How Does a Tax Lien Certificate Work?
- A tax lien is issued on a piece of property when the property owner is late or has failed to pay appropriate taxes. In some states, this tax lien can eventually be converted into a tax lien certificate and auctioned to public buyers.
- A buyer purchasing a tax lien certificate from the government is buying either the right to collect a fixed, government-mandated percentage or the right to the title of the property itself. This is possible if the owner defaults on paying the lien after a given amount of time. In short, what is bought are delinquent taxes, an interest rate -- and at foreclosure -- the property itself. Buying tax lien certificates is an attractive option for people looking to acquire real estate cheaply.
- As with any investment, there are risks to consider. If you are considering buying a tax lien certificate, do as much research on the property's title as possible as well as the owner's bankruptcy status. In a bankruptcy, the original owner's creditors and the Internal Revenue Service (IRS) can take priority over a tax lien certificate holder, rendering the certificate virtually worthless.
You also want to research the actual property, visiting it in person or having a geological survey done, if possible. Hidden reasons may exist as to why the original owner lost or forfeited the property. For example, it may be in an undesirable area, subject to severe weather or flooding or on an active fault line. - Finding a local auction is not difficult. Get in touch with your local city or county tax collector or treasurer's office to ask about tax lien certificates. You can also visit the National Association of Counties for more information.
Although anyone who can legally own property in the United States can buy tax lien certificates at auction, individual buyers are often at a disadvantage against banks and investment firms. Auctions often sell certificates by lot number, with little information about the actual property itself.
Also, be aware that many auctions require the certificate buyer to pay for purchases in cash, either immediately or within two business days. It can be difficult for an individual to have access to that amount of cash in such a short time.
Some state and county tax lien auctions have begun operating online via sites like eBay. These types of auctions are more accessible to individuals because the lots are described in greater detail and the auctions transpire over a longer time period.