Seems like a win-win situation, doesn’t it? Especially considering the fact that, in some states, the state-mandated interest rate on a tax lien certificate can be as much as 50%! And, if you can get a piece of property for just the price of its taxes, that’s equivalent to winning the lottery! However…

There are some risks involved. For starters, a tax lien is only profitable if the property holder truly has ownership of his/her property. Also, the agent selling the tax lien on behalf of the county or municipality must be legitimate.

What does this mean? Consider a situation in which the original property owner declares bankruptcy and then defaults on his/her property taxes. In such a situation, creditors and the IRS take precedence over the tax lien holder when dividing assets. That means that, by the time you get your cut of the property, it will be worth barely more (if even that) than what you paid on the original certificate.

To make sure that the tax lien property certificate you are buying has a clean title history, contact a real estate attorney first and ask for his/her help. A real estate attorney will investigate the title history of the property in question, making sure it is cleared, and he/she will also send any required notifications to interested parties.

Also, understand that most tax lien auctions are done quickly and by lot number. Thus, unless you do your homework ahead of time, you will not know if the lot number tax lien certificate you just purchased was for a 2 story Colonial or a patch of dirt. As with any other property investment, it pays to do an inspection first. 

After the tax lien certificate is won, the county or municipality will require cash payment on the spot. Some jurisdictions may extend time of payment to 48 hours after sale. So, you cannot simply show up with your credit card.

Assuming you’ve exercised due diligence to ensure a clean title history on the property, that the property lien is not under the control of the Federal Deposit Insurance Corporation (FDIC) or affected by the Drug Enforcement Administration (DEA) (which could result in a loss of your investment), and you’re aware of what type of property is being auctioned, then you are well on your way to making significant money from your investment.

On a final note, please keep in mind that tax lien property certificates are sold in the U.S.A. only. Anyone who can legally own property in the U.S.A. is eligible to purchase tax lien certificates and benefit from them.