Real estate investors purchase tax lien certificates to collect taxes plus any accrued interest. It is an attractive investment, and many investors can receive a steady income while collecting their investment from property owners during the redemption period. As tax lien holders, real estate investors can receive a high return on their investment, because interest rates that accrue on tax certificates range between 5% and 36%. Many investors consider purchasing tax lien certificates as a potentially profitable investment, because most property owners generally pay the back taxes prior to the expiration of the redemption period.
When a property owner fails to pay property taxes, the property taxes fall into delinquent status. At this point, the county where the property is located can place a secured lien on the home until the owner pays the delinquent balance. Tax lien certificates are the secured liens placed on properties for unpaid property taxes. Once a secured lien is placed on the home for unpaid property taxes, the tax lien certificates incur interest while the property taxes remain in delinquent status.
Real estate investors can become tax lien holders by purchasing county held tax certificates. These tax certificates are generally sold at public auctions. These public auctions are usually held around the same dates each year. The tax certificates are sold on a first come first served basis, and real estate investors must pay the face value of the tax lien certificate in addition to the accrued interest amount and any additional processing fees. Investors must bid on the tax lien certificates, and typically, the certificates are sold to the highest bidders. However, investors are required to make a deposit on the day of the public auction, which is a percentage of the total cost of the purchase. Rather than purchasing the tax certificates at public auctions, many municipalities also allow anyone to purchase the certificates directly from the county’s tax collector’s office.
Investors do not automatically acquire ownership to the property after purchasing tax lien certificates. The investor becomes the tax lien holder, and the property owner must redeem the tax deed by paying all of the required fees, including any accrued interests. The property owner must redeem the property within a specific timeframe, and each state sets the time limit for redemption, which is usually between 1 to 3 years. During this timeframe, the tax lien holder may not enter the property. If the property owner fails to pay the entire amount of the back taxes in addition to accrued interest, the investor has authority to foreclose on the property and gain ownership interest in the property.
Tax Lien Foreclosure
In most states, tax lien holders must initiate foreclosure proceedings and obtain a judicial foreclosure. In other words, the tax lien holder must receive a court order to obtain title to the property. Foreclosure proceedings can be costly. The tax lien holder must pay any attorney fees, litigation fees and other court costs associated with the foreclosure proceedings. In many states, if the property owner redeems the property during the foreclosure proceedings, the court costs may be added to the delinquent amount owed by the property owner.
Karl Stockton enjoys writing about real estate, finance, investment and current issues. This article was written on behalf of Bailey & Partners. Check back to read more of Mr. Stockton’s articles in the future!