Tax Lien Certificates

Written by Genevieve Hawkins
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Tax lien certificates are one of the fastest growing investment opportunities in years, and average people are snapping them up. With tax lien certificates, you have a government-insured way to earn a return on your money, often at a higher interest rate than other yields. There's also always the chance that you could wind up with a home out of the deal.

Real estate is, and continues to be, one of the hottest markets to invest in. Unlike stocks that are risky or savings accounts that take forever to mature into a profit, home buying offers a safe and quick alternative return. With a bit of background information and some careful research, it is also easy to find out about it.

What Are Tax Lien Certificates?
First, let me offer some explanation of how this investment works. As most of us know, there are property taxes owed to the government on all homes, depending on the home's estimated value. When a homeowner fails to pay these taxes, the county is allowed to take action to collect the money owed. Many times the county conducts what is referred to as a "tax sale."

Because the counties are responsible for collecting the back taxes (and reaping the benefits of the money when received), each state and the counties within have different laws governing the collection of this debt. Some are allowed to use the value of the property (place a lien) against the homeowner, which effectively means the homeowner cannot make a transaction until the county is paid. Generally, there are two different types of sales that will occur: a tax deed sale or a tax lien sale.

When a person bids on a tax lien certificate, they are essentially buying the homeowner's tax debt. The owner of the home is then given a certain amount of time to repay the certificate holder at a given interest rate. If time passes (known as a redemption period) and the homeowner has not paid the money to the lien holder, that person is able to file for an absolute deed to the property, allowing ownership of the home for a fraction of what it would normally cost. Even if the homeowner repays, there is often a high enough interest rate to guarantee a large return.

Advantages of Tax Lien Certificates

Investing in this way is, of course, not for everyone. Returns on the investment can be slow and the odds of owning any property are slim. Furthermore, most states and municipalities require cash up front at the time of auction.

That said, investing in tax lien certificates has many advantages, if done well. You can earn high interest rates on the certificates while you hold them (in some states, 16 to 36 percent), and you have real estate as security for your investment. Furthermore, because these are government issued and backed, it is likely that you will see a return in some way or another, with little effort on your part.

Just like any other investment option, there are pitfalls involved if you are not diligent about investigating the property or the nature of the lien, but overall, it is a win-win situation. You give the homeowner a second chance to keep their house, while you make money off from the return. With these advantages to tax lien certificates, it is not surprising that they are becoming a popular investment option.


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