Tax Lien Certificate

What is a Tax Lien Certificate?

Tax lien certificate is that certificate which is made available to an investor who shows his interest in a property by investing his funds in clearing the outstanding property tax of that property on behalf of the owner of such property. The investor is issued with this certificate on paying the outstanding property tax against which he will earn a specified percentage of interest from the owner of the property when he pays back.

And in case the owner does not pay the amount after a specified period, the owner of the tax lien certificate will have a claim over the property of which he has paid the property tax. A regulatory authority issues this certificate to a person who has the lowest bid in the auction and is ready to accept the low-interest rate on its investments from the owners of the property.

How does it Work?

  • The municipalities create it on the properties whose property taxes are remained unpaid for an extended period. The municipalities of the respective areas have the right to sell the tax lienTax LienTax Lien is a lawful claim concerning the assets of a person or a company that has not paid or failed to pay the taxes owed by the government. It serves as a secure payment of any debt like loans, more of the amount of the property tax outstanding in an auction.
  • Investors bid their amount in the auctions, and the winning bid, which is the lowest rate of interest on the outstanding tax amount would get the tax lien certificate. The investor who wins will pay the outstanding taxes to the municipalities, and in return, they would have the right to receive the taxes paid along with interest they have made payment of from the owners of the property.
  • The interest rate may vary from Municipalities to municipalities, area to area. The interest rates for these tax liens sold in the auctions are generally as low as 3% to 8%. The property owner has to redeem these certificates within the redemption period of one year to three years, along with the Interest portion outstanding.

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Benefits of Investing in Tax Lien Certificate

Before we go further and explain the benefits, let’s have a quick discussion on why the tax lien certificate was not that much of a popular investment. It is a low investment; therefore, it doesn’t offer a high return but offers low returns. Also, there is a liquidityLiquidityLiquidity shows the ease of converting the assets or the securities of the company into the cash. Liquidity is the ability of the firm to pay off the current liabilities with the current assets it more problem too in these certificates; therefore, because of these 2 main reasons, Tax Lien certificates are not that much popular. Now let us explain the benefits:

  1. These are way much safer investments as compared to other options of investments in the market.
  2. These are of low Initial Investment, which can be affordable to any of the small investors.
  3. It provides a return on the investment with a full lump sum payment on maturity, which adds to its advantage.
  4. It gives the right to the investor to acquire property through foreclosureForeclosureForeclosure refers to the legal action taken by the lender when the borrower fails to repay the amount due against the mortgage loan. The lender can take the possession of mortgaged asset or property or resale it to a third party for recovering the default loan more if the owners do not redeem the certificate.
  5. The property is available to an investor on pennies of a dollar if the owner does not redeem the tax lien certificate.

How to Invest in a Tax Lien Certificate?

It is not bought from the market. These can be won by placing bids in the auction market when the municipalities place the tax lien certificate for auctions. The investors place their bid for various properties whose property taxes are outstanding, and the investors with the winning bids will be issued these certificates. There is no secondary marketSecondary MarketA secondary market is where securities are offered to the general public after being offered in the primary market. Such securities are usually listed on the stock exchange. A significant portion of trading happens in such a market and are of two types – equities and debt more from where the investor can purchase these certificates. The only way to get these certificates is to win the bids in the auction marketAuction MarketAuction Market is a marketplace where the buyers and sellers trade stock by bidding. The price is calculated based on the highest amount a buyer is ready to pay and the lowest amount a seller is ready to accept. read more for the property you are interested in.


#1 – Low Capital Investment

It requires low capital investmentCapital InvestmentCapital Investment refers to any investments made into the business with the objective of enhancing the operations. It could be long term acquisition by the business such as real estates, machinery, industries, more as only the amount of outstanding property taxes of the property is to be paid by the investors in order to be eligible for the tax lien certificate. It is made available to the investor on making the payment of property tax on behalf of the owner, which has remained outstanding for an extended period to the area’s municipalities where the property is situated.

#2 – Return of Investments

It comes with a fixed rate of return on the investmentRate Of Return On The InvestmentRate of Return on Investment is the rate at which a company generates a return on investment during a period when compared to the cost of the investment made by the company. It is calculated by dividing the return on investment during the period by the cost of the more made by the investor, which is to be paid by the owner at the time of redemption of the certificate along with the property tax amount paid by the investor to the municipalities on behalf of him.

#3 – Lumpsum Amount on Redemption

The investor will get a lump sum amount on the redemption of this certificate from the owner, along with the interest on his initial invested amount.

#4 – Right to Purchase Property at a Very Cheap Rate

The investor enjoys a right to purchase the property if the owner is unable to redeem these tax lien certificates at the due date of redemption. It will bring a situation of foreclosure where the investor can purchase the property at pennies on a dollar.

#5 – Safe Investments

These are one of the safest investments as these are issued by municipalities and deemed to be redeemed by the owner of the property at maturity. In case not redeemed, the investor will have the right to buy the property at a minimal amount.


#1 – No Recurring Income

Under this, there is no regular return on the investment made by the investor. Whatever would be the return on his investment will be received lumpsum at the time of redemption or maturity of the tax lien certificate by the owner.

#2- Very Slow Process

The process of issuing this certificate is very slow. Not just issuing, but even the redemption of these is very slow. Since municipalities issue the certificate, the process is therefore not speedy, and hence neither the issuance nor the redemption of the tax lien certificate is completed on time.

#3 – Low Rate of Return

Even though these certificates provide a return on the investments (ROI), but still, these returns are not as high as compared to the other options available in the market to the investors.

#4 – High Competition

There is a very high competition between the investors, as these certificates are issued on the basis of bids, and the bids are placed by many investors, property dealers, money managers. Therefore the new investors many times does not return with the certificate, whereas the others who are regular in these market tends to place the winning bids.

This has been a guide to What is Tax Lien Certificate & its Definition. Here we discuss how to buy a tax lien certificate and how does it work along with advantages and disadvantages. You can learn more about from the following articles –

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