Every year, county governments across the United States levy property taxes on real
estate. These taxes pay for public services such as teachers, police, and firefighters.
Most property owners pay their taxes on time.
If property taxes are not paid on time, the county government will allow investors
to pay on behalf of the real estate owner. The county will get its much needed funding
to continue operations and the investor will assume the right to collect the interest
and/or penalties that the state law officially requires.
Investors can purchase tax lien certificates by being the winning bidder at a public
tax lien auction. Then the investor waits.
When the property owner pays their tax obligation, they repay the county the original
cost of the tax lien certificate plus accrued interest and/or penalties. The county
government will then contact the investor and redeem the tax lien certificate by
sending the same amount to the investor.
In the rare case that the property owner does not pay their taxes for a state-determined
period of time, the investor may then start the foreclosure process on the property.
Through foreclosure, any other junior liens will be extinguished and the investor
will become the owner of the real estate free and clear. Junior liens include mortgages
and contractor liens.
A tax lien certificate is a first priority lien on a real estate property whose owner
is delinquent in paying their property tax. The holder of a certificate is entitled
to the interest rate and/or penalties that are mandated by state law. The property
owner must pay the original taxes plus accrued interest and penalties.