Function

• Tax liens allow outside investors or purchasers an opportunity to pay unpaid taxes on another person's property. This ensures that the taxes are paid, but also gives the purchaser a chance to make a profit or gain the piece of property.
  
  

Significance

• People may choose to purchase tax lien certificates because many states place a state-mandated yield on the lien. Therefore, if the property owner wants to retain his property, he must pay the delinquent taxes plus interest. The rate of return is generally paid as a percentage of the total cost of the lien. The lien owner may also receive the property by default if the property owner forecloses on the property. This gives the tax lien owner a chance to receive the title on the property for only the cost of the unpaid taxes.
  
  

Benefits

• The major benefit to a lien purchaser is the possibility of picking up a piece of property for a very low cost. For instance, if a homeowner owes $10,000 in taxes, and a tax lien is created, the tax lien buyer may get the title, and thus ownership, of the property if the owner does not bring her payments up-to-date.
  If the property owner chooses to pay her taxes, the tax lien holder will still receive some sort of monetary payment for having purchased the lien.
  
  

Warning

• Despite, the potential advantages to purchasing tax liens, certain negative consequences can occur. In instances where the property owner declares bankruptcy, certain institutions, such as the IRS, may take precedence over the tax lien holder. Therefore, the tax lien may become worthless, and the purchaser of the lien will not be paid back for the purchase of the certificate.
  Another potential downfall is the condition of the property. A tax lien purchaser may not have viewed the property before purchasing the lien. Consequently he won't be aware of any major defects. A house could be flooded, infected with termites or have any variety of problems.
  
  

Considerations

• People who participate in tax lien auctions must be able to legally own property in the United States. They must also have enough cash on hand to purchase the tax liens outright. These liens may cost thousands of dollars, so people without access to large amounts of money are usually not able to buy them.