How Do Property Tax Lien Sales Work?

Property tax lien sales allow an investor to make money by paying the taxes due on a piece of real estate. When a real estate owner becomes delinquent in paying the property taxes, the county government sells its tax lien rights to individuals. In some cases, the investor ends up owning the property. This is the allure of getting into property tax liens, but late night infomercials offering courses on tax liens only tell part of the story. The property tax lien sales process is not as simple as it appears.

"Tax liens or tax deeds are sold in 35 states. Almost every state and territory, in the United States, has a process that is used to collect delinquent property taxes," writes Darius Barazandeh in his article "Tax Lien Investing." There are many reasons why the owners of these properties are behind in paying their annual property taxes. The amount due can be under $200 or up to $20,000 or more. At the end of the tax collection process, the county "allows ordinary individuals to purchase the rights of local governments in tax delinquent property." Many people watching infomercials think that they get ownership of the property just by paying the tax liens. This is not the case at all. In exchange for paying the back property taxes, the investor gets a tax lien certificate. The certificate gives him two rights. The first legally requires him to be paid interest on the money he invested. The interest rate varies from 12 percent to 24 percent depending on individual state laws. The investor also has the right to foreclose on the property if he is not reimbursed the principal and the interest. Depending on the state, the property owner has one to three years to pay back all the money. This is called the redemption period. During this time, the investor waits to be paid back and does not make any money on his investment.

At the end of the one- to three-year redemption period, the investor has the "right to foreclose the tax lien and take title to the property if the lien is not paid," writes Mr. Barazandeh. The investor files the necessary paperwork with the county and pays the filing fee. Once the owner is notified that the property is in foreclosure, he still has time to pay back what he owes before losing ownership. If the owner doesn't pay, the foreclosure goes through and the investor now owns the property. He can sell it, live in it or rent it out. Mr. Barazandeh writes, "since tax liens generally amount to less than 10 percent of a properties' market value, foreclosure creates a tremendous profit windfall for the tax lien investor."