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Sunday, March 20, 2011

How to buy a tax lien certificate

Tax lien certificates are issued to bidders at auctions where repossessed property and/or homes have unpaid taxes. The tax authority sells tax lien certificates to bidders to raise funds quickly whereas investors buy the liens to receive interest on the unpaid taxes or the property itself if the allowable period for reacquisition of property is forgone by the original property holder. (taxsales.com)

There are approximately 20 states that have counties that sell tax lien certificates, a complete list of those states can be found at the following link. This article and the accompanying video discuss the tax lien certificate buying process and also illustrates advantages and disadvantages of acquiring tax lien certificates.

Where and how to buy tax lien certificates

Tax lien certificates are sold in several U.S. States and can be obtained through auctions held by local government authorities. Since property taxes are often paid to State counties, the taxes due are frequently due to this level of Government. Some counties don't sell tax lien certificates but rather tax deeds that are sales of repossessed property to redeem taxes due. To purchase a tax lien certificate some basic information is required prior to purchase. Some factors investors might want to consider before investing in tax lien certificates include the following:

• How much money will be set aside for investment
• What is the expected return on investment
• Is the tax lien certificate riskier than another investment yielding the same amount
• Where is the property underlying the tax lien certificate located
• Is the property worth anything, or will it be worth anything in the future

Determining these first pieces of information are useful in both preparing for and reducing risk in tax lien certificate investments. This is so as knowing the above information can assist an investor in selecting a suitable tax lien certificate i.e. if the tax lien certificate is a good investment choice, and where the investment fits in the investors overall investment strategy. If the investor has gathered the above information and is ready to invest in tax lien certificates, the next steps involve  identifying the local auction(s) where tax lien certificates are sold and  preparing for and attending said auction(s).

Advantages and disadvantages of tax lien certificates

As with all investments, there is a risk to investing in tax liens. Specifically, the non-payment of taxes on unused, non-construction land or legally unattractive property can lead to little or no return on investment (ROI). In other words, the investment in the lien may be worthless if the tax and interest on the tax is never paid and if the property the tax lien is issued for is worthless.

Advantages of tax lien certificates include the potentially very high interest rate on the taxes that is paid to the tax lien certificate holder after either  payment of back taxes or  repurchase of the property. Moreover, since new buyers of property assume tax liens, the taxes must be paid in order to acquire the property. The tax lien certificate holders are given preference when receiving payments and may be paid first in the case of incomplete or partial payment of taxes.

Interest rates on tax lien certificates vary from state to state and can be as low as 5% or as high as 36%. For this and the reasons mentioned above, choosing tax lien certificates to invest in is ideally done carefully and with property background research. Tax lien certificates can be profitable but can also be no more profitable and more risky than some certificates of deposit.

Tax liens are back taxes due on property. When taxes aren't paid, local government sell the taxes with fixed interest rates to bidders for the purpose of acquiring what is owed to them upfront at the expense of possible interest on taxes. This process is similar to the selling of debt by banks to other financial institutions and is a money raising financial instrument. Tax lien certificates sold are consequently liquidated government assets. 

Tax lien certificate investing does involve some risk as outlined in this article but does have the potential to add value to one's investment portfolio. Acquiring tax lien certificates is a matter of identifying local tax lien certificate auctions and bidding at said auctions. The preparation for and understanding of the tax lien sales process in addition to awareness of the underlying property is also helpful to investors when considering the purchase of tax lien certificates.


1. http://www.investopedia.com/terms/t/taxlien.asp
2. http://www.taxsales.com/
3. http://www.wikihow.com/Buy-a-Tax-Lien-Certificate
4. http://www.creonline.com/articles/art-267.html
5. http://tinyurl.com/6d2wq8 (Ezine.com)
6. http://ezinearticles.com/?Where-is-the-Best-Place-to-Invest?&id=595906
7. http://www.tax-lien-certificates.com/