Each year, many property owners neglect to pay their property taxes, for whatever reason. Obviously, the taxing authority, the local city, town or county government needs these funds to provide ongoing services for the community. If, after providing ample time for payment of taxes due, the property owner does not pay, the taxing authority then readies the tax deficiencies to be sold to investors in the form of Tax Liens also known as Tax Lien Certificates.
Basically, the taxing authority is selling the tax delinquent debt that is due after it has given ample time to the property owner. Investors purchase these Tax Liens, sometimes in person, and sometimes over the web, and they may pay the amount due along with any penalties and interest depending on the local government and their policies regarding the sale of tax liens.
Investors purchase tax liens because they are an excellent source of passive income. Many states guarantee rates of return way over and above what anyone could earn in a savings account or a certificate of deposit at a bank. Interest rates can average anywhere from 8% on up. In addition to this, the investors who do purchase these tax liens are guaranteed these returns as they are stipulated by state law.
In short, a Tax Lien Certificate is an investment vehicle that will pay guaranteed funds, the premium paid plus interest, and in some cases, the penalties paid to acquire the Lien, back to the investor should the homeowner come forth to pay his or her taxes within a specific time frame normally referred to as “the redemption period.”
Once a Tax Lien is purchased, the investor now holds a priority lien against the property. The priority lien, if it’s the first delinquent tax year, takes priority even over any mortgages held against the property. This newly purchased Tax Lien now gives the property owner yet another time frame, the redemption period, to come up with the funds due, plus penalties and interest. If the redemption period elapses, and the property owner has not paid the taxes due, along with any penalties and interest that have accrued, the Tax Lien Certificate holder, the investor, can then begin foreclosure proceedings against that property owner and obtain that property for – basically – pennies on the dollar.
Many states differ in how they create and sell these liens, and there are many programs available to help teach investors how to become a Tax Lien Investor. However, there are also pitfalls. And, that’s why this site will also discuss Tax Liens. Many Tax Lien programs do not adequately warn investors of any potential future costs, out of pocket costs, before purchasing the program and before any potential profit can be realized especially if pursuing the property in hopes of obtaining a home for pennies on the dollar. Further, there is also another major pitfall that investors should be aware of prior to purchasing any tax lien. For these reasons, Tax Lien Certificates, their benefits and their pitfalls will be discussed on this site in order to help other investors realize a potential profit and avoid financial loss.