In order to better understand the concept behind a property tax auction, one must first understand government – at least on a surface level.
That is to say, one must understand that there is an overlying, federal government, under which there are state governments, and finally there are governments for each county. Each of those governments survives based on the tax dollars that are paid by the residents of each. When the taxes are not paid – even a portion of them – the government, like an individual not receiving an expected paycheck, is faced with a dilemma. After all, that money has been considered in the budget for the year and is needed to properly fund government agencies, schools, and other organizations generally supported.
When a homeowner fails to pay taxes over a long period of time, the government is forced to take action to collect the missing funds. This is the purpose of a tax lien. This is a statement placed against the house that says, like a mortgage does, that should the house be sold, any gains must first be used to pay off what is owed. In this way, the government is able to place some collateral on the debt. Because the government is missing that money and would like to collect on it as soon as possible, they sell the lien as collateral-backed debt, which the buyer can collect on.
The homeowner must then pay the debt to the new owner of the lien or else, ultimately, face the property being foreclosed on. The good part for the investor, who purchases the lien, is that the homeowner must also pay interest as a late payment penalty.
The government gives up the right to that interest in a way to secure money in the short term, whereas the investor, who is seeking a place to put his or her money in order to make more on it, now has the opportunity to do so. The interest rates on these tax liens are generally quite high and are, therefore, a better alternative to other investing methods that are seeing lower returns.
In order to invest in tax liens a person must have the capital to spend on the spot. He or she must also pre-register for the public auctions and verify that he or she is up to date on all taxes and other outstanding debt. These investments are not for everyone, but in the right hands, they are a win-win for government and investor.
