When you are delinquent in your property taxes, one way the government has of collecting its money is to place a tax lien on your property. This is the first step in the government being able to sell your property at auction. Many investors use tax lien auctions as a way to leverage their money by buying the property at below-market value and quickly reselling it for market value.
A tax lien is a claim against a property whose property owner has not paid taxes. The taxes owed are the real estate taxes that every property owner must pay to their local and/or state governments. If the taxes are paid, the lien is removed.
If the taxes aren’t paid, the government can then sell the property at auction to recover the taxes, and the winner of the auction receives a tax lien certificate, which acts as the winning bidder’s proof of purchase.
The price for a tax lien will be for the back taxes, fees and court costs associated with the property. The total of these fees will be substantially lower than the market value of the property. To lift a tax lien, the property owner will also have to pay interest to the tax lien certificate holder.
Having a tax lien certificate doesn’t necessarily mean the winning bidder owns the property. The property owner still has an opportunity to pay off the tax lien plus other costs including up to an annualized 50 percent per year interest. Otherwise the property can be foreclosed on and the certificate holder becomes the new owner of the property free and clear of any other liens, mortgages or obligations on it.
Tax liens are an attractive and safe investment to buyers. The certificate pays an excellent return and if the property owner doesn’t pay, then the certificate holder becomes the property owner and can resell the property.