How do tax liens work? To answer the question, the first step is to explain a tax lien. Local governments (county, city, township, town, parish) receive most of their operating funds from property taxes. When property taxes go unpaid the local government’s method to enforce payment of those taxes is to place a tax lien on the property. A tax lien is the legal documentation defining a debt the property owner has to pay the government past due property taxes. So the local government has the money it needs to operate it sells those tax liens in the form of tax lien certificates to investors.

For over 200 years local governments (county, city, township, town, parish) have helped investors make money buying tax liens (officially a tax lien certificate).  When an investor buys tax liens from the government the investor is making a loan to cover unpaid delinquent property taxes, this is money the local government needs to operate and pay county employees.  State laws regulate the process to protect the investor and the property owner.  Depending upon the state, interest rates on tax lien certificates can pay interest rates of 16%, 18%, 36% to reward those buying tax liens.  To protect those buying tax liens from risk state laws regulate how the tax lien buyer gets ownership of the property if the delinquent taxes are not paid.

After a tax defaulted property auction, a few states have a period of redemption (one year or less), where the delinquent tax payer has one last chance to pay the taxes and restore their full ownership rights to the property, before the tax deed buyer can take possession of the property.  Most states have no period of redemption, meaning as soon as the tax deed you’ve purchased is  paid for with the local government, you own the property free and clear for the price you paid at the auction.

The property owner pays you when they pay their delinquent taxes. The government agency (the county or municipality that collected the money from you) will contact you and ask you to return your tax lien certificate. Upon receipt they will send you a government check.

Improved property has the advantage of quick re-sale in many cases. Additionally, improved property will often have mortgage liens. Mortgage holders rarely let properties go to tax sale. Properties with mortgage liens almost always assure you of re-payment of your investment.

No, each state and county uses its own rules. The state legislatures write the statutes. However, they are subject to local (county and municipal) interpretation. Tax lien buyers should research each county before purchasing their tax lien certificate, and should become aware of the local rules.

Possibly, although it’s rare for a property owner to forfeit their real estate. In Arizona, for example, 99% of all property owners pay (redeem) the taxes due to the county. The county in turn pays you interest plus a high rate of return. Nationwide, 95% of all tax lien certificates sold are paid (redeemed) by the property owner.