Tax Liens, What are They? How They Work?

There is a tremendous amount of information pertaining to Tax Liens and how they function. The process varies from state to state, so this will be a series of blogs.

A few years ago financial planners, securities brokers and others in that field would tout mutual funds as the way to go. Sure, some years were better than others, but certain funds had an average 15-20% annual returns over five years. Well, the downturn of the NASDAQ and subsequent slide of the other stock exchanges put an end to that pie-in-the-sky belief. The fact that it happened before doesn't guarantee that it will continue that way.

So, how do we get 16% return without the risk?

Removing the risk from investments that have a good return is difficult. Conventional wisdom has it that the higher the return, the higher the risk. Maybe that's why higher investment yields are called millionaire returns-only millionaires can handle the risk, right? WRONG..

Millionaires know how to get those kind of returns, and that knowledge is the foundation of the whole idea of tax liens and deeds. One of the best but least known ways of doing that is with tax liens. Property tax liens are secured by the county government. That's safe. They most often yield a return on investment in excess of 10%, often much more. That's high! They are not difficult to find and acquire and that's good.

Government needs its revenue!

A typical county government gets at least help its annual revenue for every day operating expenses from property taxes. These taxes help fund schools, hospitals, law enforcement, fire departments, road construction, parks and county administration. Some of this money even goes to the local justice system and to public transportation.  The county depends on these revenues. When taxes are not paid, the county cannot function as it should.

When the county isn't collecting the revenues due, it does what other creditors have done…It sends it out for collections. This is where savvy investors can make high return on secured investments.

In this case, the collecting entity is the fellow citizens of the delinquent taxpayer. It works well for both parties. The county gets the budgeted revenues from the property taxes, and the fellow citizen has a nice investment with high returns, secured by real property. In any case, the purpose of selling the property tax lien is to allow an investor, in place of the property owner, to pay the delinquent property taxes due. The county receives immediate revenue and the investor benefits with low risk-high yield investment.

What is a property tax lien?

The American Heritage Dictionary defines a lien as “The right to take and hold or sell the property of a debtor as security or payment for a debt.”

A very common type of tax lien is the lien the institutional lender places on the title of an automobile that it has financed. When you pay the loan in full, you can get the lien released and the lien holder's name disappears from your title certificate. On the other hand, if you fail to pay the loan, the lien holder has the right to repossess the vehicle. The same holds true of a house if you do not pay the mortgage. Lien holders have rights of foreclosure or repossession whenever the property, real (house) or personal (automobile) is pledged as collateral.

A property owner owes taxes to the local government entity. In the U.S., this is generally the county. Evasion is impossible with real property, because it cannot disappear, and the county can simply take possession of it in lieu of tax payment.

Next series, we will discuss the tax lien foreclosure process. The differences in some states, along with a couple of examples.