The Targeted Basics: “How Tax Liens Work”

by Ryan Jackson, Senior Tax Lien Adviser

Key Points

  • The county can place a lien a property with delinquent taxes or foreclose and sell 
  • Owners always have a chance to resolve the debt, but time allowed varies by state 
  • Tax liens are attractive for the interest, whereas tax deeds are a way to secure a below-market property through foreclosure 

When an owner is delinquent on their property taxes, the county or city government where the property is located has the authority to either place a lien on the property or foreclose and sell it for back taxes.  If the municipality places a tax lien on the property because the owner fails to make good on their delinquent taxes, the lien is sold to an investor (person, bank or hedge fund), who is then entitled to collect interest from the owner once the delinquency is resolved. 

Owners may have as few as 3 months or as long as 2 years to resolve the debt (depending on the state) during which time interest and penalties accrue to the investor holding the tax lien certificate. If the debt is resolved, the investor is reimbursed their investment plus accrued interest and fees on that date. 

If the municipality uses the tax deed approach, the property itself is auctioned off to investors who may end up with the title in as little as a day. However, most locations give the defaulting owner a period of redemption (redemption period), usually no more than a few months, during which interest and possibly penalties will accrue payable to the investor. After which, if the owner doesn’t redeem, the property is foreclosed by the investor. 

Investing in a Tax Lien vs Tax Deed 

Tax lien and tax deed investing are different processes. Tax lien investing involves purchasing tax lien certificates, primarily to earn interest and if available in the locale, penalty income. With tax deeds, the investing emphasis is on securing a below-market property through the tax foreclosure process. Individual states can offer tax liens or deeds. 

So Why Do WConsider Liens?

Tax lien investing provides the potential for above-market interest rates with very little risk. Interest rates on tax lien certificates can run as high as 18%.  Once a property bypasses any stipulated grace period for paying their taxes late, the municipality levies interest and penalties on what is owed. Eventually, the municipality will place a tax lien on the property, and the property will be slated for the annual tax lien sale. At the sale, the tax lien will be sold to an investor, at that point called a tax lien certificate. 

When you buy a tax lien certificate, you are basically paying the amount of owner’s indebtedness (taxes, interest, and accrued penalties). The holder of the certificate is entitled to the interest and penalties going forward until the owner redeems or you foreclose on the property. In order to redeem, the owner must fully pay off the amount you originally paid for the certificate plus all the accrued interest and penalties.  That is what we want!  So please contact us if you want to learn more!