There are two ways to buy a tax lien certificate: from the government, or from an investor. Buying tax lien certificates from a county is a matter of finding out when the sale is, researching the properties, and placing your bids. If an investor is liquidating his tax lien portfolio for some reason, it can be transferred to a new owner in a private sale, while filing the appropriate transfer documents with the county.
Once you own the tax lien certificate, you learn a bunch of information: what the owed tax is, what the interest rate is, and when the lien expires and a foreclosure may be done. Each of those describes how an investor earns their return on their investment.
If a tax lien certificate is sold on Monday and the property owner pays off their taxes on Tuesday, the investor gets a check for the amount of the tax lien, the lien is removed from the property, and the investment has run its course. If time passes before the taxes are paid by the property owner, interest grows on the unpaid taxes, and those are paid to the investor.
If a few years pass and the property is sold, the tax lien and any interest due is paid off the top, the lien is removed, and the investor recieved a sizeable return, usually about 10% annually.
If the tax lien reaches its time limit, then the holder of the tax lien certificate has a right to foreclose on the property, take ownership, and release the lien themselves. Now the lienholder owns the taxed property – and since taxes due is usually a fraction of the appraised price of a piece of real estate they should own property more valuable than the lien was worth.
As an investment, this system seems to have no downside, as those late-night infomercials would have you believe. Either you get the taxes, or you get the property. What could go wrong?
Continue to Part 3: How A Tax Lien Investment Can Go Wrong