Local governments (county, city, township, town, parish) receive most of their operating funds from property taxes. When property owners default and fail to pay property taxes the local government’s method to enforce payment of those taxes is to place a tax lien on the property or seize the property and sell it for the back taxes which are due. If the property taxes remain unpaid the government in about half the states in the United States sell tax lien certificates and the others sell tax deeds at a tax defaultedauction. There are two basic systems used in the United States for local governments to recover unpaid taxes at a delinquent tax sale:
- In states that sell tax lien certificates the buyer of a tax lien certificate pays the government the amount of the past due taxes. When property taxes are paid, the tax lien certificate holder gets back all of the original investment plus a high interest rate from the government. In the occasional situation, where the tax lien certificate is not paid, it’s possible for the investor to get possession of the property, after a foreclosure process, for just the back taxes and fees owed to the government.
- In states that sell tax deeds the investor is buying the property, usually at a significant discount from the full market value.
Delinquent tax deed sales are most often held at a public auction, where anyone can buy, including foreign investors. Those who invest in tax lien certificates are often seeking a passive high interest return on their investment, while those, who invest in tax deeds are willing to buy and sell property and earn a much greater return on their investment at a delinquent tax deed sale auction.
Ted Thomas has helped many investors understand the answer to: “What is a tax defaulted property auction/delinquent tax deed sale auction like?” and the secrets to avoid costly mistakes. In the video linked below Ted introduces a young Canadian investor, who discusses how to pick between tax lien certificates and tax deeds.
Be sure and check out our list of Tax Deed States if you are further interested in finding your first auction.