Local governments in every state assess taxes against all types of real property. Some states allow local county tax collectors to sell tax lien certificates, while other states sell the tax deeds and allow investors to own the properties after purchasing the tax deeds. However, real estate investors who purchase tax lien certificates only purchase the liens against the properties and the authority to enforce the liens against the property owners.
Most states are categorized as either tax lien or tax deed states. Real estate investors in tax lien states often purchase tax lien certificates to make a profit from their investments, because the property owners must pay the delinquent taxes, interest and any additional penalty and court fees to remove the tax lien. In tax deed states, investors purchase the tax deeds to own the properties, though some real estate investors purchase the tax deeds and later use the properties to earn income over time.
According to Ted Thomas, an authority on tax lien certificates and tax deeds, 21 states and the District of Columbia are tax lien states: Alabama, Arizona, Colorado, Florida, Illinois, Indiana, Iowa, Kentucky, Maryland, Mississippi, Missouri, Montana, Nebraska, New Jersey, North Dakota, Ohio, Oklahoma, South Carolina, South Dakota, Vermont, West Virginia, and Wyoming. The District of Columbia is also a tax lien jurisdiction.
Local taxing authorities sell tax lien certificates at tax foreclosure sales. When property owners become delinquent because of unpaid property taxes, taxing authorities may foreclose on the properties and recover unpaid taxes at the foreclosure sales. Investors can purchase the certificates by paying the amount of the delinquent taxes plus the additional interest levied against the delinquent property.
Unlike purchasers of tax deeds in tax deed states, tax lien certificate purchasers do not immediately own the properties upon purchasing tax lien certificates. They may not acquire possession of the properties or evict property owners. The homeowners may remain on the properties during the redemption period set by state statutes; they also have the opportunity to pay the back taxes plus interest paid by the tax lien investors. The time frame for the redemption period varies from state to state; it may be from six months to four years.
During the redemption period, tax lien purchasers may enforce the tax lien certificates and collect the amount of delinquent taxes from the property owners. After the redemption period expires, tax lien purchasers have the right to file a petition in court and pursue a foreclosure against the property. They have the right to sell the property at a public foreclosure auction or evict the property owner and obtain title to the property.
Some states are hybrids – neither tax lien nor tax deed states. Hybrid states allow real estate investors to purchase the tax deeds by paying the delinquent taxes plus interest. However, the property owners may buy back their properties during the redemption period set by state statutes and pay the back taxes plus interest. Hybrid states, according to the finance website, Fool.com, are Connecticut, Delaware, Georgia, Hawaii, Louisiana, Massachusetts, Pennsylvania, Rhode Island, Tennessee and Texas.