Public tax lien auctions are governed by state law and conducted by the county government.
When the property owner pays their delinquent tax bill at the county office, the
funds are immediately sent to the investor.
Interest rates for tax lien certificates are mandated by state law. The rights to
collect this interest are transferred to the tax lien certificate investor. Even
better, the county acts as the investor’s collections agent so you are not required
to have any contact with the property owner.
Annual property taxes are generally 2-4% of the underlying property’s value. Since
a tax lien certificate is secured by the underlying real estate - the collateral
coverage is 25-50 times the tax lien amount. Even if the value of the property was
to fall by 50%, the asset coverage is still very substantial.
What are the risks?
The primary risk is liquidity risk - that is, an investment in a tax lien certificate
can be tied up for months or years at a time and there is no established secondary
market where you can sell unredeemed tax liens. Redemption periods vary from state
to state - ranging from 6 months to 4 years. If the redemption period expires without
the property owner paying the taxes and/or penalties, the foreclosure process will
take a number of months.
While tax lien certificates have priority over junior liens like mortgages or contractor
liens, liens from the IRS or sometimes state income taxes may not be extinguished
during the foreclosure process. The investor may be responsible for these senior
If the property owner enters into bankruptcy, the court may choose to delay payment
or reduce the interest rate and/or penalties of the tax lien.
If the underlying property is worthless, the value of the investment would likely
not be recovered.
With these risks in mind, it is important for the investor to perform due diligence
before investing or to use the services of an experienced investment advisor like
Treeview Capital Management LLC.
Investing in tax lien certificates is very safe. There are only two outcomes: Either
an investor will receive an attractive return on the investment through interest
and/or penalties, or the investor will own the property through foreclosure.