Have You Ever Heard Of A Tax Lien Certificates Scam?

Tax lien certificates are actually very simple to understand. Let me explain.

I think once you see how they work and why governments issue tax liens, it'll become clear why they're a phenomenal investment.

When property owners are late paying their property tax bill, the county that they live in issues a tax lien on their property. The amount of the issued lien is for the full amount of the owed taxes, plus a late payment penalty, and a high interest rate, anywhere from 10-25% (as high as 50% with some counties).

Having to pay such a high interest rate, the property owner usually either pays the lien in full in a short amount of time, or pays it over the duration of the "redemption period" - an amount of time (set by the county) that the property owner has to repay the lien.

Counties want their owed tax money right away. When a property owner doesn't pay on time, the County loses some of its ability to pay for things, like road construction projects, street lights, and other things of that sort.

So, in an effort to collect those taxes, the county holds a public auction - available to every citizen - where they sell the tax lien certificates themselves. People can buy these tax lien certificates for the full amount of the owed tax.

Buying a tax lien certificate entitles the lienholder to receive the full amount of the principal (the full owed tax amount), plus any late payment penalties, PLUS the high interest rate the County set on the certificate itself.

You might think that the County would WANT to hold on to the certificates, because they'd end up making money in the long run, however the County isn't a bank - it's not in the business of loaning money to delinquent property taxpayers. They want their money as soon as possible so they can have the full use of it today, not tomorrow.

You'll be surprised to know that not very much can go "wrong" when investing in tax lien certificates.

Only one of two things can happen:

1. The homeowner pays the back taxes
   
2. The homeowner doesn't pay the back taxes
   

The first scenario is by far the most common occurrence. I've heard anecdotal stories from tax lien investors that, even after investing in them for years, they have never had a person NOT pay back the tax. Instead, the "worst" thing they experienced was that the homeowner took the full redemption period to pay back the lien. Obviously, this isn't desirable if you're looking to invest for the short term. (Then again, to avoid that, you can simply choose a county that offers short redemption periods.)

Legally, tax liens are "first" liens. What that means is that tax liens take precedence over all other claims to the property in question. Unpaid mortgages, insurance, and the like are all secondary to the tax lien. Remember, this is back property tax that is owed the State, not an unpaid mortgage owed a bank.

The second scenario is actually terrific for the lien holder. If a homeowner never repays the property tax, then ownership of the property goes to the lien holder. In other words, the lien holder gets to foreclose on the property and keep it! This fact makes investing in tax lien certificates exciting, as you could potentially buy a house for only the back taxes owed.

There are only two scenarios where you could lose the principal:

1. In Bankruptcy court, a judge may decide to forgive the tax lien. If that happens, you would lose the principal. However, this is extremely rare.
   
2. Despite being the first lien holder, if a government entity such as the FBI or CIA needs to seize the property, they can step in and take it. This scenario is even more rare than the one above, but I thought you should be aware of the different things that can happen.
   

97% of the time, the homeowner pays the back taxes. The biggest "risk" you take by investing in tax lien certificates is the amount of time it takes for the homeowner to pay the back taxes. Redemption periods can last for years, and differ depending on the state. But of course, the homeowner can pay the back taxes in full at any time during the redemption period (which is typically what happens).

For more information, here's a useful site that has a quite a bit, including a Top Ten list about how to get started investing in tax lien certificates:

http://www.taxliencertificatesscam.com/top-10-reasons-to-invest-in-tax-lien-certificates/