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Introduction:
For more than two hundred years, the United States government has levied taxes against real estate. At the county government level these taxes fund a number of services, including hospitals, public schools, law enforcement, road construction & maintenance, parks, and playground equipment. When taxes are not paid, the government does not have the operating capitol needed for these programs.Tax Sale Definitions:
The following is a list of some of the common terms used in tax lien investing. Once you are familiar with the language used, the processes are similar. However, remember that since every state and county handles the sales and auctions differently, so you must become familiar with the Local rules, Regulations and Statutes prior to going to an auction in your particular area of interest!
Tax Liens
A lien placed on property that has delinquent taxes due and is in tax delinquency. In order for the owner the clear the title, the lien must be paid off. Often if the owner does not pay the taxes that are past due, the lien is sold to investors. After a period of time expires, called the redemption period, the owner will forfeit the property to the investor. In many states, pools of tax liens are sold to investors once a year at a public auction. To make the liens interesting to investors, an interest rate, ranging from 8% to as high 50% is placed on the lien so if the investors buys the debt due on the lien, he/she gets a high return on their money. Otherwise, if the delinquent property owner does not pay off the lien, then the investor often gets the entire property for only the taxes, penalties and interest owed.For instance, if you own a home but fail to pay your property taxes, the county where the property is located will often place a lien on your property for the amount of taxes owed plus any penalties and interest. Before you can sell or transfer this property, you must pay this tax lien to clear the title. Also, the IRS may place a lien on a person and any property they own if they fail to pay federal income taxes Counties issue the most widely known tax liens to property owners that do not pay their property taxes. If these liens are not paid off in a specified period of time, then in some counties the debt is sold to investors using an instrument called a tax lien certificate. These certificates are sold at tax sale auctions.
Tax Lien Certificates
When property owners due not pay their annual property taxes; the county often issues what is called a tax lien certificate. A certificate that is usually sold at a public auction represents the debt, penalties and interest owed on tax delinquent property. These tax lien certificates are often sold at public auctions once per year (annually) in most counties in the United States. During these tax lien auctions or sales, as they are more commonly called, investors can bid on the certificates. The winning bidder receives a legal claim to the tax debt, usually called a tax lien certificate (TLC) or certificate of purchase, that records the amount of money due to the investor should the property owner pay off the debt by redeeming the certificate. If the owner pays off the debt, the owner gets their money back plus the prevailing interest rate in the state. Depending on the state, interest rates can range routinely from as low as 8 percent per year to as high as 24 percent per year. If the owner does not pay back the certificate in full, then the investor often gets the entire property for only the taxes, penalties and interest due. In the second year, many states tack on a substantial penalty so the investment returns in the second year can exceed 24 percent. In Michigan, tax lien certificates pay investors a whopping 50 percent return the second year.Tax Lien Properties
Tax Lien Properties that are offered at a tax sale that can purchased by investors. Tax sale properties are created when a property owner fails to pay their property taxes. After a period of time expires called the redemption period, investors, often for only the taxes, penalties and interest due, can purchase the property. Many states provide lists of tax sale properties that can purchased at tax sale auctions or over the counter after the tax sale auction.Tax Lien Sales
Tax Lien Sales are conducted annually in most counties to offer properties to investors that have delinquent property taxes due to the county. When a property owner does not pay their property taxes, the county places a high priority on getting their money. To get their money quickly, the county conducts a tax lien sale, where either a tax lien certificate or an actual tax deed is sold at public auction. The purpose of the tax lien auction or sale is to offer the debt or actual property to investors so the county can start receiving tax revenue from the property again. Depending on the state, two types of tax sales are usually conducted, tax lien certificate sales or tax deed sales. Some states conduct both. Here is a list of states that conduct tax lien certificate sales and tax deed sales. As noted in the table, Canada also conducts tax sales. Following the annual auction, some states sell unsold tax lien certificates directly over the counter (through the mail in many cases).
Tax Sales
A sale often sponsored by the government for the purposes of disposing of real property. County governments, to dispose of real estate that is in tax delinquency, conduct the most widely known tax sales. These sales, often called tax lien certificate sales or tax deed sales and are conducted annually in most counties in the United States. Canada also conducts tax sales. However, in Canada, most sales are only tax deed sales. At these sales, investors bid on either tax lien certificates that represent the debt due on the property, or tax deeds that represent actual ownership in the property. Tax lien certificates usually pay the investor an interest rate that can range from 8 to 50 percent. Tax deeds do not usually pay an interest rate, but after a period of time, called the redemption period, investors that buy tax deeds receive the entire property, often for only the penalties and interest due.Important Note: It is extremely important to know and understand which type of sale you are attending, a tax deed or tax lien/certificate sale. Each has specific rules and guidelines which must be followed promptly, and which can differ greatly county to county. It is strongly recommended that anyone interested in attending a tax sale be aware of the method and timeliness required for payment and delivery of a property. For further information, familiarize yourself with property tax law, consult a legal attorney, and contact the government agency conducting the sale.
Other important information to consider:
Interest Rates
Redemption Periods
Tax lien auctions
Tax deed sales
Bidding Process
State Specific Information
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