Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Lien Sale

What it is:

A lien sale is the sale of a lien by a relevant authority to a third party in an effort to recoup money owed.

How it works (Example):

Let’s assume John Doe owns a house in the country and the annual property taxes are $4,000. John has fallen on hard times lately, and he’s been unable to pay his property taxes. Accordingly, the county files a lien on his property for the unpaid taxes. The lien is represented by a tax lien certificate. A tax lien certificate is written proof that a taxing authority has placed a lien on a piece of property for unpaid property taxes.

When a tax lien is placed on a property, the property owner cannot sell or transfer the property until the taxes are paid. And if the taxes are outstanding long enough, the taxing authority can even seize the property and sell it to recover the unpaid taxes.

The taxing authority decides to sell the tax lien certificate. An investor pays the taxes on behalf of the property owner. He does this by attending an auction of public tax liens, and if he is the winning bidder, he receives a tax lien certificate to show that he purchased the tax lien. The price of the tax lien usually equals the amount of the outstanding taxes as well as fees and court costs (and whatever it takes to become the highest bidder).

Why it Matters:

Lenders are always anxious to get their money, which is why lien sales exist. In our example, to remove the tax lien, John has to pay what the investor paid for the tax lien certificate plus a set rate of interest (which is what makes tax lien certificates an interesting investment vehicle). The property owner pays this amount to the taxing authority, which then transfers the money to the holder of the tax lien certificate. If the property owner never pays the taxes and the taxing authority forecloses on the property as a result, the owner of the tax lien certificate (the investor) becomes the owner of the property free and clear.
 

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