Property taxes serve as an important revenue source for local governments. When property owners fail to pay their taxes, a county tax collector, for example, would be responsible for collecting the delinquent amounts. The tax collector holds a yearly sale to auction the tax lien certificates. When a certificate is purchased, the county receives its delinquent tax amount and the investor owns a high-interest priority lien secured by the underlying real estate.
Issuing Tax Liens
Each year, the county tax collector sends out property tax bills to the owners. If the taxes are not paid within the statutory time limit, the taxes become delinquent. The tax collector places the property on the delinquent tax role and issues a tax lien. The tax lien amount includes the past due taxes and monthly interest. The interest accrues monthly at the state statutory rate. If the property owner does not pay the full amount, a tax lien certificate is issued and placed on the tax collector’s auction list.
Before the Sale
Once a year, the county tax collector holds a public annual tax lien certificate sale. About four weeks in advance the tax collector publishes a list of the tax lien certificates available for sale on their website or in a local newspaper. Investors can use those four weeks to conduct their due diligence. Interested participants must preregister with the county tax collector online or complete an application at the tax collector’s office. The tax collector will open an account and assign each bidder a number. Many counties require auction participants to provide proof of money or deposit a minimum amount into their account before the auction begins.
Tax Lien Sale Day
The county can conduct a live auction or hold it online. The bidding is on the interest rate and not the tax lien amount. Unlike traditional auctions, tax liens are sold inversely. The bidding starts at the maximum state statutory interest rate and ends with the bidder who will accept the lowest interest rate. For example, a tax lien is worth $20,000 with a statutory 18 percent interest rate. The bidding starts at 18 percent and is bid down to 16 percent, 15 percent and finally to 12 percent. The bidding ends when no other participant bids a lower interest rate.
After the Sale
Each tax lien certificate is offered for sale. When the bidding is over, the winner must immediately pay for the tax lien certificate. Participants can bid on as many tax certificates as they like. When the auction is over, the tax collector will reissue each certificate and mail it to the winning bidder within a few weeks.
- Montgomery County Treasurer, Ohio: Tax Lien Information
- Maricopa County Treasurer, Arizona: FAQ: Regarding Tax Liens
- Internal Revenue Service. "Understanding a Federal Tax Lien." Accessed Jan. 24, 2020.
- Internal Revenue Service. "Publication 594: The IRS Collection Process," Page 5. Accessed Jan. 24, 2020.
- City and County of Denver. "Delinquent Taxes and Tax Lien Sale Information." Accessed Jan. 24, 2020.
- Weld County Government. "Tax Lien Sale." Accessed Jan. 24, 2020.
- State of California. "Public Auctions and Bidder Information." Accessed Jan. 24, 2020.
- National Tax Lien Association. "Common Questions about Tax Liens." Accessed Jan. 24, 2020.
Based in St. Petersburg, Fla., Karen Rogers covers the financial markets for several online publications. She received a bachelor's degree in business administration from the University of South Florida.