Tax Lien Facts

Tax Lien Facts

Below you’ll find the answers to many of the most commonly asked questions we receive regarding investing in Tax Lien Certificates and Tax Foreclosed Real Estate. The answers to these questions will give you a new understanding of how the Tax Lien Certificate investment process works, which will help you become a well informed Tax Lien Certificate investor.

You can either scroll down through each question below, or you can jump ahead to a section of interest by clicking on the question in the table of contents.

Table of Contents for This Page

  1. What Exactly is a Tax Lien Certificate?
  2. Do All States Offer Tax Lien Certificates?
  3. How Does the Tax Lien Process Work?
  4. Are There Any Risks?
  5. Is There a Lot of Competition?
  6. Aren’t You Taking Advantage of People in Financial Trouble?
  7. Why Would Someone Lose Their Property for a Couple of Hundred, or Couple of Thousand Dollars in Back Taxes?
  8. Why Wouldn’t the Bank Pay Off the Back Taxes?
  9. What if I Just Want the High Interest Rate, and Don’t Want to Acquire Property?
  10. What if I Do Want to Acquire the Property?
  11. If I Decide to Attend a Tax Lien Certificate Sale, How Does the Process Work, is it an Auction?
  12. Realistically, How Much Time Does It Really Take to Successfully Invest in Tax Lien Certificates?
  13. Why Doesn’t My Stockbroker, Financial Planner, or Bank Offer Me Tax Lien Certificates?
  14. How are Tax Lien Certificate Investments Protected?

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What Exactly is a Tax Lien 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.

Pays
24%
Interest / Year

Actual Tax Lien Property
 
TLC Amount: $2,128

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.

Tax Lien Certificates fall under property tax law, and are therefore enforced and governed by state law.

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.

One is not necessarily more advantageous, lucrative, or preferred over the other. The two systems are simply different; both have their advantages, and both are lucrative in their own way.

IMPORTANT: You don’t have to live in a Tax Lien Certificate state to acquire tax lien certificates, and you don’t have to live in a Tax Deed state to acquire tax deeds. Through the strategy of "assignment purchasing," you can safely acquire tax lien certificates and tax deeds from the comfort of your own home.

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%).

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.

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.

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.

Pays
18%
Interest/ Year

Actual Tax Lien Property
 
TLC Amount: $1,255

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.

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.

Conversely, when you implement the strategy of "assignment purchasing," which allows you to safely acquire tax lien certificates from the comfort of your own home, you can live in that same county, and now you have access to:

These are just a few examples. There are over 2,000 counties in America that offer Tax Lien Certificates.

County Tax Lien Certificates Available Interest Per Year
Dade County 73,579 18%
Maricopa County 36,114 16%
Cook County 57,181 18% / 6 months
Polk County 6,212 24%

Aren’t You Taking Advantage
of People in Financial Trouble?

No! When you and I acquire a tax lien certificate, in essence what we’re doing is paying someone else’s delinquent property tax bill for them. In return, we receive a tax lien certificate on the property, which bears the interest rate. Because the tax lien certificate has a grace period of 6 months to 3 years, we just bought the property owner time. Rather than taking advantage of someone in financial trouble, we did just the opposite; we gave them the opportunity to stay in their home for an additional 6 months to 3 years.

We don’t know of any other creditor in the world that would give the property owner a 6-month to 3-year grace period to pay their delinquent bill without any negative consequences. Banks don’t, credit card companies don’t, car loans don’t, student loans don’t, phone companies don’t, insurance companies don’t, internet companies don’t, landlords don’t, and utility companies don’t. Tax lien certificate investors do!

When you and I acquire a tax lien certificate:

  • The property owner benefits because we in essence lend them the money to pay their property taxes, allowing them to stay in their home an extra 6 months to 3 years without any negative consequences.

  • The county and local community benefit because they receive their much needed property tax revenue for schools, police departments, libraries, fire departments, hospitals, roads, and parks.

  • And the investor benefits because he or she safely earns 18% to 36% interest per year.

Tax lien certificates are a socially responsible investment that benefit society as a whole, and help people who may be in financial trouble.

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.

Why Wouldn’t the Bank Pay Off the Back Taxes?

If there’s a bank mortgage on the property, and the property is being foreclosed on for delinquent property taxes, in many cases the bank will step in and pay the back taxes to protect their mortgage position, which insures the tax lien certificate investor will receive their 18%, or 25%, or 36% interest.

Although it’s impossible to know exactly why a property is lost to tax sale, here are some factors to consider when it comes to banks:

  • According the U.S. Census Bureau, 40% of homes in America don’t have a mortgage, therefore, there’s no bank involved.

  • 297 banks failed in the 2-year period from 2009 to 2010, and another 73 in 2011 so far, which is more bank failings than the previous 17 years combined (source: FDIC). What’s happened to all of the mortgages and bank owned properties from these 297 banks? Who’s paying the property taxes? Who should the county notify regarding delinquent property taxes?

  • Foreclosures and bank owned property inventories have been at record highs for several years now. Are the banks staying current on all of the delinquent property tax bills? Some yes, and some no.

  • Mortgage companies packaged up countless thousands of mortgages and sold them to "Wall Street." Wall Street packaged up loans and sold them to foreign investors. Who owns the mortgage now? Do they know when a property is being lost for delinquent property taxes?

  • Some banks are just poorly run, and have horrendous record keeping. Look at the rate at which they’re failing.

These are just a few of the logical factors as they pertain to banks. I’m confident there are several more reasons why banks fail to pay delinquent property taxes, and hence lose very nice properties to tax sale.

What if I Just Want the High Interest Rate,
and Don’t Want to Acquire Property?

Many of our successful clients have no interest in owning real estate, and feel much more comfortable just earning high interest only. You can definitely invest in tax lien certificates and earn the high interest rates of say 18%, or 25%, or 36% interest, and basically eliminate the possibility of owning the property.

If you want to earn the high interest rate, and eliminate the possibility of taking properties back, then you must acquire tax lien certificates on the right types of properties. For example, single-family residential homes (primary residences) in great neighborhoods that have a mortgage that’s not "underwater" is just one category. It’s been our experience that most people won’t lose their primary residence for a couple of hundred, or couple of thousand dollars in back taxes. Therefore, if you want to earn the high secured interest rate, and you don’t want to own the property, we’ve found that these type of single family residential homes almost always redeem. This helps insure that you earn the high interest, and not own the property.

What if I Do Want to Acquire the Property?

If you’re interested in acquiring real estate, then you’re going to want to invest in "Tax Deed" states, and also use the "Tax Resale Property" acquisition strategy.

Tax deed states don’t offer tax lien certificates. Rather than offer a tax lien certificate that gives the property owner 1 to 3 years to pay their delinquent property taxes, the tax deed county will take no action for 3 to 5 years. During this period of time, interest and penalties accrue, but the property owner is in no danger of losing their property.

So here’s how the tax deed states work: let’s say it’s a state that allows 5 years delinquency. Once property taxes are 5 years delinquent, these properties will be offered at tax sale. By law, the opening bid must be the price of the back taxes and penalties only. When you acquire one of these properties at tax sale in a deed state, you’re purchasing and owning the property. Remember, in a Tax Lien Certificate state, you’re not acquiring property; you’re merely acquiring a first position lien on the property.



The "TR-Property" acquisition strategy is used in tax lien certificate states, and not in deed states. Because of the volume of tax lien certificates offered at some tax lien certificate sales, and the relatively low number of investors who attend, countless counties have thousands of tax lien certificates that do not get purchased. The myth is that these are the leftovers that no one wanted. Nothing could be further than the truth.  We’ve been consistently investing in tax lien certificates for over 20 years, and we know for a fact that this is simply not true. The truth is, in many cases, there simply aren’t enough investors to acquire all of the desirable tax lien certificates available. These non-purchased tax lien certificates become county held, and when the redemption period expires, come counties will foreclose and take title to the properties. The county will then offer these properties to investors. By law, the first time the county offers these properties, the opening bid can only be the amount of the back taxes and penalties owed. You can acquire these valuable properties at the sale, or from the comfort of your own home via "assignment purchasing."

Each of the properties above were acquired via the Tax Lien Certificate investment process, and were acquired for less than 10% of the market value of the property.

If I Decide to Attend a Tax Lien Certificate Sale,
How Does the Process Work, is it an Auction?

There are three basic types of tax lien certificate sales; premium bidding, rotation bidding, and bid down the interest rate.

IMPORTANT: You DO NOT have to go to auctions and enter into bidding competition to acquire highly profitable tax lien certificates. We’re addressing the auction procedures here simply because it’s a very commonly asked question.

In the bid down the interest rate method, the interest rate gets bid down, and the person willing to accept the lowest interest rate is the successful bidder. Typically, the interest is bid down in ¼% increments until the bidding stops.

In the rotation bid method, the county simply goes round-robin, and each person gets to acquire their lien of choice on the list. They continue to rotate through the group until the group stops investing. Investors pay face value for the tax lien certificate, and receive the maximum interest rate.

In the premium bid method, you’re bidding a dollar amount above the price of the tax lien certificate. The premium you bid above the price of the tax lien certificate is not recovered, and goes into the county’s general fund. The premiums are typically bid up in one-dollar increments. The person willing to pay the highest premium is the successful bidder. By paying a premium above the price of the tax lien certificate, and not getting the premium back, in essence what a person is doing when they pay a premium is lowering their effective interest rate.

Realistically, How Much Time Does it Take to
Successfully Invest in Tax Lien Certificates?

Investing in tax lien certificates isn’t complicated. It’s a matter of understanding the rules and procedures for the markets you have an interest in, and then knowing how to complete thorough due-diligence in a timely manner. Once you understand the due-diligence process, you can successfully acquire tax lien certificates anywhere America – right from the comfort of your own home – in as little as four hours a week, or even less. Like most anything else, the more time and effort you dedicate, the more successful you can become.

Why Doesn’t My Stockbroker, Financial Planner,
or Bank Offer Me Tax Lien Certificates?

A tax lien certificate is a non-commissionable investment vehicle, i.e. counties do not pay commissions on Tax Lien Certificates. Stockbrokers, financial planners, and bank’s can recommend tax lien certificates, but they wouldn’t make a commission if they did. Tax lien certificates that pay you 18%, or 25% interest per year would compete greatly with their "safe" investment vehicles that do pay commissions, but only pay the investor 1% or 2% interest per year.

Tax lien certificates are not governed by the typical financial regulating bodies, such as the Securities Exchange Commission (SEC) or Financial Industry Regulatory Authority (FINRA); rather, the rules and procedures are set and enforced by State Law.

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.

These are the answers to the more frequently asked questions we receive. We understand you likely will have additional questions, and may desire additional information. For more detailed information on investing in Tax Lien Certificates, we developed a Free Online 7-Day Tax Lien Certificate Investment Mini-Course. This is not a college course. The information is designed specifically for novice to intermediate Tax Lien Certificate investors. You’ll learn at your own pace, and receive the answers to most any other questions you may have.

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