What are Tax Lien Certificates?

I'm sure you think that sounds great, but what are Tax Lien Certificates? Tax Lien Certificates (TLCs) are financial notes that you can purchase from counties in several states across the country. These TLCs are actually in lieu of unpaid taxes by those who own properties in these counties. When property owners don’t pay their taxes, the counties do not have the money to fund their yearly budgets. So many states have enacted laws that allow the counties to collect their funds another way. That other way is by selling TLCs to investors.
The counties sell the unpaid taxes to investors who are willing to pay the taxes for (1) a lien against the owner's property, and (2) the rights to get high interest rates if the property owner eventually pays the money back. If the property owner doesn’t pay their taxes, plus interest, by the state defined time limit the lien gives the TLC owner the right to the property. In these cases the TLC purchaser can file paperwork to take possession of the property.
The rates of interest you can expect range from 8% all the way up to 50%, depending on the state. For example, Texas allows for 2% each full or partial month, or 24% a year! And, on an annual basis you can actually exceed these rates in some cases. This is possible because some states have a set penalty or fee for redemption regardless of when the tax lien is redeemed. For example, in New Jersey there is a 3% penalty in addition to a 15% per annum interest rate. So, your best rate of return is actually when the property owner pays the very next day. That would give you a rate of return of 3% x 365 or 1095% on an annual basis. As good as that is, you won't be able to repeat the feat for the other 364 days of the year. You will usually prefer to let them take a little longer to pay.
The state set redemption time limits (when you can file for possession of the property) can range from less than a year to several years. And once that point has been reached you have another state defined time limit by which you must file on the property or lose the lien altogether. So, if you want to give the owner some more time, and you some more interest, you can wait. Or, if you want to see if you can get the rights to the property you can file right away.
There are as many formats to tax lien sales as there are counties! The following is a rendition of one of the many variations on sale methods.
You time your traveling so that you arrive at the sale at 8 a.m. This is one hour before the sale starts and is the time this particular county starts accepting registrations for the sale.
The people at the county treasurer’s office are there at tables taking registration information. They request a filled out w-9 for each investor, as they will be reporting investor earnings to the IRS. They take your name, address, and phone number etc... They assign you a bidding number for the sale. The treasurer’s office also provides you with a sheet with instructions for the sale and a packet with the listing of the tax liens for sale this day. You find yourself a good seat and spend the extra time you have reviewing the tax lien listing. You are looking for words and indications of properties you wouldn’t want if they were offered to you. It might be just too high or too low of a price. Or, it might be that there is a significant number of previous tax years tacked on to the sale item. Or, it might be that the wording indicates the property is "common property" and would be difficult to redeem. Or it might be improvements only, like a farm silo, and you are not interested in farm silos.
In any case, you mark up your listing so that you know not to accept your "no" tax liens. If a particular property is borderline and you haven’t decided yet, you place a question mark next to it so you can decide later depending on how your investment day is going.
The sale starts promptly at nine. The county treasurer gives a little information on how the sale will be run; that the sale is “buyer beware”; that the investor has no direct rights to the property they receive (i.e., you are not allowed on the property as that would be trespassing), and asks if there are any questions before they start.
The sale starts.
At this particular sale, they use bingo balls to pick the investor. As each ball comes out the investor number is called out. If the investor wants the tax lien they say “yes”. If they do not they say “no”. A “no” answer means that the treasurer takes out another ball and calls on another investor. Eventually someone accepts the tax lien and all the balls are put back into the bingo machine. Then the next property on the list is read out and a new ball is picked.
Each of the properties is gone through one by one until they have all been taken by investors.
At the end of the sale the treasurer’s office needs time to tally up the totals for each investor. You are asked to come back at 2 p.m. to pay for your purchases. This sale was over by 11:30 a.m.
You head off for some lunch. In the meantime you also add up your purchases to see if they agree with the county’s total. When you arrive at 2:00, and the total agrees, you write out your check. The county gives you copies of your tax lien certificates. You head back home, confident that you will be making good interest on your money.