Tax lien investing is not a new investing strategy or idea. It has been in practice for centuries in the United States, and even longer outside of the U.S. In short, it’s a program created by state governments and managed by county governments to help collect funds that go unpaid in property taxes. Let’s explore it.
Every property owner in the United States is required to pay property taxes to the county in which the property resides. That money is used by the government to support programs like public education, police, fire, roads, schools, parks, etc. Property taxes are the primary source of income for the county; however, a large percentage of property taxes go unpaid every year. The county knows that they will get that money from the property owner eventually, but they need that money today.
The county places a tax lien on the property, which limits what a property owner can do with their property. Then the county will hold a public tax lien sale or tax lien auction to sell what is called a tax lien certificate. The certificate price is the price of the unpaid property taxes plus any fees or amounts the county spent to issue the tax lien and bring the tax lien certificate to sale.
In most cases, the tax lien sale is a public event that anyone can attend. Individuals participate and purchase the tax lien certificates. The purchaser is not satisfying the property owner’s tax liability but is simply buying a certificate in the same amount as the delinquent taxes. This gives the county money today to continue to fund the programs mentioned previously.
What does the tax lien investor get in return?
The county charges a penalty to the property owner for being late, and they pass this penalty directly on to the tax lien investor. The return, however, is only realized when the property owner pays their unpaid property taxes plus the interest and/or penalties associated with it. The property owner pays that money directly to the county government.
When the county receives the money, they check their records, then send the money directly on to the tax lien investor. That money typically comes through a bank or ACH transfer these days, which makes things very simple.
But what happens when the property owner fails to pay their property taxes?! Good question. Check our next blog post.