Tax Lien Certificates

A tax lien is a debt or encumbrance against a property for failure to pay taxes. In some states, the local taxing government (typically the county, but in some states the municipality) will place a tax lien on a property when, after an amount of time prescribed by state law, the property owner fails to pay the property taxes owed. (In other states, the local taxing government will simply foreclose on the property and sell them at tax deed sales.)

When an investor purchases a tax lien certificate at a sale (public or online) or over-the-counter, he must pay the property taxes due (plus any interest and/or fees that may be due) to the local taxing government. Not only does the taxing government get its money, it also gives the property owner even more time (called the “redemption period”) to pay off his property tax debt.

In exchange for this “loan” to the local taxing government, the investor will earn an interest rate (in some states a fee) on the amount of money invested. At a typical public or online sale, bidding on a certificate starts at the interest rate mandated by the state, and then is competitively bid down from there, with the person willing to take the lowest interest rate winning the certificate. Certificates purchased through the mail (or “over-the-counter”) receive the full interest rate as there is no competitive bidding.

The investment amount plus the interest rate (or fee) is paid by the property owner (or other party with an interest in the property) to the taxing government, which then notifies the investor. After the investor turns in his tax lien certificateto the taxing government, he will receive a check for the amount of his investment plus the interest (or fee) earned during the redemption period.

If the redemption period expires before the property owner pays back his tax lien debt, then the investor may foreclose on the property and take ownership. (Ownership is clear of any mortgages, except in a few states, and most liens.) This is in lieu of the investor receiving his investment money back plus any interest or fees earned during the redemption period.

State laws govern the tax sale process, although there can be nuances between counties or municipalities.


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