Tax lien certificates are financial instruments associated with overdue uncollected property taxes. Tax lien certificates are sold by local governments to investors who acquire:
Harry Homeowner did not pay his property taxes for 123 Main St and he owes $1,000 that are normally collected by the city of Springfield. Springfield holds a tax sale every June where investors submit bids to purchase tax lien certificates. At the latest Springfield Tax Sale, Ivan Investor purchases the tax lien certificate associated with Harry Homeowner's property for $1,000 from the government of Springfield. The government of Springfield has now recouped lost revenue, which is the purpose of the tax sale.
Ivan Investor then contacts Harry Homeonwer to let him know that he owns the tax lien certificate for 123 Main St, and the current balance is $1,000, with interest accruing at 16% annually.
After 1 year, Harry Homeowner decides to sell his house and, in order to remove the lien to establish clean title, he pays Ivan $1,000 principal plus $160 in interest. Ivan Investor earns 16% return on investment.
To invest in tax liens, you need to register for your local government's annual tax sale and submit your bid for tax liens associated with specific properties.