I’ve been asked if tax lien certificates, which carry quite high interest rates, sometimes as high as 30%, are a good investment.

Tax lien certificates represent the last attempt by the ‘crats to collect the taxes due on a piece of property. When all else fails, the ‘crats encumber the property with a lien in the amount of the unpaid taxes. They then sell the lien and the right to collect the unpaid taxes to a third party investor. This means the ‘crats get at least some money and no further hassle trying to collect. Basically the third party investor is now a collection agency. Most counties in the US offer them, usually by auction, at which you have to be physically present. Anyone who wants to buy the property from the owner must clear the tax lien by paying off the certificate plus accrued interest at whatever rate was set. Of course, you have to wonder why the owner didn’t pay the taxes or sell the property. These rates are set high so the certificates look good, but actually collecting it is another matter. If no-one buys the property (and the owner doesn’t pay up), after a set period (like three years) you may own the property after payment of a title fee. If the owner is in bankruptcy then you are probably out of luck as the IRS and other creditors take priority over property tax liens. Like any other credit, you should research and inspect the property before you invest. These issues generally limit these deals to folks who are knowledgeable and located not too far from the property. You can be sure that any good deals will be snapped up by the local insiders and out-of-town folks will only get junk.

So the short answer is, probably not, unless you are well-connected local who has done his/her homework and knows exactly what the deal is with a particular piece of property. If that’s you, you didn’t need to read this anyway.