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Tax Lien Certificates Explained

Low Risk High Return

It has been argued that only two things are certain in life, “death and taxes”. There is no escape from paying property taxes levied against a property or owner. Tax lien investing banks on this phenomenon.


First, county governments and municipalities are the entities who impose tax liens and issue the tax lien certificates and deeds to collect unpaid property taxes. Because they are regulated by state laws, all sales and transfers are monitored very carefully, which lowers the risk for fraud for this type of investment. 


Second, the security for the investment is not merely paper, but tangible real property. If the defaulting taxpayer does not pay back the complete investment including accrued interest and penalties, he loses his property. Owners become very motivated to pay delinquent taxes when the alternative is to lose their home and real property.  


Third, a tax lien, like any government lien, holds a priority senior lien position above all other liens. That means that a tax lien takes payment precedence before any mortgage, mechanic's lien, or other encumbrance against real property and must be paid first in any foreclosure action. Any investor foreclosing on tax lien certificates wipes out all of the non-governmental encumbrances.


Fourth, the return is iron clad. Once the interest rate is set by the government, there is no negotiation. Interest will accrue and continue so until paid in full, or the investor will obtain a valuable real property. In every exit strategy, the investors wins.

Fifth, a modest investment secures a property multiple times its value. The investment only represents a small percentage of the property's fair market value. Because of the leverage position an investor has, more than 99% of all tax lien certificates are paid. If the delinquencies are not paid, the investors have so much more to gain.

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What Is Tax Lien Investing?


When home and property owners fail to pay their property taxes, a tax lien is issued by local governments for the amount due. When they remain unpaid after several notices, tax lien certificates and tax deeds are created in an effort to collect unpaid funds. These are offered for sale, typically at auctions, to garner immediate cash payment for taxes due. Investors who buy the tax lien certificates and tax deeds earn interest in return, and the rate is fixed and guaranteed at the time of purchase.

Certificates and deeds are secured by the real estate upon which the taxes were levied. Investors purchase the right to collect the delinquent property taxes due from local governments when they are paid, or “redeemed”, together with penalties and interest.


The maximum interest rate limits vary from municipality to municipality, but are initially set at the maximum allowable. Interest rates, amounts payable, and return percentages, however, may be affected by negotiation at auctions in bid-down formats. Investors are not purchasing real estate, but in essence, interest rates or appreciable returns anticipated on their investment. 


For each year of unpaid taxes, a new lien is created, together with a new tax lien certificate. Understandably, this industry grew during the years of the financial crisis as more and more people defaulted on their property taxes and ultimately their mortgage payments.

Why Should I Invest in Tax Lien Certificates?


The fact is that tax lien investing benefits everyone. Not only are you earning healthy profits for yourself, but you are helping communities, residents, and delinquent home owners throughout the country collect more than 20 billion dollars each year in unpaid property taxes.


These taxes are needed to provide funds essential for services like hospitals, public schools, police protection, fire departments, parks, roads, and more. Without these funds, communities cannot function. The adverse effects can be unimaginably devastating.

Brad Westover, the National Tax Lien Association's Executive Director confirmed the importance of tax lien investing for everyone: “Fortunately, over 99% of delinquent taxes are paid prior to a tax foreclosure. Most properties are protected from foreclosure by property owners, family members, or mortgage holders". 

This means that in large part, tax lien certificate investing is a motivator that allows delinquent homeowners and property owners time to pay their taxes without harsh consequences to themselves or their communities. As an investor, you can reap the benefits of having a secure investment earning high interest returns with the knowledge and satisfaction that you are helping communities and not just yourself.

Tax Lien Certificate Investment Strategies


Tax lien investing is designed as a passive way for you to earn a long-term high interest rate returns. It is having your money work for you while you idly stand by and wait for your redemption checks.  Certain details such as where the property is located or other logistic information does not matter because it is unlikely that you will own any of the properties secured by the tax lien certificates. This type of portfolio is designed to invest in an interest rate return and not for purchasing real estate.

Before the execution of your portfolio, we review the logistics of the properties in detail, show you how your investment is protected, and by what date you are likely to be paid. Most of these certificates redeem within one to five years.  We carefully select the location and properties most ideal for our clients' goals and purposes. We only shop in the areas offering the highest interest rates and against properties with the largest equity positions. Most properties we select are under assessed compared to fair market value. This provides the utmost security for your investment. 

Click on the tab below to review what required to invest in Secondary Tax Liens..

What about Tax Deed Investing?


Now you understand the basics of tax liens investing lets quickly review whats involved with tax deeds. Click on the tab listed below to learn more about Tax Deed Foreclosures and how they work.

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