taxes and receive a reasonable return on their investment. When an investor pays these taxes, they have essentially purchased what is known as a “tax lien” or a “tax deed”. Each state uses a different term for these because how they work varies from state to state, but don’t worry about these details at this point.

The rate of return on a tax lien or tax deed is generated by late fees charged to the delinquent tax payer. The investor does not normally have any contact with the delinquent tax payer. The job of collecting these taxes normally falls upon local governments. These governments collect the back taxes and then pay the investor. Though the rate of return to investors is specified, the actual amount of this return can vary quite a bit depending upon how long it takes for the taxes on the property to get paid. Normally, the longer the taxes remain unpaid, the more the investor collects in penalties.

A strong feature of this type of investing is that they are secured by the underlying property on which taxes are due. In other words, if taxes are not paid by a certain deadline, the tax lien or tax deed holder (the investor) can take possession of the property. Though this does not happen very frequently (usually less than 3% of

the time), when it does, it is often an additional bonus to the investor because it allows him/her to take possession of a property for only the cost of the taxes.

Factors that influence returns and risk – size of the tax lien purchased, when (if ever) the taxes are paid, location of property (returns vary from state to state and not all states sell tax liens/deeds), state and county law, when the delinquent tax bill is paid, value of the property on which the delinquent taxes are due, other parties with a financial interest in the property (banks, mortgage companies, government agencies like the DEA, etc.), potential hidden liabilities in the underlying property

Suggestions for further research – Call your local county office for details. I found a website which explains my county tax lien sale process very well by doing a google search. There are many courses on this subject available, but I have not taken any because I was able to learn everything I needed to learn on my own. Others may find such courses valuable if this process looks intimidating. Courses on this subject are easy to find by searching the internet.

If you are serious about this kind of investment, be sure to learn your countries rules and do some due diligence on the underlying property which the taxes are due on. If there is some huge little know liability (like a toxic waist site) on the property, an investor could get burned. Though this is rare, it is something to be aware of.

Last edited by jlpicard; 10-23-2005 at 03:34 AM.

In the absence of scrutiny, absurdity prevails. - Dr. Paul Kordis

Category: Insurance

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