General Background on Tax Liens
What is a tax lien?
When the owner of a property fails to pay taxes on that property, the jurisdiction in which that property is located puts a lien on the property. This lien remains in place until the unpaid taxes, interest, penalties and fees are paid in full. A lien, or a certificate of purchase ("CP") evidencing a lien, may be owned by the taxing jurisdiction or may be sold by the taxing jurisdiction to investors. In Arizona, CPs evidencing amounts owed are auctioned to investors roughly two years after the year the taxes went unpaid. If successful in buying a lien at auction, an investor must wait at least three more years before they can foreclose, assuming that the amounts owed remain unpaid.
By auctioning off CPs, the government is able to collect monies needed for public services, including schools and roads, and other necessary government expenditures. Payment of amounts owed are not guaranteed by the government - the investor bears the risk of non-payment by the property owner. In the event that a property owner remains delinquent in their payment obligations, the only security that the lien-holder can look to is the value of the property securing it.
Some Risks of Tax Lien Investing
As discussed elsewhere, there are many risks in tax lien investing, including liquidity risks, property risks, legal, procedural and other risks. Tax liens are relatively secure investments, but by no means are they risk free! The liquidity risk of tax liens arises from uncertainty in the timing of repayment (if ever) and the almost complete lack of a secondary market. Companies like Arizona Tax Lien Services aim to help mitigate liquidity risks in tax lien investing by providing secondary market liquidity, as both principal and broker, for tax lien investors.