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Tax Lien Certificates and Tax Foreclosed Real Estate - FAQ


1.  What is a tax line certificate?

A Tax Lien Certificate is a first position lien on real estate due to delinquent property taxes. Once property taxes on a property are one year delinquent, the county government is going to offer a tax lien certificate on the property. Tax lien certificates pay fixed rates of returns of 8% to 36% interest per year depending on which county you’re investing in. The price of the tax lien certificate is the amount of one years back taxes and penalties, and therefore can range in price from under $100, to hundreds of thousands of dollars.

The tax lien certificate investment is secured by the property, similar to a mortgage, except by law, a tax lien certificate takes priority over a mortgage. Because property taxes are a small fraction of the value of the property (less than 2%), the tax lien certificate investment is typically secured by property on at least a 50 to 1 basis. To put this in perspective, banks only secure your deposits dollar for dollar or 1 to 1.

2.  Do all states offer tax lien certificates?

No. About half the states in the United States offer Tax Lien Certificates, and the other half offer Tax Deeds. Both systems offer very lucrative investment opportunities for the informed investor. Both are means of collecting delinquent property taxes, putting properties back on the tax roll, and generating revenue to the county for schools, police departments, roads, hospitals, fire departments, and libraries.

3.  How does the tax lien process work?

Once property taxes are one-year delinquent on a property, the county government is going to hold a sale and offer tax lien certificates for sale on all of the delinquent properties. As investors, we can attend these sales and acquire tax lien certificates that pay you 8% to 36% interest per year depending on which county we’re investing in. Again, you don’t have to go to auctions to acquire tax lien certificates; it’s simply the way the process begins.

When you acquire a tax lien certificate, by law, you are now the first position lien holder of record. In essence what you did was pay the delinquent tax bill, and in return you received a Tax Lien Certificate. When the delinquent property taxes are paid, you receive all of your original investment back, plus the guaranteed high interest rate (16% or 18% or 36%).

Each state has a redemption period, or grace period in which the delinquent property taxes must be paid. Redemption period’s range from 6 months to 3 years depending on which county you’re investing in.

If the delinquent property taxes are not paid within the redemption period, then the property will be taken through a judicial process (property tax foreclosure), and once this process is complete, the tax lien certificate investor will receive the deed to the property free and clear with no mortgage.

Property tax law clearly states that once this process is complete, "tax foreclosure will result in the loss of ownership of the property and all rights of all interested parties…" which gives you a free and clear deed to the property.

When informed investors conduct proper due diligence, and acquire tax lien certificates on the right types of properties, there are only two outcomes: 1) the tax lien certificate redeems, and the investor receives all of their money back plus say 18%, or 24% or 36% interest, or 2) the tax lien certificate does not redeem, and the investor receives a free and clear deed to the property with no mortgage for literally pennies on the dollar.

4.  Are there any risks?

The most common risk factors are: IRS liens, Bankruptcy, condemned structures, environmental issues, unusable lands, undesirable neighborhoods, industrial properties, and worthless properties. It’s important to note that these risk factors exist even when you’re purchasing your own home.

Although these risk factors exist, with proper due diligence, each of these risk factors can easily be avoided. It’s simply a matter of knowing what the risk factor is, and the specific strategy to completely avoid it.

Some counties will identify these types of challenged properties on their lists. Other counties will remove these challenged properties from their list completely. We always advise our students to complete thorough due diligence no matter what. After 20 years of real world, in the field experience, we’ve learned the most accurate information we can rely on is from our own due diligence.

5.  Is there a lot of competition?

Yes and No. If you don’t have a nationwide strategy, and you restrict yourself only to your local market, then yes, there could competition. When you have a nationwide strategy, where you have access to safely acquire Tax Lien Certificates nationwide right from the comfort of your own home, then NO, there’s almost no competition.

For example, if you lived in a county that only paid 8% interest, and had very few tax lien certificates available, then there wouldn’t be much opportunity there.

6.  Why Would Someone Lose Their Property for a Couple of Hundred, or Couple of Thousand Dollars in Back Taxes?

Most people don’t lose their primary residence for a couple of hundred, or couple of thousand dollars in back taxes. The vast majority of tax lien certificates on primary residences do redeem, which insures the 18%, or 25%, or 36% interest to the investor. The typical single-family residential home that doesn’t redeem is usually some sort of rental property, many times with an out of state or absentee owner. Thousands and thousands of these type of properties get acquired through the tax lien certificate process every year. Due to the most recent economic downturn, and the sub-prime mortgage crisis, we’ve also seen an extraordinary number of property taxes remaining delinquent due to the fact the mortgage is higher than the property is worth. With bank-owned properties at record highs, we’ve seen a more than usual number of beautiful properties, residential and commercial, being acquired through the tax lien certificate process.

7.  How are Tax Lien Certificate Investments Protected?

The interest rate, redemption period (grace period), and collection procedures are set and enforced by state law. Each state has its own set of rules, regulations, and procedures.

Within the state, each county has its own set of procedures for conducting tax lien certificate or tax deed sales, how and where they advertise, how and where they post lists, over-the-counter investing, disbursing checks, record keeping, issuing deeds, and publishing information on properties.


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