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Investing In Real Property Tax Liens

investing real estate

By John L. Lohr

Real property tax lien investing, a once little-known, niche market, has been gaining in popularity in recent years. With real estate investors seeking opportunities to diversify their portfolios and tax lien certificates available for purchase for as little as a few hundred dollars, investors at all levels are getting into the game.

So, what exactly is a real property tax lien certificate? In Arizona, county governments by operation of statute place a lien on real property when a property owner fails to pay his/her property taxes. After two years of the taxes being delinquent, counties will auction off the tax liens to investors in the form of tax lien certificates of purchase. A tax lien certificate, in most cases, becomes the first lien on real estate, which means that it is superior to and takes priority over most other liens, including a mortgage or deed of trust securing a loan on a property, with some exceptions.

Arizona counties sell tax liens through auctions, which typically occur in February of each year. Maricopa County, for example, sold unpaid 2016 property taxes via an online auction Feb. 6, 2018. In mid- January, a list of the liens available for purchase was published on the internet, as well as in a newspaper of general circulation chosen by the County Board of Supervisors. To be eligible to bid, you must register online and be assigned a bidder number. For Maricopa County, bids can be submitted on the website once the list is published on the internet, and bidding closed Feb. 6. Other counties have similar deadlines. In some counties, like Pima, you must still appear in person for the auction.

The way the auction works is an investor bids on the interest rate on the tax lien. Arizona law allows an investor to receive up to 16 percent interest per annum on the tax lien certificate. The bidder with the lowest bid on the interest rate wins the auction on each lien. If you are the successful bidder, you pay the outstanding taxes and receive a tax lien certificate. Unfortunately, at least with Maricopa County, tax liens have become so competitive that the average interest rates are down to between 2-4 percent the last three years for most successful bidders as some investors have been bidding as low as 0-1 percent interest. While a 0 percent interest bid may get an investor the rights to the tax lien certificate, they may wind up losing money if the owner redeems due to the fee charged by the county for each tax lien certificate purchase unless they are able to foreclose the property three years later.

In order for the property owner to redeem the tax lien certificate, the property owner must pay the taxes plus interest and a small redemption fee to the county. From this redemption amount, the investor receives the investment back plus the interest rate that he/she bid at the auction. In the event that the property owner does not redeem the tax lien certificate within three years of the purchase of the tax lien certificate, the investor has the right to foreclose the tax lien certificate by filing a judicial foreclosure lawsuit. The judicial foreclosure in a tax lien lawsuit is unique compared to other foreclosures as only the investor will wind up with title provided the owner and anyone with an interest in the property does not redeem prior to the court entering a judgment against them.

Purchasing property tax lien certificates can be a great investment tool, but there are a number of decisions you need to make that can help minimize your risk and protect your investment. In addition, understanding the foreclosure process and navigating the court system can be complicated and tricky. An experienced real estate attorney practicing in the tax lien foreclosure area can guide you every step of the way.


John L. Lohr Jr. is a partner of the law firm Hymson Goldstein Pantiliat & Lohr PLLC.