In this country, anyone who owns property is obligated to pay property taxes. However if for any reason the owner fails to pay the tax, the state still needs the money to pay its own expenses. To solve this problem, the state turns to citizens like you and me and offers us tax lien certificates, in exchange for payment of the taxes due.
When a property owner has failed to pay his real estate taxes, anyone who agrees to pay the taxes is awarded a first lien on the property. Then, if the owner still does not pay the taxes due within a specific period of time – usually 18 to 24 months – the holder of the tax lien certificate is awarded ownership or the property, free and clear, regardless if there were any mortgages.
However, suppose the owner does in fact pay the taxes within the specified time. If you have a tax lien certificate on the property, you will still come out significantly ahead. That is because the state will tack on a 10 to 50 percent surcharge that the delinquent property owner must turn over to you, as a penalty for late payment of taxes.
So there are two ways to win with tax lien certificates. If the taxes don’t get paid, you get the property, and if they do get paid you get the interest penalty!
If this sounds like money in the bank, or something even better, that is exactly what it is. However there are a couple of catches. First, not every state offers tax lien certificates as described above. At present about 30 states do, which narrows the field of opportunity a bit. Second, in the states that do have the certificates, they are offered at auction on a county by county basis. With up to 2000 counties holding auctions across America, some time and effort may be required for traveling and gathering the necessary information. On the other hand, this may keep other people away, which can work to your advantage.
The actual mechanics of a tax lien auction are very simple. The actual amount of taxes due is based on the assessed value of the property. The tax bill could range from a few hundred dollars to a few thousand, depending on the value of the property.
At the auction however, you are actually bidding on the amount of interest the certificate will pay. If you are willing to accept the lowest rate of interest, you are the winning bidder.
To simplify things, lets say a typical state will pay a 25% interest reloj control rate on their certificates, which is very common. You would bid at the auction on a tax lien that is $1500. You are actually bidding against other people for that tax lien certificate, and the person who agrees to accept the lowest interest rate, gets the certificate. So, in our example you would pay $1500 for the taxes due and lets say the rate you agreed to accept was 16 percent, you would receive your initial $1500 investment plus 16% of that amount.
If the property owner does not pay within the specified time period, you would foreclose on the property. Once this foreclosure takes place, all liens prior to the property tax lien, including the mortgage, are erased and will not be your responsibility. You own the property outright.
It is very rare that the property owner loses the property by not paying the tax lien. So you are basically loaning your money to the state for 18 to 24 months at a rate of return of anywheres from 15 percent to as high as 50 percent, in some states.