What are the Best Tips for Buying Tax Lien Certificates?

J. D. Kenrich
J. D. Kenrich
Performing due diligence regarding existing encumbrances is a worthwhile endeavor.
Performing due diligence regarding existing encumbrances is a worthwhile endeavor.

Buying tax lien certificates is an investment strategy known for its relatively low risk and attractive rates of return. Every year, many municipal and county governments in the United States offer tax lien certificates for public sale to replace revenue lost as a result of property tax delinquencies. The potential profits offered by this type of investing can be significant, though there are several key factors to be analyzed prior to making a purchase. Some of the best tips for buying tax lien certificates include examining the sales process used by each jurisdiction, becoming familiar with the specific rights conferred by ownership of the certificate, and researching the current condition of the target property.

Anyone contemplating a purchase of tax lien certificates should first determine the jurisdictions in which they would like to invest. It is important to research the registration and sales process utilized by the relevant governmental unit. The sale methods used can vary significantly in terms of when and how the sale is conducted and the type of advance documentation required from bidders. It is also wise for those buying tax lien certificates to gain awareness of the payment methods accepted by each governmental unit, and how soon after the sale their funds must be remitted.

It is important for prospective tax certificate purchasers to determine the specific rights the acquisition of the certificate will confer. In many cases, a tax lien certificate is the equivalent of a first-priority lien, ahead of all other existing liens. It also may be the case that prior liens of other taxing or regulatory units will be given precedence. This is particularly true when federal taxes have gone unpaid by the owner of the property and liens have previously been attached. Performing due diligence regarding existing encumbrances is, therefore, a worthwhile endeavor.

Investors should also familiarize themselves with the potential consequences of a bankruptcy filing by the property's owner. It may be the case that the interest rate payable on the certificate may be reduced by the court. It also is possible the tax lien would be partially or completely extinguished in the course of the bankruptcy proceedings. Analysis of the true position the certificate holder would possibly assume under such circumstances helps facilitate a more accurate assessment of the investment's risk.

It is advisable for those interested in buying tax lien certificates to conduct sufficient research to gain an understanding of the true condition of their target properties. Neglected, dilapidated, and otherwise undesirable properties pose great risk for tax lien certificate holders, because they would likely require expensive improvements to be sold should the lien and accompanying interest not be paid. A final step for prospective tax lien certificate purchasers to take is to investigate whether there are any outstanding environmental problems on the property that could ultimately subject them to costly fines or remediation expenses, rendering the investment essentially worthless.

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    • Performing due diligence regarding existing encumbrances is a worthwhile endeavor.
      Performing due diligence regarding existing encumbrances is a worthwhile endeavor.