A tax lien is a legal claim by a government entity against a property whose owner has failed to pay the owed property taxes. When property taxes are delinquent, the local government issues a lien on the property. This lien ensures the government's priority in the collection of unpaid taxes. Tax liens are then often sold to investors through auctions, providing governments with immediate revenue and offering investors an opportunity to earn returns through interest accrued on these liens.
Purchasing a tax lien at an auction results in the issuance of a tax lien certificate to the investor. This certificate represents the debt owed on the property, including the unpaid taxes, interest, and any penalties. It does not confer ownership of the property to the investor. Instead, it allows the investor to collect the debt, with interest, from the property owner. The interest rates on these certificates can be quite attractive, making them a potentially lucrative investment.
Each tax lien certificate comes with a redemption period, which is the time frame within which the property owner can pay back the owed amount, including interest, to clear the lien. If the property owner fails to redeem the tax lien within this period, the certificate holder may be eligible to foreclose on the property. The duration of this period and the rules surrounding foreclosure vary significantly from state to state, making it essential for investors to be well-informed about the specific regulations in the states where they invest.
Tax lien investing is governed by state laws, resulting in significant variations in how tax liens are handled across the United States. These differences can be in terms of interest rates offered, the length of the redemption period, and the bidding process at auctions. Some states have a competitive bidding process focusing on lowering the interest rate, while others may bid up the premium. Understanding these diverse laws and procedures is crucial for investors to make informed decisions and to strategize their investments effectively.
