Today I’m answering your question, “How do tax lien sales work?” and the topics I’m going to cover are:
- A Tax Lien Is the Result of Delinquent Property Taxes
- How Counties Resolve the Issue of Tax Delinquent Properties
- Tax Lien Certificates Are a Safe and Secure Investment
- What Are Tax Lien Certificates Interest Rates by State?
- What Happens if the Tax Lien Is Not Redeemed?
- Acquiring Mortgage-Free Real Estate by Paying Back Taxes on Property
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A Tax Lien Is the Result of Delinquent Property Taxes
To start with, tax liens, or more formally called tax lien certificates, are one of the preferred investments for newcomers and those who prefer to invest with little to no risk.
How do tax lien sales work? Let’s start at the beginning. Decades ago the local county government gave each parcel of land a number. That number is a tax number.
The state legislature requires the local county to collect taxes on all properties. The legislature gives direction to the local county treasurer and authorizes that property taxes be levied and collected.
The tax lien is a consequence of a real estate owner failing to pay property tax on a property like a home, farm, or residential lot.
The non-payment of property tax sets off an alarm at the local county treasurer’s office. Due to that non-payment, the treasurer will put that property in a default situation and begin to send notices of default for non-payment of taxes. This is the first step.
How Counties Resolve the Issue of Tax Delinquent Properties
All property owners are required to pay property taxes. If they fail to pay, the treasurer is authorized to confiscate the property and resell it.
The county officials do not want the property. They want the tax revenue which is used to pay county employees and to maintain infrastructure.
Approximately half the states seize the property and sell it at a tax deed auction. The other half of the states sell a tax lien certificate and wait for the property owner to pay the taxes.
How do tax lien sales work? In a tax lien state, the county treasurer will issue a tax lien certificate and allow others to pay the property taxes. The treasurer will advertise the sale of a tax lien certificate on the county website and in the newspaper.
Tax Lien Certificates Are a Safe and Secure Investment
Tax lien certificates are sold at public auctions. The investor invests directly with the local government when purchasing a tax lien certificate. This is a safe and secure system when viewed from the investor’s standpoint.
The tax lien represents a debt for the property owner, like having another mortgage.
States which sell tax lien certificates are very lenient. They allow the property owner to stay on the property. The county does not push the delinquent taxpayer off the property for as long as 3 years.
Meanwhile, the certificate holder waits for the property owner to pay, in other words, come forward and redeem the certificate.
When they redeem the certificate, they must pay the full amount of the taxes plus the high interest which was bid at the auction.
What Are Tax Lien Certificates Interest Rates by State?
How do tax lien sales work for bidders, and how is the interest rate determined?
Bidders in Florida, for example, bid the exact price of the tax certificate, and then the auction is all about what price they are willing to accept for an interest rate.
Tax lien certificates pay different rates in different states. For example, Arizona pays up to 16%, Florida up to 18%, Iowa 24%, and Illinois 36%. Different rules apply in different counties and in different states.
The investor invests directly with the county and then waits for the property owner to come forward and pay the amount of the tax certificate as well as the outrageous interest rates.
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What Happens if the Tax Lien Is Not Redeemed?
How do tax lien sales work if the property owner doesn’t pay? Many certificates are paid almost immediately. Other certificates are unpaid until the final due date. Local governments will have hundreds, and in some cases thousands, of property owners that fail to pay taxes.
Most investors have little to no experience with this alternative investment. They’re nervous and want to be assured that they won’t lose their money. An investor’s biggest question usually is, what is my security?
The investor’s security is two-fold:
- Their money is protected by the property tax code
- The investor has paid someone else’s taxes and that results in the ownership of a tax lien certificate.
The certificate comes with a covenant, that is a promise, that if the property owner doesn’t pay, the county will allow the certificate holder to take the property and become the new owner.
Acquiring Mortgage-Free Real Estate by Paying Back Taxes on Property
How do tax lien sales work if you get the property instead of the interest? Skeptical investors are nervous and worry what happens if they get the property.
The truth of the matter is, they will be purchasing the property for only the back taxes, probably 10 cents on the dollar, and the treasurer would have deleted the mortgage or deed of trust loan from the property.
Imagine buying a tax lien certificate, paying taxes on a \$200,000 property then the property owner disappears and does not come forward to redeem the certificate.
The county government after a short legal process will allow you to become the owner of that property without a mortgage.
Investors ask what would I do with the property? I teach my students, you bought it low by purchasing for just the back taxes, why not sell it low, earn a big profit, and move on to the next one? That is perfectly legal and taking place in all states.
We hope you enjoyed Ted’s lesson, “How Do Tax Lien Sales Work?”
Tax lien certificates are sold at county auctions, and they’re a passive investment that pay interest rates as high as 36%. However, unlike most high-yielding investments, tax liens are low risk because they’re secured by real estate.
If you’d like to know more about tax delinquent property investing, Ted Thomas provides full support and complete training with home study courses, Q&A webinars, live tutorials, workshops, web classes, and personal coaching with certified coaches.
Learn how to reap huge rewards from tax lien and tax deed investing! Get started today by taking advantage of this Free Gift from Ted. Act now, it costs you nothing and will give you a big head start!
Ted Thomas is America’s Leading Authority on Tax Lien Certificates and Tax Deed Auctions, as well as a publisher and author of more than 30 books. His guidebooks on Real Estate have sold in four corners of the world. He has been teaching people just like you for over 30 years how to buy houses in good neighborhoods for pennies on the dollar. He teaches how to create wealth with minimum risk and easy-to-learn methods.
Ted Thomas is not an attorney at law or a real estate broker and is not giving legal advice or investment advice. Investors should seek legal advice from licensed professionals.