A few years ago I decided to try investing in tax liens in Mississippi. A tax sale occurs when a property owner is delinquent on their property taxes. The owner is notified of their delinquent status and if they fail to pay a lien is auctioned off against the property. The successful bidder pays the delinquent property tax and is provided a tax lien certificate as evidence of their claim against the property.
The owner of the property has two years (in Mississippi) to pay the tax lien certificate holder the principle amount of the lien (delinquent property tax) plus 1.5% interest for each month they fail to pay. This equals an 18% return annually (36% if they fail to pay until the end of 24 months). If the property owner fails to pay the tax lien certificate holder the title of the property is deeded to the tax lien holder.
Here is a redemption receipt I received for several properties I had liens on in Gulf Port, Mississippi.
The 2011 taxes delinquent on these properties totaled $3,272.24. I received a check for $5,108.08 when the property owners eventually paid the delinquent taxes plus interest. I received $1,380.14 in interest on these properties.
There are some risks associated with buying tax liens. You might get stuck with the property if the owner fails to pay the back taxes. Sometimes you get stuck with a dump. Here is a property in South Carolina that I owned for a while that I wish I had not obtained the deed. I eventually sold it for slightly less than I had into it.
Some states do not sell tax liens. Call the county in your state or research online if your state sells tax liens. Here is a link to a website that has some more information on this subject.