A tax lien sale is a sale through which the county government tries to recoup unpaid property taxes by selling tax lien certificates. When you buy tax lien certificates, you will assume the responsibility for recovering the unpaid taxes. The property owner will have to repay everything he or she owes to you. If the property owner fails to repay the property taxes, you have a right to initiate foreclosure proceedings against the property. If the proceedings are successful, you will be able either to keep the property or sell it to the highest bidder. While buying tax lien certificates can wind up a great investment, it can also backfire on you, so be cautious.

Buying a Tax Lien

When a property owner fails to pay his or her property taxes, the county government has a right to put the tax obligations up for sale. They are sold at an open auction that is held every year. If you are interested in buying a foreclosure certificate, all you have to do is come in and buy the certificate. Be sure to bring plenty of cash--in most counties, you can't buy a tax lien certificate any other way.

In most cases, you will be able to get whatever certificate you want by paying the original price. However, if another investor wants the same certificate, you will have to make a bid. Whoever wins the bid will get the certificate. Different states have different methods to determine what you need to do in order to win a bid. They include the following:

  • Bid down the interest--Under this method, the county government gives a starting interest rate. Investors can either accept it or agree to a lower interest rate. Whoever agrees to the lowest interest rate wins the auction.
  • Premium--This method is similar to what you expect at an auction. The country government sets the sale price, and investors offer to pay more. Whoever agrees to pay the highest amount wins the auction.
  • Random selection--Under this method, the winning bidder is chosen at random either by a computer or by hand. This method is often used when other methods don't produce a clear winner.
  • Rotational selection--Under this method, the bidders are given numbers. When their numbers are called out, they get a chance to buy one of the randomly selected certificates. If they pass, the person with the next highest number gets the choice. This can continue until the auctioneers go through all investors.
  • Bid down the ownership--Under this method, the investor agrees to take only part of the lien. For example, you can choose to get only 80 percent of the lien, and your certificate will be worth 80 percent of its value. Whoever agrees to the lowest percentage wins. 

Holding a Tax Lien Certificate

Once you buy a certificate, the property owner has to pay all of the taxes he or she owes, plus interest set by the county government. The property owner has to pay it off by the end of the period set by the county government. Thanks to the interest charges, the total payments will be greater than what you paid for it, allowing you to earn profit.

If the property owner doesn't pay off the property taxes in time, you have a right, as stated above, to initiate foreclosure proceedings. You will need to be able to prove that the property owner failed to make the payments. If the judge accepts your evidence, you will be get the ownership of the property. At this point, you can either hold on to the property or try to sell it, earning even more profit.

The problem with this is that when you buy the certificates, you don't have much information about the property save for a cursory description. And since you have to buy the certificates at the auction, you have no time to verify this information. As the result, you may wind up with property that either isn't worth much money or has so many problems that you will need to spend far more money than it's worth to bring it to a state of good repair.

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