Tax Lien Investing

There are various terms and resources associated with tax lien certificate investing that must be understood in order to begin to comprehend and exploit this investment opportunity. First we’ll examine specific terms associated with real estate and tax lien investing and then we’ll define concepts that come into play when engaging in the process of purchasing tax liens.

Common Real Estate Terms

The following terms are those most often used when determining the value of a property in relationship to assessing real estate taxes.

Assessor’s Parcel Number (APN): This is the parcel number that is used to identify a specific property.

Assessed Value: A property has a specific value related to the marketplace and it also has an assessed value. The assessed value, which may certainly be different than the market value, is a determination of what a property is worth for tax purposes. Thus, real estate taxes are based on a tax assessment and not on how much a property may sell for in the open market. In the marketplace, a property may be worth more or less than the assessed value.

Fair Market Value: This relates to the amount of money a piece of real estate would bring if offered for sale in the open market. The fair market value would be realized as long as the seller and buyer possess all information related to the condition of the property.

Fiscal Year: The standard fiscal year usually runs either from July 1 through June 30 or January 1 through December 31.

OTC: OTC stands for “Over the Counter” tax liens, which are those liens that have gone through at least one auction and were not sold. These liens are then offered for resale by either the county or the state and may be bought through the mail in a noncompetitive manner.

Premium: When more than one person bids on a specific tax lien certificate and these investors end up tied for the bid, the county or state may settle the tie by accepting a “premium” from the potential investors. A premium is a payment made by the tax lien certificate buyer that is above and beyond the cost of the lien. Premiums do not accrue any interest and are nonrefundable. The investor who offers the highest premium wins the bid.

Random Selection: This is a method utilized when more than one investor desires a tax lien on the same property. With random selection a computer is usually incorporated to choose the winner.

Redemption Period: This is a prescribed amount of time, which can be as short as one year and may be three or more years, during which the landowner may pay their taxes and any penalties or interest. If the landowner is able to do this, they retain their property.

Reverse Auction: Often, when investors are trying to buy tax lien certificates and more than one person wants a specific lien, the buyers participate in a reverse auction. In this type of auction, investors bid down the interest rate; the person willing to take the lowest interest rate wins the tax lien. This is also known as “bidding down” the interest and as a “reverse bid.”

Secured Assessment: A secured assessment is a lien that is assigned to real property.

Supplemental Assessment: This assessment involves the reappraisal value of a parcel of land and any structures on said property minus the total of any previous supplemental assessments and property’s previously determined taxable value, which is also known as the roll value.

Tax Deed: A tax deed gives the holder all rights to the property. A tax deed sale or auction is different from a tax lien certificate auction in that when one purchases a tax deed, one if purchasing the property.

Tax Foreclosure: A tax foreclosure occurs when the redemption period on a tax lien has expired and the county takes all rights to the property in order to sell it and recoup the back taxes, penalties and interest.

Tax Lien: A tax lien is used by either a state, county or town government to secure back taxes on a parcel of real estate. The government entity will put a lien on a property, which in essence ties up the rights to the property in order to secure the payment of back taxes.

Tax Rate Area: A tax rate area is a designated geographic region within a particular county that is taxed at a specific rate that is determined by the number of public services, such as fire and police, which are contained in that area.

Transfer Date: The date on which the sale of a specific property is officially recorded.

Unsecured Assessment: This is a lien that is not connected to real property.

Use Code: This code, which is utilized for the purpose of assessment, is a descriptor for how a property is being used. There are three major types of real estate described by use—vacant land, residential property and commercial property.