How does the Tax Lien Market Work?

The tax lien real estate market is a very dynamic with huge return potential. Many investors make substantial sums of money in this market. While it is a prominent source of success for many investors, the majority of people do not even realize that it exists. If you are looking for an alternative way to invest your money and potentially receive a huge return, the tax lien market could be for you. Here is how the tax lien market works and how it could help you as an investor.

What Are Tax Liens?

In the United States, everyone that owns a house has to pay some sort of property tax on the house each year. Their house is assessed by the county assessor and that percentage of money is charged every single year. As a homeowner, you are required to pay that amount of money to the county in which you live. If you fail to pay the property taxes on time, your property taxes are considered delinquent.

When you are delinquent on your taxes, the county government does not get their money from you. Each year, they have budgets that they have to hit in order to operate. They need the money from each house's taxes in order to operate. Therefore, they need another way to generate this money. This is where tax liens come into play. The county will place a tax lien on your house. This lien will not be removed from the property until you pay the taxes or the property is sold. The county is going to find a way to get their money one way or another. Therefore, if you do not pay your taxes, they use liens as an alternate way to get the money that they need to operate.

Tax Lien Sales

Once the county generates these tax liens they need to sell them quickly in order to receive the money that they need. Each county will do this a little differently, but they will all sell them. The most common method is through an auction format. This is often held at the county courthouse and anyone can come.

During a county tax lien auction, they will go through each lien individually. They will announce the parcel, the amount of the lien and the interest rate that they are starting with. They will start at the maximum amount of interest that the owner of the lien can charge and then work their way down to the lowest bidder. 

The winner of the auction now holds the tax lien to that particular property. If the tax lien is not paid by the owner of the property, then the person that bought the tax lien now can foreclose on the house and keep it. This could be a potentially huge return on a small investment. If they pay back the taxes, the winner of the auction gets to make a nice return on the money through the interest that was charged. 

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